“We’ve got back-ups for everything here — boilers, oil components, extra machines — so if something breaks, we can replace it,” Dube says. “The government doesn’t have a back-up plan when a pipeline explodes. It’s incredible.”

What is odd about this statement is that (at least so far as I can tell from reading the article — I have no other knowledge whatsoever about the situation), the only involvement by “the government” is that the facilities are overseen by NOPSA. If I am reading correctly, all of groups involved are private, and in this case “the government” is not involved in the transport of gas, nor in the generation and distribution of electricity.

It’s an interesting piece of information, thanks for bringing it to my attention but, unfortunately, I see things differently.

On page 4 of his testimony under the heading – “The adequacy of risk management by risk officers and executive boards” he concludes (and I’m paraphrasing) that the recent multi billion dollar write downs were not a failure of the risk models and systems. Instead, he said that risk of the over-sized inventories by financial institutions being carried was there for everyone to see (which is probably true). He states that the real cause of these failures was that “…The risk managers did not have the courage of their conviction to insist on the reduction in inventory, or the senior management was not willing to heed their demands…”

His solution is for the feds to “Establish a liquidity provider of last resort” in a formal fashion. He goes on the use the bail out of LTCM and Bear as examples of the appropriateness this approach. He even says that this won’t create a moral hazard because firms will still be allowed to fail. He even suggests that taxpayers may be able to “pocket some profits” as Citadel did with Amaranth. He neglects to mention what happened when the RTC rolled up, packaged and sold all the problems S&L assets during th late 80’s and early 90’s. While most folks give the RTC a good grade for its efforts, It wasn’t a profit but instead a huge loss a huge loss that the taxpayers got to pocket.

His solutions are to 1) to rethink the mark to market rules (which we’ll set aside for now). And 2) the creation of a regulatory risk-management function that, through regulation will be given access to more specific real-time data (asset positions, leverage, etc.) of all “major risk-taking institutions, including hedge funds…” I see… so the regulators will be free of political pressures and have better knowledge and therefore better sense of conviction to proactively take action at critical moments, when its been shown that battalions of incredibly smart people, who were living comfortably with what are now seen as hugely obvious risks within all those financial isntitutions, did not. I don’t think so.

Create a new huge new source of federal backstop capital -and guaranteed- it will be diverted at some point to an inappropriate use, such as what’s being contemplated for the FHA by congress.

It might just be better to keep the mark to market rules. If the result is that financial institutions reduce the level of leverage used to carry their inventories, because of the associated inherent real-time risk
of carrying overly large portfolios, then that might be just what is needed to reduce the systemic risk to the markets.