Cool Numbers and Regulation

Did you know: "Banks and brokerages account for almost 35 percent of all salaries and wages in New York City." An interesting statistic in an otherwise bleak article, which discusses projections in future job cuts at these financial firms could up upwards of another 20,000 in NYC alone. The bulk of the cuts, the report suggests, will occur in 2008.

Since last July, Wall Street firms have lost about 34,000 employees. Apparantly, this is on track with the 2001 recession, where a similar number of jobs were lost in a similar period of time. Unfortunately, when all was said and done, a staggering 90,000 jobs were lost "in the 2 years after the internet implosion."

Paulson made an announcement today about wanting to increase regulation for investment banks. With so much government intervention (e.g. the Fed bailing out Bear Stearns), and Wall Street's self-induced meltdown, I wouldn't be surprised.

This WSJ article suggests that, if more financial institutions are going to take advantage of the Fed's help, they should follow more strict rules and regulation. Investment banks today essentially compete with commercial banks directly. In the past, corporate banks have had the advantage of issuing deposits that are insured by the federal government, but the Fed essentially did this to Bear Stearns when it bailed them out. The article does a great job summarizing what the regulation would entail, here is a quote:

First, the process for obtaining funds by non-banks must continue to be as transparent as possible. The Fed should describe eligible institutions, articulate the situations in which funds will be made available, and the magnitude and pricing structure for the funds. The TAF process is a good model for a structure that would provide relevant information to the marketplace.

Second, and perhaps most importantly, the Federal Reserve should have the information about these institutions it deems necessary for making informed lending decisions. The Federal Reserve is currently working to ensure the adequacy of such information. We suggest that the Federal Reserve, the SEC, and the CFTC continue their work of building a robust cooperative framework. Already, at the invitation of the SEC, the Federal Reserve is working alongside their teams within these institutions. These regulators should consider whether a more formalized working agreement should be entered into to reflect these events.

A wider perspective is offered here. It looks like increased regulation may spill over into other areas, piggybacking on our concern over dangerous Chinese imports.

Here is a brief objection to the Fed's actions. The author argues that this motion will offer incentive for similar smaller, less responsible forms to make shaky judgments, as long as they know the Fed is willing to bail them out, like they have done with Bear. Should the Fed nurse our economy, or let it ride out this fever, and hopefully grow from our mistakes? This is a question that has been in debate for ages (look at Herbert Hoover's success compared to Margaret Thatcher's, both played tough love, one was significantly more successful than the other).

With this added regulation, other professions may start to look more attractive - like private equity, which is already challenging investment banks on the tasks they perform (which I write about here).

Actually, some of the biggest issues are essentially accounting problems. How do you value this asset? What standards do you refer to? If the rules (or principles) are clear, then we may be finding banks in the future spurning less liquid securities. Considering the US's GAAP is switching to international standards (we talk about this briefly here and here), we may be seeing a better solution from the accounting standards setters.

Interesting note: Looking back in history, today has some interesting parallels with the Great Depression and FDR's response, as offered by this Slate article.