Tuesday, April 28, 2009

Out of the box

I believe I have mentioned before the statement made by a speaker at a conference I attended that we cannot, “think outside the box. We are the box.” The current apparent thrashing about in search of the solution to the current banking crisis brings that statement to mind. Depending on the same people who created the environment that allowed the systemic problems to take root and then flourish to provide the solution has become part of the problem.

It is understandable to seek out expertise in a subject to provide guidance in all matters pertaining to that subject. Unfortunately it is also understandable that self preservation becomes the default mode. How can we expect the very people who insisted on repealing Glass-Steagall to now lead us back to similar regulation. How can we expect that those who wrote the legislation allowing banks to police their own capital levels to throw themselves on their swords or find the solution that is not within their view of the universe?

The problems hatched by financial engineering and complexity beyond the understanding of even those who created it cannot be solved by adding yet more complexity engineered by the same persons. The response that a problem is so complex that it can only be addressed by those who created it is common. The problem needs to be deconstructed to a level at which mere mortals can provide simple coherent solutions.

Each time I hear a CEO of a failed, insolvent bank lament that compensation limits will mean they lose their best people I am surprised that the questioner does not follow up with, “and you don’t think that would be a good start?”

The solution to the banking problem would be fairly simple those without vested interests were not the ones looking for the perfect solution that supports the status quo. The holders of Citigroup and Bank of America bonds are not preponderantly widows and orphans. They are credit default swap wielding, monolithic investment banks. It is time that the private sector step up to the risk they took as sophisticated investors and lenders. The taxpayer is NOT the counterparty on poor judgment insurance.

If Mr. Geithner and Mr. Bernanke believe they are the protectors of the banks that has bought them lunches for the past decade they should be replaced. Since they can’t think out of the box they are in, we need a different box and they should move theirs from K street back to Wall St .