B.A., Amherst, 1966; LL.B., Yale, 1969; LL.M. (in taxation), New York University, 1976.

… not an econommist. Now that doesn’t necessarily mean that his arguments are wrong, but questioning the source of his arguments and motives is a responsible thing todo.

===

So next we’ll focus on his arguments.

#1 The argument that risk is reduced is valid, but this justifies regulation ONLY if the savings in risk exceeds the cost and dead weight losses produced by regulation.

He explicitly states that the cost of regulation in the US is 40 percent of the relevent budget, compared to 8-12% in other countries, though he does not use the total budget size to calculate a total cost or cost per business.

He does, however, imply that the direct federal budget for this activity is large. When you add the costs of litigation and prevention (obviously not “on the books”), the total cost is certainly substantial.

#2 While I trust that the 30% premium is accurate data, suggestion *a single* possible explanation does not necessarily make it true. Further, even if it’s explains some of the difference, it is unlikely to explain all of the difference.

An equally sensible explanation is that participation in US markets opens them to a much larger pool of investors. Without specific data, it’s reasonable to aruge that major European investors have to consider playing in US markets. Conversely, sophisticated US investors can stay primarily in the US. This is a far more compelling supply-demand argument that justifies a price on simple economic grounds and does not rely on presumptions on the value of litigation… oh I mean regulation.

===

John offers a perfectly *possible* explanation, but nothing in the provided data necessarily implies that his explanation is any better than a hundred others.

Further, he has rational motivations to support regulation (and the associated litigation) and does not appear to have applicable economic experience on which to build this theory.

I’m not saying that he’s totally wrong, but this hardly meets logical and critical standards (shocking particularly when you consider that the sources is the Financial Times).

In August I posted a note here (and an article on my website: newcombat.net) suggesting that the nascent disaster in structured finance might perhaps only be cured by price controls on the wounded bond classes. Perhaps for two years or so.

Friends laughed; some politely up their sleeves.

The time has now come, with the bond insurers on the brink. If something is not done almost immediately, we will have to stop tallying s-f bond writedowns with billions.

As the monolines blew up last week, Jumpin’ Jersey Jim Cramer began shouting that the gov’t should simply buy the insurers and guarantee 50 cents on the dollar for the wounded bonds.

Price controls might be better and simpler. Writedowns would come under control quickly. The world could catch its breath. Monetary and fiscal policy could begin to heal the underlying economic problems. And the bonds could continue to spew out a good deal of the interest they were intended to produce. Issuers could wind up early (almost all s-f deals are expected to wind up much sooner than their stated term in any case).

Trades would still be hard to come by, since the Price Controlled price would have the stink of artifice about it. But I assure you that 95% of the trillions in complex derivatives out there were never designed or expected (by their buyer & sellers) to be traded in the secondary market. They were “bonds” in name only. Everyone on the inside thinks of and calls them “trades” or “deals”.

Red faces on the masters of the universe at Davos this week, eh what? Maybe they’ll persuade Ben to lighten up for chrissakes.

Similarly, we’d probably still have adulterated meat were it not for the FDA. And development experts say that one of the keys for development in third world countries is to have a proper system of property rights, particularly as regards land. This also relatively seldom comes about spontaneously.

Thanks for the link. Will have a look.

Yves,

I think the explanation for how BAC hopes to limit legal liability in case of CFC purchase is here:

http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

Is your point merely that ‘..people see that in a world with freedom of contract and jurisdictional arbitrage, principals and agents would arrive at (a) regulation on their own..’ or, ‘(a) regulation’ would be the natural outcome of said freedom?

Please advise.

Northern Rock: Labour’s fig-leaf for failure
By Philip Stephens
Published: January 21 2008 18:09 | Last updated: January 21 2008 18:09
I cannot help thinking that there is something more than a touch ironic about the British government putting its reputation in the hands of an investment bank as it struggles to salvage something from the wreckage of Northern Rock. The financial chicanery that brought the roof down on global markets last summer is now to be set to the purpose of rescuing one of its casualties.

Anything but nationalisation, one of Prime Minister Gordon Brown’s cabinet colleagues told me the other day as he mulled the government’s narrowing options.

The following is excerpt of Project Wing – the executive summary of a plan, put together by
Merrill Lynch, Citi and The Blackstone Group, to sell stricken mortgage lender Northern Rock,
code-named Blackbird. This “Briefing Memorandum” has been sent to all potential acquirers.

Any assets and liabilities not transferred to the purchaser will be retained within an entity called
“FinCo.”
FinCo is expected to remain listed and to be placed into a solvent run-off with the objectives of (i)
orderly run down of the balance sheet; (ii) repayment of creditors; and, if appropriate, (iii) the return
of residual value to Blackbird shareholders.
Blackbird invites recipients of this Memorandum to participate in a process for the acquisition of all
or parts of the business. This Memorandum is intended to assist recipients in assessing, in particular,
the WholeCo, PrimeCO and PlatformsCO structures, the ongoing new business potential, the nature
of obligations with FinCo, and the corresponding value of the proposed new standalone entities.

Blackbird is currently pursuing a sale of its business as a whole (”WholeCo” or the “Whole
Company”). This is Blackbird’s preferred outcome. As an alternative to the sale of WholeCo and to
assist interested parties, Blackbird has defined two discrete preferred asset sale structures, namely
the acquisition of either (i) the Company’s existing infrastructure/operational platform and/or
Blackbird’s retail deposits and matching assets (”PlatformsCo” of the “Platforms Company”) or (ii)
PlatformsCo plus further selected assets and liabilities, including the securitisation and covered
bond funding programmes (”PrimeCo” or “Prime Mortgage Company”). Blackbird and its advisers
encourage offers for assets and liabilities of the business which are different from those
contemplated under the preferred structures. For example, this Memorandum also gives separate
financial information on the retail deposits platform.

Show Me the Money
http://wallstreetexaminer.com/blogs/winter/?p=1356

For example, go to the Fed’s H4.1 site, and check the numbers for January 4, 2007, and the latest. This shows that FCBs bought only $78.6 billion in Treasuries, and $235.4 billion in “Federal agencies”. Going back to January 5, 2006, FCB custodial holdings of “federal agencies” has increased $409 billion. In total FCB hold $836.9 billion of these so called “federal agencies”. What is the collateral and condition today of all this paper bought at the peak of the housing market? None too good I would imagine? I have come to conclusion that there is no transparency at all in this general “federal agency” account label.