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Against Monopoly
The most important decision on financial reform seems to have been made by the Administration: to reject Volcker’s lead on financial reform to reinstall the wall between commercial and investment banks and repeal the implicit government guarantee to the investment bank lenders link here. Rather Obama chose to follow that of Summers-Geithner-Bernanke (christened the “Summersists”, as opposed to the “Volckerists”), to leave the banks big but try to regulate their behavior. This might be the right choice, in order to get it through Congress, but the banks seem happy, apparently in the belief that they can get what they want. Why do I feel that they are right?
Felix Salmon raises questions about write downs in banks’ valuation of mortgage servicing rights which give banks a steady income and which they have capitalized on their balance sheets link here. Presumeably, they bought these from mortgage lenders and mortgage derivative creators, but there is no current market price for them so holders can play games with the carrying value on their books. Their value will vary if mortgages are paid off early, ending the service income but also with interest rates on alternative investments. This is another aspect of the enigma that is investment banking. Why should the government guarantee lenders to …