In my wonderful Google-Reader I tripped over this News Headline this Morning: Washington Broker The Evolution of Hank Paulson, so I opened the link and began to read and then I tripped over this paragraph, quoting:
A Republican, Paulson would bring government into some of Wall Street’s most private quarters. He said banking regulators should have a major say in how financial firms compensate their executives and that the Federal Reserve should have the power to regulate any financial company it considers crucial, including hedge funds and private-equity firms. He added that the policy statement he crafted on hedge funds in January 2007, which stated they should not be regulated, was wrong.
I believe Hank Paulson could not be more right and he sould be elected man of the year 2008. This is why I believe so:
1. If you look at the amount of energy that has been wasted through the financial industry in the last 3 years, it is massive. Just look at the UBS stock price in Switzerland today (since a couple of month I am saying it will touch CHF 12. My friends said, if that will happen, UBS will be bankrupt. My response: Why? They can go down to zero point something) and compare it with the bailout package of CHF 60 billion with some 7 million inhabitants of Switzerland and USD 700 billion bailout package of the USA and their 300 million inhabitants. Switzerlands bailout is 3 times bigger if you compare the size of the populations as well. Massive waste of money and empty houses in the USA, funded with Swiss money ;).
2. If you look at the USD 50-60 something trillion of unregulated Credit Default Swaps in unregulated territory not knowing what they insure and what is on the other side of the balance sheet, you start thinking like Hank Paulson as well. You baisically just have to!
3. I like to take another metaphor from another industry, but I believe it is a nice comparison. Compare the Tokyo Metro System to the New York City Metro System. The Tokyo Metro System ist highly regulated, you can not drink or eat on the train, there are no trash bins in the stations, the stations are very clean, you always know when the next train is coming, entering and leaving the metro is highly efficient with a magnetic passcard or with your cell phone. To make it short: So many people use the Tokyo Metro every day, it just _has_to_be_well_organised_and_highly_regulated. The Tokyo Metro has several private companies competing (I include JR as well) against eachother, in a highly regulated market. I am not even mentioning the tons of shops and restaurants you get underground in the Tokyo Metro stations. That Eco-System just works.
No fly over to New York City and use the Metro System there. You will want to leave again, right away. The NYC Metro is not a five star place. It is dirty, you never know when the next train is coming, sometimes you have to pay with coins, sometimes with paper money and sometimes you have to walk to the next station to be able to pay and get on the train.
The point I am trying to make with the above comparison is this: The more people rely on a system, the better organised it has to be. If people start fighting in the metro, because it makes them feel that way, then you have to be very strict with the rules and make them very transparent to everybody. The same rules for everybody, no exceptions. Relying on good faith does not work.
4. The global financial system has a lot of dependencies but no or very few rules at best. Actually it contains more greed then rules. The dependency of governments and populations on a working financial system is very big. At the moment the global financial System looks more like the Wild Wild West with John Wayne and Billy the Kid in it (and at the momemt both of them are shouting and screaming for help from the Sheriff, because they lost their money gambling against eachother). The global financial system should look like the Tokyo Metro System.
Now I will continue reading what Hank Paulson has to say.
To the Harvard Business School students I can only say: Apply for a job at the Treasury. You will make history (because changing history is not possible). But you have to go there and work there for a couple of years. Forget about your bonuses in banking. Forget that! Please, trust me. I am begging you.