Following the global financial crisis of 2008/9, it was not surprising that Congress laboriously constructed a new set of laws to improve regulation of financial institutions.  That noble gesture was called the Dodd-Frank bill.  Five years later, implementation of that law is as gridlocked as everything else in Congress.  The war is lost!

While I supported the bill, it was with reservation.  It made some progress in pulling derivatives regulation out of the shadows, which is critical.  But, like most laws, it was over-regulation and under-punishment.  And, it actually made “too-big-to-fail” institutions ever bigger.  It will require a million more pages, literally, of forms to be completed annually, which would probably never reviewed by regulators.  As usual, it would focus on disclosure and not punishment.  The only way anybody goes to jail is when their copy machine breaks down.

But, Dodd-Frank would be a step in the right direction.  Unfortunately, the banking lobbyists have successfully stymied anything and everything associated with Dodd-Frank.  That war is lost, and it is silly to keep fighting it.

As an alternative at the economics conference last week, Alan Greenspan proposed ‘co-co” bonds, which stands for contingent-convertible bonds.  These bonds would be sold by banks.  If the bank has so many losses that it must write-off equity, these co-co bonds would cease to be bonds and would become stock in the bank, thereby increasing additional equity, which might even be used to absorb additional losses.  (Of course, these bonds have have to pay a higher rate of interest, reflecting the higher risk.)

This could easily replace much of the doomed Dodd-Frank bill, and I hope we see co-co bonds soon.  It would require less precision paperwork and fewer under-educated regulators.

Even stronger, I still hope we see more “paper-perfect” bankers doing the “perp-walk”. . . in the middle of a mine field.