I had no idea what a can of libertarian worms I was opening when I suggested that the sale of reverse convertible bonds should be banned. I dealt with one line of objections last night — the silly idea that since reverse convertibles are basically a put-writing strategy, and since Warren Buffett writes puts, then reverse convertibles must be kosher.
Peter Thal Larsen picks up on a potentially-explosive quote from Bank of England governor Mervyn King last night: that “if some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big”. King, of course, is the UK’s top bank regulator, which means that some of the biggest banks in the world ought to be feeling rather worried right now: too-big-to-fail banks dominate the UK banking system.
Algonaut asks whether the Financial Services Oversight Council will have a direct line to banks’ chief risk officers; I’m sure the answer is yes. But I also think that won’t be enough. What I’d love to see — and this could be put in place directly by the major banks, without the need for any legislation at all — would be a regular formal meeting of all the big banks’ chief risk officers, where they can talk about all the systemic risks they’re worried about which require coordinated response. Does anything like that exist? Is there some way in which the FSOC or the Fed could use its moral suasion to make it happen?
David Sunstrum emails with an interesting idea:
I know the big surprise of the last couple weeks was how the SEC would survive Obama’s regulatory shakeup. But the paper repeatedly states (bottom of p. 6 for instance) an intention to harmonize regulation between futures and securities. Could they be paving the way for a merger of the CFTC and the SEC in the not-too-distant future? Did he not want “Obama abolishes SEC” headlines?
Remember the regulatory arbitrage whereby clever use of securitization could reduce the amount of capital that banks needed to hold without reducing the amount of risk on their balance sheet? Well, the white paper wants to put an end to such shenanigans: