I actually think the problem is more that those who hold preferred equity, shouldn’t. It’s wonderful if Bruce Krasting or John Hempton want to own agency preferreds. It’s another matter that regulated community banks were loaded up with this stuff. So I guess I am saying preferreds are ok, as whomever owns them should own them on the basis that this is money that they can afford to lose.

If you are talking about preferred stock with no maturity, then yes, but many preferred stocks have maturity dates, though most are long-dated.

Truth, long-dated bonds should do as well. I guess my dislike of the alternative forms of capital does not stem from any loss of capital in a crisis, but that the banks that used them were more aggressive, and tended to fare worse in the crisis.

FT Alphaville linked to this article — perhaps that will help the proposals get a bit more exposure.

Jim Fickett

I’ve been watching for some idea on TBTF that would actually have a chance. A sliding scale for RBC is a very good idea and its mechanical and gradual nature just might give it a slight political chance.

Perhaps a chink in the armor in all of this is the restriction that regulated financials could not invest in unregulated. If that were the rule and I were a big bank I’d look for cross-border ways around that.

Jim Fickett
ClearOnMoney.com

It perfectly describes why we need the Volcker rule, or something like it. Thank you for this well thought out piece. Here’s hoping someone up the regulatory/political ranks will take the time to read it.

Also, the levels there are arbitrary. We would have to ask where we want the cut-off to be, and how much of a capital penalty. Sizing the RBC factors for different types of lending would be an issue, and how much ability to invest in or lend to other financials would be the biggest factors here.

… accounting has to be more conservative…
… More transparency is needed everywhere, and if the financial companies complain…

The first rule of Liquidation Analysis is to put all actual and contingent liabilities on the balance sheet and to shrink the actual and contingent assets. In other words, no netting, presume that all paying counterparties will fail, not the receiving counterparties will insist on getting their money, NOW, by invoking cross-default clauses.

Banks, aother finance companies, and companies receiving Governtment taxpayer support should all be required to publish such worst case Liquidation Analysis, monthly or at least quarterly.
This way, we won´t have to wait for the tide to go out to see “who’s swimming without bathing trunks”… as Warren Buffet says.