Friday, September 18, 2009

Wells Fargo Time Bomb? Give Me A Break

Can somebody tell me why the following is even happening? I'll let you read the story, but the quick and dirty is that Wells Fargo bought Wachovia and with it came exposure to some derivatives that have a good chance of blowing up (in other words major losses that might not be showing up on the balance sheet now). My beef here is not with Wells Fargo or Wachovia (okay, a little with Wachovia) its with the Federal Reserve and the FDIC - how in the world were these "Banks" allowed to write insurance policies on risky mortgage securities? Why is this stuff even on a bank's books?

I keep hearing calls for greater regulation, of which some of it I support (like requiring a company to reserve their CDS exposure), however I have to wonder why we aren't talking about how badly our current regulators failed. Under Ben Bernanke and Timothy Geithner (during the Bush years) banks were essentially regulated as if risk didn't exist. Our banking regulators were so asleep at the switch one wonders if they weren't on an Ambien drip; yet they are the same ones who are now in charge and calling for greater regulation. Just who is going to enforce these new regulations? The same guys who failed to enforce the old regulations?

In my opinion banks need to go bank to being banks, they shouldn't be writing unreserved, off-balance sheet insurance policies on esoteric, difficult to value securities. They should make appropriate loans and accept deposits - nothing else.

I never supported Glass-Steagall's repeal, but I also wasn't against it....I figured we would put appropriate and reasonable measures in place to protect the banks and taxpayers, I was not just wrong, I was naive (I was only 23 at the time). I saw the combination of entities that were highly regulated and relatively low-risk to be a no-brainer. In reality there is no reason why banks and insurance companies can't be combined, if regulated properly - however, investment banks should not be traditional banks.

Scott Dauenhauer CFP, MSFP, AIF