We see lots of commentary and proposed actions for the current financial crisis. Let's try to get our heads around the issues at hand by imagining a conversation between a banker in trouble (Barry) and a taxpayer representative (Tad):
Barry: Hey, I need your help. We're getting beaten up pretty bad.
Tad: Wow, what's wrong?
Barry: Well, we made some bets related to mortgage debt, and now no one will loan us any money.
Tad: Why do you need money? Aren't you an investment bank?
Barry: Sure, but most of our money is locked up in these long-term bets, so we rely on short-term debt for working cash.
Tad: Ok, just so I understand, you only have to come up with short term money?
Barry: Well, umm, we do have to maintain our bets to bankroll ratio... and since we lost a bunch of those mortgage bets, we have to raise more bankroll as well.
Tad: So, is that it? Just those two things?
Barry: Yes.
Tad: Ok, so the bets to bankroll ratio is a regulatory requirement. I can relax that for the duration of our problem, but you have to list on your website the dollars you have at risk for a given variable. Just like you do for stocks and bonds now.
Barry: We can't do that; it'll expose how we bet in the market.
Tad: I'm not asking for how you structured your bets; I just want to know how much money you stand to make or lose for a given change in some variable. You can report to the public with a lag time of 60 days, but you need to provide us with that data in real time. Like you do for bets on commodities.
Barry: Ok, and what about the short term money?
Tad: How much do you need?
Barry: It varies, and I don't know how long this market collapse will last.
Tad: Ok, I'll loan you all the dollars you need at 6 percent over the treasury rate. I'll publicize that commitment and you should be in the clear, provided that you haven't bankrupted yourself on these bets.
Barry: And if I have?
Tad: Either you convince us that you haven't or we'll find someone to buy you, both within two weeks time. It'll be a very busy time for all of us....
I would like to see a simple, concrete description of the problem and how the proposed legislation will solve it. Nothing inspires confidence like clear thinking....