Guest Post: Systemic Risk is All About Innovation and Incentives: Ed Kane

Tyler Durden's picture

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Bear's picture

Haven't you heard ... In the spirit of transparency and efficiency, Obama Administration has suspended all 10-k and 10-q filings for financial institutions making the problem go away ... this Administration is dedicated to subterfuge.

Anonymous's picture

Regulation should be entirely designed to prevent entities, particularly banks, from hiding their troubles and keeping secrets from their investors, debtors and depositors.

If banks were required to continually report (like hourly) their deposit to capital ratio, and the specific nature of the risks they are exposed to some kind of free market effects might be possible - lower capital ratio = higher interest. The market might even find a equilibrium of what the proper ratio is at any time.

But somehow our entire generation has been duped into believing that freedom is the only key element for successful market dynamics, and little details like 'full knowledge' are not important.

As long as banks get to operate in secret it will always be a constant battle with regulators to view the secrets and ensure the bank is not too fraudulent. Of course the bankers have the upper hand since they get to set their own rules via the bought and paid for government. It is hard to see how this can ever be resolved..

Intuition's picture

Good points. Freedom is purely illusory without full disclosure and knowledge on the part of each party to any cooperative agreement. Without such openness, the tyranny of information asymmetry reigns supreme and we know that simply allows the den of thieves to run amok.

agrotera's picture

Sorry Tyler, but this Edward J. Kane must have written this paper in order to impress the owners of the privately held federal reserve.   He actually said that there was no good reason to reinstate the Glass Steagall Act because banks would just take continue to do this one stop shop business overseas.  And he is completely stepping over the idea of legalized criminality by trying to write the whole bankheist mess of with the idea that the makers of the mess are just looking to have a cover story, but what the real problem is is...(he details it in his ridiculous paper).

I have really liked some of what they publish at institutional risk analytics, but this is groupthinkthinktank fed propaganda...sorry.

Chris Whalen's  little note and the Andrew Jackson quote was a jewel but i would choose nail scratching on a chalk board over reading his guest's post again.

Intuition's picture

The underpinnings of this most interesting post remind me of a talk I watched recently (can't remember who or from where) that discussed how the black market responded to increasing regulatory pressures. Basically, the idea is that the more you regulate (or enforce regulations) a particular segment of the black market supply chain, the more you increase the profit margin involved in pushing the product through that highly regulated point.


Combined with the fact that moral hazard is impossible to separate from regulation, I really believe that anarcho-capitalism is the only realistic way to deal with the issues at hand. By trying to stop the profits found in financial engineering, we only increase the profit margins of those who can successfully navigate the regulatory structure (read: execute within the loopholes), while giving the public a false sense of security that the sovereign has everything under control.

Anonymous's picture


Bubby BankenStein's picture

I have the highest regard for Chris Whalen.

Ed Kane's epistle is one of the most outrageous purveyance's of commie speak apologetiks imaginable from a professor in finance.  Oh I forgot, who taught the beneficiaries of the TDFU how to be businessmen?

This is a collection of high class mumbo jumbo assembeled to obfuscate financial reform.

Repeated reference to safety-net support and it's implications are stunning.

agrotera's picture

That is what i was trying to say, thanks Bubby BankenStein!  I thought i might have a stroke over the repeated references to safety-net support and that is why i think he probably published this pack of lies to have as his top listing on his CV in an application package to the fed.

DaveyJones's picture

Agree. The ex-prosecutor in me is wondering why this fool is saying don't reinstate the rules because the criminals will just figure out more ways to break the law. At the same time, he uses this same logic to avoid any discussion of punishing those who already did. Finally, he concludes that it is all our fault for encouraging the criminals by passing laws that forbid their crimes:

"Regulation-induced innovation by financial firms seeks relentlessly to outstrip the monitoring technology and the administrative focus that supervisory personnel use in controlling institutional risk-taking. Exclusionary laws and rigid capital regulation encourage rather than control regulatory arbitrage over time."  


Cistercian's picture

 It could be summed up thus: regulation is futile, we will game the system anyway.


I think it is intellectually dishonest at best, and propaganda from a lower level of hell at worst.The truth is probably between those, on the hellish side I suspect.




Anonymous's picture

Cistercian said : It could be summed up thus: regulation is futile, we will game the system anyway.

I agree fully but I would say they are "the system" and the government is just a tool, a branch of their system not the other way around.
Reminds me of how "the military industrial complex" that kept the Vietnam war going to fuel the military and manufacturing contracts. There was way too much money to be made off that skirmish. How many years and how much did that cost us big bad Americans to try squash a few Asian ants? A lot of people got rich off that war. Lets not talk about that though, the system knows whats best.

tom a taxpayer's picture

Ed Kane throws a heaping bucket of sand in everyone's eyes. But he can not hide the greatest financial crimes in U.S. history. The financial crimes of the century demand the prosecutions of the century. 

We need coast-to-coast arrests, from Countrywide to Goldman Sachs and every one in between. We need Racketeer Influenced and Corrupt Organizations Act (RICO) prosecutions and mass trials in style of the Maxiprocesso (Maxi Trial) of the Mafia in Sicily during the mid-1980s that resulted in hundreds of defendants convicted. We need RICO confiscations of the hundreds of billions in illegal "profits" from the criminal enterprises of the banks, mortgage industry, and Wall Street Mafia.


