Friday, June 17, 2011

Why Not Cut Your Exposure?

The markets are rife with concerns that European banks and American banks will lose a lot of money if Greece defaults. So, why don't the banks simply sell their Greek sovereign debt holdings and avoid any further exposure? After all, post-2008, the banking systems in the US and Europe have been subject to new regulations and are marking their portfolios to market. Right? Wrong!

As usual, regulation doesn't work. If European and American banks sell their Greek debt assets, they will take huge losses precisely because they are not marking these assets to market as everyone assumes. The regulators are letting these banks carry all of this bad debt at par and their balance sheets incorrectly show assets at highly inflated values. So much for financial reform!

It's the same old story. Everyone assumes that bank regulation works. The fact is that it doesn't work. Just when you need heads up banking regulation, what you get is a wink and a nod and political interference. That is what is going on right now.

What would have been a minor problem -- a Greek default two years ago -- is being elevated into a major problem that will ultimately undermine the financial stability of Europe and the US.

Financial regulation doesn't work. Regulators are not the answer. Dodd-Frank legislation is a sham and is simply a hindrance to a serious economic recovery. Let the markets work. Let those who buy bad debt take their losses without involving taxpayers in the process.

We are in serious danger of replaying the fall of 2008 by more foolish government policy regarding the debt markets.

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