Levine on Wall Street: How Not to Regulate
Switzerland just isn't that jazzed about investment banking.
Here's a story about how UBS and Credit Suisse, which have already cut back pretty dramatically on their investment banking and trading businesses, "are prepared to scale back their investment banking operations further if the country’s strict capital rules become even more onerous." You sometimes hear U.S. bank executives talk about how onerous regulation will make U.S. banks less globally competitive and cause the U.S. to lose financial business to offshore competitors, which it is widely assumed would be a bad thing for America. But here you have a case of a whole country more or less saying "yeah okay global financial-services behemoths are not really where we want to be." And so they're pretty much shutting them down: "Although Swiss regulators introduced some of the toughest capital requirements in the western world in the aftermath of the financial crisis, politicians and the wider public have continued to express an unease about the scale of both UBS and Credit Suisse."
Here's how to make the Volcker Rule worse.
I don't care all that much one way or the other about the Volcker Rule TruPS CDO thing, but it's just obvious that Congress is not going to improve the Volcker Rule with a bill that, "notable for its briefness, provides that nothing in the Volcker Rule 'shall be construed to require the divestiture of any collateralized debt obligations backed by trust-preferred securities issued before December 10, 2013.'" Nononononono. Here is how to write good legislation:
- Think about what your problem is. Think of a way to fix it. Spend some time making sure it doesn't make anything else worse. Then write it down in a clear way.
Here is how to write terrible legislation:
- Get mad about a problem. Write "notwithstanding any other thing, nothing shall be construed to cause that problem, sort out the rest of it yourself." See what happens.
Bad stuff is what happens.
Though regulatory cost-benefit analysis has its problems too.
Here's a new paper from Harvard Law professor John Coates about cost-benefit analysis for financial regulations, which has been in the news a lot as courts keep striking down regulatory actions because the regulators didn't do enough quantitative cost-benefit analysis first. Coates is skeptical, arguing that this analysis leaves a lot of room for expert judgment and estimation, and "can be expected to do more to camouflage discretionary choices than to discipline agencies or promote democracy." Or as Coates tweeted, "Why impose new cost-benefit tests when cost-benefit analysis tests haven't been shown to satisfy a cost-benefit test?"
LightSquared may get what it wants.
Here is a dramatically vague story about how Dish Network and its chairman Charlie Ergen might be withdrawing their offer to buy LightSquared Inc. out of bankruptcy "over a technical matter." Not a "technical matter" as in a technicality, as you might have thought given the fact that LightSquared has been litigating viciously over technicalities in Ergen's bid. No, "technical matter" as in something that "if not fixed would impair utility of LightSquared's spectrum." Previous technical problems at LightSquared have been the sort that might crash planes and kill people. LightSquared's board has been trying to fend off Ergen and back a competing proposal, though that competing proposal doesn't exactly involve providing LightSquared with cash now, so Ergen's sudden maybe-disappearance seems like a bit of a problem.
You should charge a lot to terminate very in-the-money contracts.
Lots of people and municipalities entered into interest rate swaps to hedge against the risk that rates would go up, and then rates went down and they had to pay millions of dollars a year on the swaps, and sometimes they negotiate to terminate those swaps for multi-hundred-million-dollar termination payments. That's sort of what's happening in Detroit, among a lot of other things. Here is a sports story that is more or less the same story: The NBA wrote some guys a swap on NBA television revenues, and then those revenues went up, and now those guys are very very rich, and they're fixing to get richer in exchange for terminating the swap. It's a feel-good story because the loser here is the NBA.