Saturday, March 7, 2009

Fast feedback on regulatory failure

One feature of improved communication via blog and internet is the speeding home of roosting chickens. Nowhere more so than with the failed finance company Mascot proving in virtually an instant the risks of governments trying to “save” investors, government’s trying to “guess” what is and isn’t risky, the risk of policy making on the run, the risk of following the Bledisloe Cup opponents into policy and how easily government interventions can generate perverse incentives.

Brian Gaynor – not a regular favourite of mine – does a great job in pointing out some of the problems  and combined with troubles about the scheme I have, we should note:

  • the scheme is designed to run for two years. Any board of directors suspecting a problem in month 23 faces strong incentives to call in the receivers. It may even be their fiduciary obligation to do that.
  • why would trustees even bother any more? Depositors will get their money back anyway and no one is going to sue them. Their position is as idiotic as this ill conceived notion has ever had it.
  • It’s a great time for raising short term capital. With bank deposit rates low why wouldn’t you buy what is in effect a call option priced at zero. You get the upside, the taxpayer pays any downside.

And all that is before we address the effect on the incentives relating to what those raising capital actually do with it – all we can be sure of there is that it will be put to more risky uses than it would without a guarantee.

The mistake in all of this would be to think that by  “making” the Treasury “do a better job” of applying the criteria or doing “more” due diligence these problems can be “fixed”.

The problem to be addressed is the need to understand and accept that:

  1. no one and no institution can reduce risk to zero.
  2. amongst arrangements to manage risk the worst choices are:
  • regulatory interventions which simply shift costs from depositor to taxpayer, and
  • government created quangos such as the trustee tangle where no one apart from depositors loses their shirt for incompetence.

Happily it is a very short time since this farce began…. it may be a short time until it ends.

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