As we look back each November to bestow the year’s crop of Golden Turkeys to the silliest and most annoying instances of regulatory overreach, legislative inanity, governmental misfeasance or the mere idiotic behavior of people without any help from the government apparatchiki, there’s always a glorious excess of candidates. This whole commentary thing would be really hard if the world made sense and behaved in a predictable, rational, Newtonian universe sort of way, but blessedly it does not.
So, as we get ready for the season of cheer, the season of desperate efforts to close yet one more deal and the nice calculation of bonuses, and before we imbibe too much good food and drink to be at all disciplined, here is our list for 2017:
The John Le Carré Meets Maxwell Smart Award
…goes to the Kremlin, the heart of perhaps the deepest of deep states, for continuing to bewilder, divert and distract the American electorate and our government with stories of secret meetings, portfolios of salacious gossip, bags of cash, Facebook buys and grassy knoll leaks to keep the pot stirred. I’m not really sure there is a point to all this (alleged) Russian interference. Maybe in some way this really advances the Czar’s interest, or maybe it’s just fun. Mr. Putin to his coterie of spies and operatives: “Hey guys, I’m bored. Have someone call The Washington Post and tell them that Richard Nixon and Elvis were just seen in the White House with the Russian ambassador, five underage hookers and a dude from Alabama and then stick a note in Mr. Mueller’s underwear drawer telling him to check it out.”
Here Be Dragons Award
…We have made this observation before, but every year we get a little closer to that point when the geniuses that run our monetary policy (no, I’m not being facetious, they may be geniuses, it just doesn’t mean they’re right) are going to start to force up short-term interest rates and unwind the Fed’s balance sheet in a meaningful way. And we have no idea what all that will do. The traditional monetary models taking into account money supply, inflation, productivity, etc., have essentially all fritzed out. You can get ten opinions on the efficiency and advisability of the Great Unwind from any eight economists ranging from “What, me worry?” to “The End is Near,” but we really don’t know what happens when we push that button. I am reminded of the scene from Ghostbusters where the frazzled EPA official is confronted by the mayor after turning off the containment field and Dr. Venkman says, “Yes, it’s true, this man has no dick.” So as we approach the edge of the known world we write: “Here be dragons.” The doomsters could be right this time, there may be dragons.
The Dysfunction Award
…A small contretemps erupted at our committee meeting on this award. Is it really meaningful to use the word dysfunction when talking about our government? I mean a system that works and then gets bad is dysfunctional, but what do you say about a system whose steady state is dysfunction? Dr. Milton Friedman famously said that if you put our government in charge of the Sahara Desert, in five years there would be a shortage of sand. My, my. But here we go. This is about how our distinguished elected representatives and the broader polity are playing while Rome burns. I understand there are real policy differences in the country and hence, in Washington, but isn’t the rabid, ad hominem flux of bile they all pour upon each other every day on every disagreement, no matter how fundamentally minor, sad? An undisciplined and jejune game. Where are the adults? (Like Game of Thrones without, largely, the gratuitous sex and nudity, but we are hearing rumors that the Cannon Building is a frat house after hours so maybe there is sex and nudity?) Politics, personality and policy are inexorably intertwined and it would be naïve to think otherwise, but have we lost our minds here? Across the parties and the broader polity, it’s a circular firing squad where the national wellbeing seems to be entirely overlooked. I’m not looking for a lot here, people, but help me out, ok?
The Award for Fighting the Last War
…Do you know that when the First World War began, French troops entered the field wearing bright blue and red uniforms with a cute little white cross on their chests? The Germans approved. It made shooting the French much easier. The French general’s staff’s blind commitment to “offensive à outrance” (roughly, “attack at all times”) and its concomitant refusal to recognize the utility of the machine gun is a classic example of what happens when we fight the last war. Not to go off on a tangent here, but did you know that the ubiquitous French 75 mm field guns at the beginning of WWI did not have protective armor because the French generals thought it was better for the men to be able to stare into the eyes of the enemy…whilst being blown to kingdom come?
Sorry, meanwhile back to the award. Dodd-Frank and its progeny, which continue to bloat our financial sector rulebook even today, continue to make capital formation more difficult for very little incremental reward. Just recently, the Fed renewed its commitment to the loopy Fundamental Review of the Trading Book Rule, which makes it harder to make a market and deliver liquidity. Meanwhile, the gnomes at Basel republished their daffy Step In Rule, which makes financial institutions hold capital for liabilities they don’t have. Both of these add capital charges on top of capital charges in what seems to us a completely unthoughtful response to a cry now over ten years old to just do something. Are we so mindlessly unreflective that a decade old cri de coure still motivates the same regulatory instinct it did ten years ago? Sailors carry compasses because once in a while it’s really important to figure out where you are and to recalibrate where you are going. Where we are going now stifles liquidity and damages capital formation. No one is looking at the compass. Why are we still doing this? Silliness.