It takes only one prosecutor to investigate just one crime, and follow the money and the connected crimes, and bring down the overlapping criminal enterprises using RICO prosecutions. This is a target rich environment, and the criminal activities (fraud, Ponzi schemes, extortion, looting of treasury, cover-ups, etc.) are continuing today. So the investigation and prosecution can begin anywhere and follow the trail, with Countrywide, the mortgage industry and the appraisers or Freddie and Fannie or Citi and the big banksters or with Goldman Sachs and other Wall Street investment banks and brokerages or the rating agencies or AIG or with the federal co-conspirators at U.S. Treasury, SEC, OTS, and the Federal Reserve or with Hank "the mole" Paulson, Ben "the bag man" Bernanke, Tim "the patsy" Geithner, or the members of Congress who took money to facilitate the criminal enterprise.


To get a recap of the rampant criminality that begs for prosecution, see William Black's "Great American Bank Robbery":


Once a tough prosecutor applies the pressure, the white-collar softies on Wall Street will crumble like feta cheese. Once a tough prosecutor drops the first weak link, the rats will trample over each other to be witnesses in hopes of leniency. 


When a prosecutor takes off the kid gloves, and hits the criminals with the iron fist of justice, the prosecutor will become a national hero.

faustian bargain's picture

sure, prosecute fraud...but start with the source of the fraud in government and the Fed. They set the playing field and the rules. Without this fertile ground of moral hazard and inflationary monetary policy, the business of harvesting middle-class wealth will dry up on its own. (to mix a few metaphors.)

One thing is true - all the regulations and regulators in the world will not solve the problems caused by leaving bad monetary policy in place.


edit: unless that whole "iron fist" thing is the vision of the future. That might solve *everything*.

Anonymous's picture

Wall Street is complaining because they don't like the flavor and quantity of their carrots.

Perhaps it is time to skip the carrots and serve up a heaping helping of 'stick.'

blindfaith's picture


Break the damn banks UP!  Why all this bandaid crap and trying to figure out some answer to PLEASE the bankers, or keep jerks like this author employed.  F*&K them, as the have our nation. The have destroyed 50 years of building by Good Citizens of this country.   THEY ARE TRAITORS, a threat our military would have stomped on if the name Talaban was attached. 

THERE IS NO justice, you all know this...hope springs eternal, it that it.  What? maybe 3 years at some Fed Golf Club for a billion dollar pay scam...please.

blindfaith's picture

"Systemic Risk is All About Innovation and Incentives"...yea, that is what the Nazis thought too.  That is how they got everyday Germans to go along with their confiscation of money, property and rights.

Like the jews, Americans have been slowly stripped of their weath one by one and rounded up and barbwired into a concentration camp.  We acquiesced.  Watched these bumbs in finance and government steal us blind...and it was OK as long as those 401K statements kept looking so fine.  YOU invested in these monsters to make a buck, didn't you?  You watched as they took your neighbors house, right?  YOU watched as they sent your neighbors job to china, so you could have a nice fat 401K to look at.  Well, You are next to the camps, and unlike the Allied troups, there is no hero to cut the barbed wire from the camps being built for you as I write.  They own the ball , the statum, the seats, the team, and the town...and your 401K too.

Anonymous's picture

so phil gramm is writing under the pseudonym of ed kane now....well isn't that speeeecial....

kane/gramm is a quack which the rockefeller / rothschild terrorists sent to confuse folks with such winners as increasing regulator compensation (so that the salary differential between gs and governnment sachs is not so great when they rotate between positions), taking an oath (so that the terrorists can fool cnbc anchors), extending risk (so that shell cames of unimaginable complexity can be played), and filing contingency bankruptcy plans (so that meaningless make work can be created).....

kane can go back to his rockefeller overlord and fuck himself....

the crisis occurred in part due to glass steagal rescission, in part to regulatory avoidance and obese regulators, and entirely to loss of moral and financial hazard....

the financial terrorists are 40-70 year old frat boys who know that whatever damage they do will be paid for by dad and the community because the punks are too cute to hold accoubtable....

fuck the fed, whelan, kane, gs, jpm, and the rockefellers.....

Anonymous's picture

Stunning, this version of the argument that regulation begets innovation, as if to say laws beget crimes.

But it is true that the Wall Street types who were walled off by Glass-Steagall have waged a successful 40-year siege on markets formerly protected by high walls of bank regulation. The simultaneous rise of money market funds and securitization in the post Vietnam War era of "stagflation" eventually moved nearly half of the action out of the banks and into unregulated markets where trading, arbitrage, hedging prevail.

It is a mistake to think of the counterparties in this system as banks, yet bank seems to be the only word we have for it. This confusion causes us to imagine that regulating banks will matter. Indeed, everything we are seeing today comes down to an effort to protect the system, even if that means artificially supporting insolvent counterparties.

Mr. Kane argues that safety nets promote innovations in regulatory avoidance, but a more straightforward economic view would say that innovations in regulatory avoidance were motivated by the attraction of the lucrative fields controlled by the castle and the gold within those walls. What we are experiencing is not a banking crisis so much as it is the capture of the money creating mechanism at the heart of the system.

Anonymous's picture

You know I read the TDFU at first as "too dumb to fail", or once I got the letters right, "too dumb, f*ck u".