Who Says Financial Innovation Is Dead?

You can't hold a good banker back, it seems. I had to laugh when I read the cover of the FT this morning, with a story on how Goldman Sachs, Barclays and others are finding ways to soften the burden of the new capital requirements being imposed on them in the wake of the financial crisis. One of the ways they are doing it, apparently, is by splicing and dicing together assets from several different clients into a single security, which, as the FT notes, "can be sold to other investors and rated by a credit rating agency, potentially reducing the capital allocated against the assets by between 10 percent and 50 percent."

It's complex securitization. Sound familiar? It should – it's what started the financial crisis to begin with! The bankers say it will help move risk around to those who can best afford to hold it. But that's what they said when CDOs were invented too (Greenspan agreed, only to issue his now infamous mea culpa). I don't know enough about these funky new products to pass judgment at this point but this all sounds suspiciously like a way to get round the fact that investment banking in the future must be less leveraged and somewhat less profitable in order to be safer for the public at large. One thing that most people – even the best bankers I know – seem to agree on post financial crisis is that banking must get back to its moorings in the real economy. Bankers are here to help other businesses get started – not to be an end themselves. The fact that these banks now have teams of people figuring out how to arbitrage their new capital requirements makes me nervous – it sounds far from "real economy" to me.

The other thing that I took away from this story is that it is going to be very, very difficult for any regulator to police this sort financial innovation – it moves too quickly, and its creators are far more clever than those who are watching them. Let's hope that these new innovations aren't going to be just another way of doing investment banking business as usual.