No Sympathy For Financial Companies

By: ispeculatornew
Date posted: 07.20.2008 (1:05 pm) | Write a Comment  (1 Comment)

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There have been a lot of dramatic steps taken by the Fed and the SEC to prevent the deserved collapse of some banks. While I understand that they don’t want to see a run on the banking sector I don’t think that would be the case if the market were left to sort things out on its own. The banks that took excessive risk and leverage would be in trouble and the banks that managed their risk and leverage would be fine. In fact the actions taken by the Fed and the SEC are doing more harm than good.

First, the Fed and the SEC are sending the message that financial institutions can profit from excess risk when times are going good and not have to face the consequences of their actions when times turn bad. This is a terrible message to send and it is only going to lead to the same problems in the future. Banks will have no deterrent from taking the same risks in the future if they know that the government is going to bail them out with taxpayer money when the risks turn sour.

Second, if the government is going interfere with the market and implement rules and regulations that help financial institutions then it also needs to develop rules and regulations that restrict financial institutions as well.

A few months ago the Fed took the dramatic step of lending taxpayer money directly to investment banks but there has not been any rules implemented to bring investment banks under the same rules as regular banks. That is unacceptable.

More recently the SEC has prevented naked shorting of select financial institutions. If the SEC thinks that naked shorting is a problem why doesn’t it extend this policy to all stocks? Also, I find it troubling that the SEC is trying to blame the problems in financials on people who are shorting these companies. They sound like a dumb message board poster who thinks the reason their stock is going down is because of paid bashers and naked shorts in Europe. I don’t think naked shorting should be allowed but the decline in financials should not be blamed on people who are shorting these companies. Financial companies caused their own problems and the investors who have been shorting these stocks have proven to be very smart over the last year or two.

I think the intervention by the SEC and Fed is only prolonging the inevitable collapse of some financial companies and their interference in the market is sending the wrong message.

On a final note I have a couple of suggested regulations the government might want to implement since the government seems intent on interfering with the market. First, why doesn’t the government limit the undeserved excessive executive compensation that companies have been paying out for quite a while? Financial companies have been the most egregious when it comes to this. Second, why doesn’t the government cap some of the excessive fees that banks and credit card companies charge? Also, why doesn’t it look into the deceptive practices that banks and credit card companies have been employing for quite some time? These regulations might actually help regular people.

Disclaimer: I do not have a position in any financial company.

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1 Comment

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