Randomly Noted

It’s all about the risk, stupid.

You want to grab these bank executives around the shoulders and shake some sense into them, especially after reading about their latest efforts to hold off any reform aimed to prevent another financial crisis like the one we just went through.

Today’s WSJ has an article that explores the different moves here and overseas to tax banks. The idea is to raise money that can be used to bail them out in the future, rather than use taxpayer money to do so, if any crisis comes upon us.

Predictably, the banks are crying foul. A trade group cautions the wisdom of a tax because it would remove capital from the banking system – capital that then couldn’t be lent.

Banks in many ways brought this all upon themselves. If they monitored risk better, that would have lost billions and billions of dollar. Risk isn’t defined as just that low credit investment you bought in the market. It’s things like giving loans with no underwriting standards alongside them.

The banks did it with residential mortgages, then commercial mortgages and leveraged loans connected with buyouts. And to top it off, they repackaged these things, zipped them up with leverage and got stuck holding a bunch they couldn’t get rid off.

What governments around the world are attempting to impose on banks is a better reserve system. Clearly, they didn’t properly reserve for the kind of risk they were carrying on their books.

Sure, greater reserves cut into the capital you can redeploy. But what  cuts more into capital is huge write downs resulting from very non-existent risk controls.

Maybe when the financial service industry can show it has the discipline to employ proper risk controls and be honest about the reserves needed to handle that risk, maybe that’s when we don’t need to tax them.

But we aren’t there yet.