Fool: Open Letter to the Fed

A bittersweet piece of satire from a couple of folks who write for The Motley Fool. The (fictional) premise is that they’re starting a new financial institution called Money Unlimited, and are submitting a business proposal to the Federal Reserve:

…let us assure you that we will start from day one as a very well capitalized institution, with no need to raise outside capital. While actual cash is on the lower end of the spectrum, we both own stock portfolios that we plan to use as collateral for our banking operations…In addition, Matt owns a home in Las Vegas. Though this asset is currently considered “under water” based on market valuations, a house down the street just sold for slightly more than Zillow.com said it was worth. We extrapolated that gain into infinity and determined the housing bust is simply a figment of the media’s imagination…Without getting into the complexities, our models show our combined net worths at just over $1 billion, all of which we’ll use as capital for Money Unlimited. We hired a 22-year-old right out of college who’s pretty darn good with Excel. He assures us it’s a conservative figure.

Their plan is to avoid the nuts and bolts of deposit taking and lending, and to focus on capital markets instead:

…we’re going to leverage our borrowings from the Federal Reserve to create a massive, money-spewing trading operation. It’s quite simple, really. We’re going to borrow money from the Federal Reserve at 0%, then lend it back out to the U.S. Treasury at 3%… If we leverage our $1 billion asset base 20-to-1, we’ll pull in $600 million in year one without breaking a sweat. Because we want to do what’s right for the economy, we plan to keep operating expenses to a bare minimum and limit our bonuses to $20 million each for the first five years…We understand that hard work and tangible economic contributions need to be rewarded, so in the sixth year of operation we both plan to take $500 million bonuses and use company money to buy ourselves private jets.

Predicting some of the objections to such a plan, the proposal points out how benefits are sure to accrue to financial markets and the economy at large (although at only 20-to-1 leverage, we’re not sure how they’ll compete effectively!):

Money Unlimited will offer other significant benefits to the economy as well. We’ll compete against [other large] banking organizations…who are no doubt engaging in similar practices. Plus, we’ll allow other banks to buy credit defaults swaps against us. As any financial professional worth his salt can tell you, this “increases liquidity” and helps small businesses. We can’t tell you exactly how that works, but salesmen who wear shiny cuff links and talk really fast tell us it’s true.

…Before long, the founders of Money Unlimited expect our trading operations will become so large that we will be considered “too big to fail.” While some may consider this a concern, we disagree. There should be more competition among “too big to fail” institutions so that the risk of a Chernobyl-type catastrophe in our financial system is spread more broadly.

Great stuff. Unfortunately, what they describe is still happening, as governments continue dithering with regulatory reform, and Wall Street desks resume trading as if they’ve forgotten one of investing’s best known adages.

URLs:

http://www.fool.com/investing/general/2009/11/20/an-open-letter-to-the-federal-reserve.aspx

http://www.thestreet.com/static/rules1.html