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At this week's Agora Financial Investment Symposium in Vancouver, put on by The Daily Reckoning newsletter, one of the more intriguing speeches came from Andrew Lowenthal, a powerful Washington banking lobbyist.
Yes, a real, live bank lobbyist. I sort of felt like biologist viewing a new species for the first time: "Oooh, so that's what they look like." Frankly though, I was impressed. Lowenthal was dead honest, concise, and provided some great information that I think you Fools will enjoy. Below is a partial transcript of his speech; this was a rush transcript, so I may not have gotten every word down exactly.
On lobbyists: The reason people are so aware of lobbyists is because we're incredibly transparent. You can find out anything about me. My agenda is out there for you to see.
On regulation: We like to think the assault on enterprise comes from Washington. The truth is that it comes from the financial services industry itself. They argued for so long about the ability of markets to enforce discipline, yet they were the first ones to ask to be spared of their own bad decisions. And they made a lot of bad decisions.
They want you to think this was some really complex ordeal that led to the crash. It wasn't. It's not as complicated as they've led you to believe. Most of it was really simple: they invested in long-term assets using overnight funding. It was a Ponzi scheme that fell apart. Simple.
I don't think our government is the problem. Most people don't worry about government on a day-to-day basis. That's a good thing. In countries with dysfunctional governments, people have to think and worry about their governments every day, not knowing what's going to be seized or confiscated. It's not like that here, whether people pretend it is or not.
That's one reason I'm very bullish on America. There's a lot of uproar right now, but this is nothing new. There's never been a time in history when we haven't thought that we were at the brink of the end of the world. Never. Every election I've ever been involved with has been "the most important election in history." At some point it's not. It's just the path of history. There's this fear that we're going to hand over our lives to JPMorgan Chase (NYSE: JPM ) , Goldman Sachs (NYSE: GS ) , Bank of America (NYSE: BAC ) , and Citigroup (NYSE: C ) . That just isn't going to happen. It's not that bad out there, folks.
On problems with the Fed: Most of our government is very transparent. I can find out exactly how much we spend on Guantanamo, trade pacts with China, what we're spending on prescription drug coverage, or what the budget of the CIA is. Most of it is all out in the open.
But you can't find anything out about what the Fed does with our money. They won't tell you. To let you know the truth would undermine faith in the system, they say. It's not like that anywhere else in the government. With the Fed, we're told, "Close your eyes and listen to those brilliant men over there." It's dangerous.
On systemic risk: Before the crisis, people thought hedge funds were the systemic risk. But ask any hedge fund that did business with Lehman Brothers where the risk was. The risk was with the brokers, not the hedge funds. These [brokerages] are so dependent on trading profits that they can't survive the next 24 hours without more capital. With a company like US Steel (NYSE: X ) , they need several years to see their return after investing in a project. Traders don't have that. It's 24 hours. That's incredibly dangerous.
On too big to fail: Left unregulated, big banks have a huge advantage against anyone who isn't too big to fail. If investors lend to a big bank, there's no risk. That pricing advantage cannot be left untouched. In the wake of the regulatory burdens that will fall on them are clawbacks of the advantages they receive. That's a good thing. They've been conferred upon them a huge advantage they don't deserve. The market should price for risk. That's what we need to get back to. People are getting outsized rewards for taking too much risk. That will change.
Left out of financial regulation: Venture capital (VC) was largely left out of the regulatory regime. That's very interesting. VC is not part of the Volcker Rule. It can still deliver outsized returns. And money flows to the path of least resistance, so I'd look for an influx of venture capital dollars going forward. That's not an intentional consequence, but the fact is money goes where regulation isn't.
Where you can invest after financial regulation: Community banks were pretty much left alone in the regulatory bill. They'll have same regulatory scheme they currently have. And they're very familiar with their regulations. Same with monoline entities: Jefferies (NYSE: JEF ) , Edward Jones, Lazard, pure insurance companies -- those are basically left alone. There's an opportunity there as regulations sit on big guys and make them more static. Another interesting opportunity is the exchanges. Driving business toward centralized clearing will benefit all the exchanges.
Losers of financial reform: Mid-sized depository banks -- those with assets between $50 billion and $500 billion. They'll face the weight of regulation, but they're not too big to fail. Some of them are nimble enough to compete against static bigger banks, but it won't be easy.
And your thoughts? Share 'em in the comment section below.