Regulation Required to Stop a Repeat Crisis?

(rephrasing an earlier post)

Consider how various classes of actors have fared in the crisis (either as contributors or victims). The worst actors are regulated, sometimes highly so. The best actors are unregulated. Here are lists categorized by how they have performed:



Performed Badly

Credit Rating Agencies (regulated by SEC under NRSRO designation)

Monolines (MBIA, etc) (Regulated by State Insurance Commissioner)

Banks and Securities Firms (Multiple Regulators, and including French and German primary regulators)



Performed Well

Hedge funds (famously unregulated; approximately zero blow ups)

Dumb mortgage borrowers fleeced by unregulated mortgage bankers (as a class net received $400 billion of transfers from domestic and foreign regulated institutions )





Note that there are 10,000 hedge funds, with $2 trillion of equity capital, with a variety of strategies and leverage ratios. They are ill-understood and pretty unregulated. Yet there are almost zero credit losses to counterparties and the biggest surprise is that quantitative equity trading (stat arb) had what they would call a 25-sigma one week move and even then haven’t blown up. On the other hand, there are banks and securities firms that may have negative networth on a true mark-to-market basis. And of course we have the credit agencies rating the monolines AAA with a market implied likelihood of default in the next year in the tens of percent.