Saturday, March 27, 2010

Say Hello To Theo Bawki

Theo Bawki is not a friend from South Africa.  Rather, it's Sudden Debt shorthand for The End Of Banking As We Know It.  And if the Volcker Rule passes Congress without a bunch of customized  loopholes and exceptions, that's exactly what is going to happen. Thankfully.

As preamble, let me take you back 12-13 years. I was visiting the London HQ of Merrill to see a bond trader on behalf of my firm.  During our discussion, I noticed he kept referring to Merrill as a "bank" and, since I was an ex-member of The Thundering Herd myself, I was curious why.  After all, we who had graduated from its rigorous training program never thought of Mother Merrill as anything much more than a big brokerage firm, i.e. a very powerful marketing and sales organization for investment "products".  We most definitely did not think of ourselves as "bankers" - this was a title reserved for the boring folks who worked at Citi, BofA, etc.

But when I innocently asked him if he meant "brokerage firm", he got offended.  He had placed Merrill  (and himself) amongst those who raise funds and invest on behalf of  their institutions as principals, instead of being an honest Mr. In-Between. Apparently, in his mind this carried far less cachet than being a "banker".  The re-transformation of our financial system had started and the walls of  Glass-Steagall were coming down far faster than I imagined.

We all know what happened in the years that followed.  Our financial system became a mishmash of "players" who could and did switch hats at will in order to obtain maximum profit and minimum regulation.  Bank, broker, investor, speculator, private equity and hedge fund, loan originator, packager, servicer, dealer, trader .. all melded into an amorphous mass where Anything Goes.  And, of course, everything went: pop and south.

Patti Lupone In Cole Porter's Anything Goes
In olden days a glimpse of stocking
Was looked on as something shocking,
But now, God knows,
Anything Goes. 

In the aftermath, we urgently need to re-separate and re-define the roles of each member of the financial community.  It is insane to allow institutions that accept government-insured deposits and have access to the Fed to become heavily leveraged speculators, even in their so-called subsidiaries.  Ditto for pension funds: it is insane to allow them to "invest" in highly speculative hedge and private equity firms in the name of yield-enhancement or counter-cyclicality.  It is insane to allow small-time investors to participate and get fleeced in 500-1 margin FX trading or bucket-shop betting on indexes.

Deregulation as practised in the financial industry did not create a simpler, more transparent industry  that operated in the interest of society at large.  Instead, it begat a highly concentrated secretive club of mega-firms run by mega-billionnaire dealmakers who flaunted their riches and power ("I can get a billion at the snap of my fingers", "We do God's work", etc.).  And to add insult to injury, the very same club demanded and got a bailout by the taxpayers when it caught the clap.

So, Mr. and Mrs. Shadow Banker, meet Theo Bawki.  I hope you embrace him warmly and make him your close friend.  But if you don't, don't worry. He's not going away any time soon.


  1. There are far easier solutions.

    1. Decide on the level of deposit insurance.

    2. On paying out money in the event of a wind up, priority is given to payouts under this level. ie. They are preferential creditors.

    3. Beyond that all bets are off. You are in the queue with all others.

    That leaves systemic risk, and that is credit risk.

    Here, the regulators have shown themselves to be incompetent. So the solution is to force all banks to publish their credit risk profiles. To whom are they exposed.

    With all that data in the public domain, other banks will make their own systemic risk decisions. Third parties can step in and offer bundles of CDS to minimise risk, and hence minimise the risk of default and the risk of systemic risk. Ratings agencies can perform a far more accurate assesment of what's going on.

    Just separating function out is a partial solution

  2. WOW... go over to the most recent post at Carlat and see the REPETITION of your problematic in another domain.
    You take out "banks", and you stick in "psychiatrists", and see how the post looks..
    Ah, those distincitive differences...

  3. Oops, almost forgot.
    AS A RESULT you can import my responses on Carlat for YOUR post... (if they get past censure...)
    That's the way it works.

  4. Thanks for the clip. Heart warming, the sound of those little heels on the polished floor.
    Nice to know that we haven't forgotten how to do everything. Even if it looks a lot slicker now than it probably did then.

  5. Debra, thank you so much for making that connection.

    Hellasious, I've been reading you religiously for several years now, and sometimes you hit the nail so surely, so clearly, and so spot on that you take my breath away.

    Today was one of those days.

    I truly believe that the reason that the sun is starting to peek out in little bits and pieces around the land is the tireless drumbeat of people like you and Simon Johnson. You may not get credit in the history books, but some of us will know.


  6. Oh, and can't forget Elizabeth Warren. (grins) She's like the energizer bunny, that one.


  7. Hell,

    This post is about what you think SHOULD happen.

    But honestly speaking, what do you think WILL happen?

    Do you seriously believe that sweeping reforms will be made?

    Now that the crisis is "over", I suspect people will just want to go on with "business as usual". The so-called reforms, if implemented, will probably be just a small token.

    After all, Goldman Sachs "was never in any real danger", you know...

    In my opinion, we probably need a few more crises to really wake up...


  8. Dear Anon,

    Yes, you are right. With its ex-CEO at Treasury Goldman was never in any danger.

    What will happen? I don't know, but I suspect SOME financial regulatory reform will occur, particularly if the economy doesn't bounce back smartly.

  9. Hahaha - No, Not a lot will happen until the first sovereign default in a 1-st world country; Then a lot will happen very rapidly.

    It is wrong to hope that the structure that created the current mess will be able to fix it - the tried-and-tested human approach to problem solving is: "Apply More of whatever caused the problem in the first place."

  10. Fajensen, you're SUCH a pessimist...
    And you ENJOY being a pessimist, moreover...

  11. I must agree with fajensen, unfortunately.

    We cannot fix a debt bubble problem by issuing more debt.

    We are now forming a sovereign debt bubble, created because we refused to allow a few more (major) financial firms to go under. We may all of us end up paying with a lot of pain for our "leaders" unwillingness to accept their responsibilities.

  12. Fireworks should start popping off in the fall!