The Self-Inflicted Wound Award
…So once upon a time, LIBOR got diddled, or at least it is alleged to have been diddled. It was purportedly managed to make someone at a very large financial institution a basis point here or there on a trade. That all seems to be true, but, for all that, LIBOR really worked as an index for hundreds of trillions of dollars of financial transactions around the globe for over 30 years. Admittedly, it was always a stupid index; the rate equal to the arithmetic average of the interest rates at which major banks would borrow money from one another if they did borrow money from one another, which, of course they don’t. To think we based such a huge amount of lending and derivatives trades off such an absurdly unobservable data point is in hindsight a startlingly bad idea (and, of course, there is something slightly risible about the notion that someone fraudulently adjusted an already fake number in the first place, but that’s a discussion for a different day). Here’s the point. We don’t have a workable replacement for the index on which hundreds of trillion of dollars of trades are written.
We just took our hands off the steering wheel of our Formula One race car hurdling around the track at 200 mph to…floss? It’s really not a good trade to be dead but have terrific looking gums. Fixing the susceptibility of LIBOR to fraud is undoubtedly a laudable goal, but people, let’s think through how to do this. So, we have decided to find a new index. Fine. But, hello? How do we get from LIBOR 1.0 to 2.0? Has anyone thought how much pain and suffering and loss this might entail if the transition is not perfect? LIBOR is going to be gone, at the outside, by 2021 (and I, for one, worry it could go earlier) and that’s looking increasingly like a now-time problem to me as we enter trades that have tenures longer than four years. Can’t we figure out how to adapt to the new rate at the same time as we pursue inventing it? Apparently, we are all too linear for that. If it takes us two years to figure out what this new rate is going to be and we haven’t adapted the market to change, it’s going to be a disaster – trust me.
The Orange Swan Award
…goes to the American people for electing Donald Trump! My, my, how time flies. About this time last year we were busy trying to position ourselves for the presidency of the lady in the pantsuits; a third Obama term, with the first gentleman (hopefully) attending an HR training or two. And then we got Donald Trump, the ultimate Orange Swan. Leadership in 140 (now upgraded to 280!) character bursts. The watercooler has taken control of the Oval Office. The market is doing grand, the regulatory state is in retreat and nothing really bad has happened (yet). But we certainly are experiencing uncertainty on steroids. Maybe it’s the steroids that make one orange?
The “New Packaging, Same
Great Awful Taste” Award
…goes to the Federal Reserve, FDIC and OCC for responding to calls to clarify the HVCRE framework by introducing HVADC – a new (and different) set of impractical hoops to jump through! Talk about hitting a guy when he’s down. For years we’ve been lambasting the regulators about the High Volatility Commercial Real Estate (HVCRE) regulations (a small piece of the Basel III capital framework adopted by the Federal Reserve, FDIC and OCC in 2013) that affect acquisition, development or construction (ADC) loans. They’re opaque! They’re applied inconsistently by the regulators! They are applied inconsistently by the regulated! They hurt borrowers and regional banks! In September, the Federal Reserve, FDIC and OCC said “we hear you” and released a proposed solution meant to simplify the regulatory treatment for certain assets: HVADC. Simple it is not. It replaces HVCRE for one subset of banks with HVADC but leaves it alone in its current form (maybe not for long…as Congress doesn’t want to be left out) for another subset of lenders (but makes it vague enough so that most banks will try to adhere to both). It perpetuates disparate capital benefits across banks of different sizes and likely will cause no regulatory reporting relief (at least not for banks trying to adhere to both HVADC and HVCRE). There’s a great idea. But wait, there is more. Now comes Congress. The House has passed HR 2148, which would replace the current HVCRE framework. The bill is before the Senate – one governing body that we can probably count on to do nothing fast. In the meantime, the public is welcome to comment on HVADC. As we count our blessings, what we do have is an unworkable HVCRE rule, a potential amendment to that unworkable rule and a new (different), potential unworkable rule. Each seems as awful as the last. Three versions of a bad idea and more confusion than we had before. There’s not enough lipstick to make this pig attractive.
The Brexit Award
…goes to Brexit and the GOP! The Brexit Award goes to any truly profoundly stupid decision made by a great enterprise. Well, there you go, Brexit, Britain gets it for Brexit itself. In a fit of populist anger and little England-ness, it has jumped off the European Community pier without apparently spending a great deal of time thinking about whether the tide was in. Then, course, there’s the Grand Old Party that after seven years and 60 repeals of Obamacare, when it didn’t matter, apparently didn’t really have a clue, as to what to do when it did matter. Pier, no tide, redux. And without taking sides as to whether the UK being out of the European experiment is a good idea, or the US out of the unbelievable regulatory jungle which is Obamacare is an improvement or not, it’s rarely a good idea to leap into the dark with nary a thought as to what might be hiding there. The Republicans, after having thought about it for a while, seem to be creeping back into something that may be called Trumpcare, but in large measure will continue the prior administration’s initiative to provide healthcare to a large swath of heretofore uninsured Americans. No matter how often they say it’s not Obamacare… it kind of is. In Britain, Ms. May and her clown car of a cabinet seem to be trying to walk Brexit back. Perhaps when the French Gallically dismiss the stupid British for more Anglo-Saxon bullshit, it doesn’t really matter, but when Chairman Jamie Dimon of JPM says, “what the hell you doing?” the grandees of London appear to take note. (See LIBOR discussion above for the runner up for the Brexit Award.)