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Stock Ideas Investors Daily Edge The Keys to the Porsche Should Come with Limits
Stock Ideas Investors Daily Edge The Keys to the Porsche Should Come with Limits 
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| The Keys to the Porsche Should Come with Limits |
| Thursday, 25 September 2008 | ||||||||
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OK— I can’t resist just a little analysis of the problem. My main conclusion being that the news is full of baloney. And so are all the politicians who wasted time investigating steroids in baseball and other bits of idiocy instead of acknowledging a problem that was obviously headed to a climax. So, to the news… Another investment bank bites the dust. The “last two” surrender and decide to become bank holding companies. You heard about all that, right? Well, the news has been just a little incomplete. The last investment bank is not gone. Among those still in business… Raymond James, Piper Jaffray, Canacord Adams… these are darned good investment banks. There are many more here and abroad. Also, most investment banks did not really disappear, they just went on to become a division in a company that pairs them with a commercial bank. They will continue to do what they have always done. This pairing is great for stability. Commercial banks take deposits and make loans. They have a capital base to offset the riskier stuff that goes on in investment banks that underwrite securities and engage in trading. The pairing also brings these investment banks within commercial banks and insurance companies under Federal Reserve regulation. That’s very good. The Fed sets capital requirement that limit how much risk a bank can take. Had these rules, or even some slightly more generous version, applied to investment banks like Lehman, they would not have taken on so much risk that they destroyed themselves in the process.
Don’t count me among the totally anti-regulation crowd. It’s true that sometimes government interference strikes me as particularly stupid. The current ban on short selling is a perfect case in point. But the day-to-day guidelines that keep rogue traders within bounds are useful. It comes down to this: when a business is so big that the government needs to step in if it fails, then that business should be monitored and held to sensible standards before it takes itself to the destruction point. Leaving a business alone to do anything it wants and get into as much trouble as it desires then standing ready to bail it out is about as wise as handing your 16-year-old hothead the keys to the Porsche and your credit card and telling him there’s no curfew, either.
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