How To Clean Up the Credit Mess

At the heart of the current credit troubles is a crisis of confidence. Nobody trusts the rating agencies, the auditors, the regulators, or the bankers anymore because they are either viewed as liars or as incompetent. It won't matter how low the Fed lowers interest rates or how much money they continue to pump into the system because all that money won't jumpstart anything as long as people perceive that corrupt people and corrupt institutions are allowed to remain in power. It's Business 101--never do business with people you don't trust.

How do we fix this then?

I had written a thirty page journal article titled "Wall Street's House of Cards" warning about our current crisis over twelve months ago along with a prescription of how to prevent it from happening, but no one would publish it because editors thought either this topic was too arcane or believed it was against their politics. I also tried to bring it to the attention of regulators, but S.E.C. commissioner Annette Nazareth wanted me shot. Obviously, when I get the door slammed in my face as often as I did for trying to be a patriotic American, my hope and idealism start to evaporate along with the credit market. But since, you dear readers, seem to care, I will offer one of my solutions. I don't see the point in giving everything away so that those in power in Washington and in the media can take all the credit.

Impose limits on leverage and counterparty risk and improve data transparency and regulatory filings.

The Fed should require all financial institutions to report, on a real time basis, risk reports including leverage, rather than the monthly call reports that are presently used but are of limited utility. The Fed should also require companies to report their true value at risk (VAR) for up to 25 standard deviations, their solutions to it, their top 25 counterparty exposures, the kind of products to which they have exposure, and transaction documentation for all material transactions.

This is a dream list, and if the banks reported this level of detail, then we have transparency. But they won't if left to their own devices. Government officials like Al Hubbard who go on television and say that banks will provide transparency because it's in their best interest have completely lost all credibility. Banks, especially the large multinational ones, have never and never will have any interest in providing more transparency because transparency will expose them as emperors without clothes now and squeeze their profits in the future. It has been this very LACK of transparency that has allowed Wall Street to announce record profits and provide billions of bonuses for so many years. They will only provide transparency if they are forced to do so. Unfortunately, Tim Geithner, the NY Fed President, is not the one who will have the guts to get tough on banks since it was his former boss Bob Rubin who installed him in that lofty position and who now needs him to return the favor as Citicorp is falling apart. It isn't a coincidence that politicians and regulators can talk all they want about a need for transparency, but they don't spell it out, and they don't make it happen.