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Long-Term Consequences of Regulatory Arbitrage

Peter Fisher Is Alarmed

Justin Fox reports:

Justin Fox: Peter Fisher says Hank Paulson needs to be quicker: Peter Fisher used to run the open market desk at the New York Fed. Then he was Under Secretary of the Treasury during the Paul O'Neill years. Now he's co-head of fixed income at BlackRock, the firm that's managing those $29 billion in Bear Stearns assets the Fed took on back in March. So you could say he's kinda plugged in. Here's what he said in a Business Week interview with Maria Bartiromo (it was posted a couple of days ago but I just noticed it):

They've got to help sort out the institutions that are going to be survivors and those that aren't. One of the problems has been that when you give a speech or announce that all the banks in America have got to raise capital, you're pre-announcing dilution, and that doesn't do much for the existing equity owner's confidence. It makes them run for the exits. So I think if banks are going to raise capital, you've got to do it really quickly. Goldman Sachs raised capital in a heartbeat. You don't threaten dilution and therefore upset your shareholders. The other thing is that the authorities have got to close those firms that are not going to be survivors as quickly as possible. We can't wait around for consolidation.

This seems to now be a consensus view now among economists, Wall Streeters and a lot of policymakers in Washington. So why's it taking so long to happen? My first thought is that it's just hard to get everything lined up and figure out who lives and dies and the like. You can't do it in a day or two. But I can't shake the feeling that there's been at least a little bit of foot-dragging about this on Hank Paulson's part. Is it that he sees such triage as admitting failure? Or is he having trouble persuading bank executives that we've reached this point? Or has he had trouble persuading President Bush? Or does he just really really need a nap?

One characterization I have heard is that the Fed, the Treasury, and major U.S. financial institutions are "having a bar fight on the Titanic."

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