Corn and Finance.

Financial players have managed to take a single measure of value, and slice, dice, reportion, repackage, and redesign the risk so that it appears in many different incarnations, each different from the others but reflecting the same underlying economic value. And my use of multiple verbs above, which are usually used by the media with a negative connotation, are meant in no such way. I actually think that the transformation of value into different vehicles can be tremendously useful - as long as the markets can actually keep up with the scope of their complexity, which has proven to not be the case. Just as humans are limited, all participants in the market are limited.

So today, I thought I would trace the source of our regulatory failure (i.e. fragmentation) through a single prism: A bushel of corn.

• Buy or sell a bushel of corn? No regulator. At least not a financial regulator. Who knows about the corn gods.
  
  
• Sweet. Now you've sold your bushel of corn. Put the money from that bushel of corn into a bank. Now that money is regulated by bank regulators the Federal Reserve, Office of Thrift Supervision, or the Office of the Comptroller of the Currency depending on what the bank looks like. And the Federal Deposit Insurance Corporation (FDIC) which will save your ass if the bank fails.
  
  
• Buy the bushel of corn in advance, that is, buy a future in corn? Then that contract for that future bushel of corn is regulated by the Commodities and Futures Trade Commission (CFTC).
  
  
• Forget the corn itself, it's too corny. How about you buy an ownership stake the company that sells the corn? Now you've bought yourself an equity stake, a security, a share in a company. Now you're subject to the SEC and 50 state securities regulators.
  
  
• Too complicated. How about instead of selling away rights to your corn company, you just agree to sell the stream of income from the bushels of corn? Well you got yourself a security still. And the SEC and 50 state securities regulators are watching.
  
  
• Eh. Still complicated. I'm just gonna grow corn and pay a tiny little percentage to the insurance company and buy insurance on whether that corn crop will survive the season. Now you are subject to zero federal supervision, and you are instead subject to 50 different state insurance regulators all with their own rules. Yay federalism!
  
  
• Ok, so let's simplify again...what if you just decide to flat out lend money to the farmer who grows the corn? Now you have to watch out for state usury laws, or, if the farmer is getting loans from lots and lots of people and decides to issue standardized debt agreements (bonds), then you're once again dealing in securities, although this time they're debt securities, and the SEC is breathing down your neck.

• Now fuck the corn itself, how about you just learn about the corn markets and get paid to give advice to someone about whether to buy shares in the corn company or lend money to it? Now
  you're an investment adviser and the SEC regulates you as an investment adviser
  
  
• Or, you could just sorta stand in the middle and buy and sell corn and corn related instruments to and from farmers and investors. And...take a penny or two off of every transaction, because you help the buyers and sellers find each other. Well now you're a broker-dealer. SEC and the Financial Industry Regulatory Authority (FINRA) regulate you as a broker-dealer.

And voila. The regulatory system in a nutshell. The question is then, how different are these different packages of corn? Do we really want 15 regulators regulating one thing packaged in 15 ways? Sure they're specialized and understand the nature of their little fiefdoms, but Who watches the Watchmen? (ha, I hate me too.) What is being pushed now by the Treasury and the Fed is to consolidate regulatory authority so that entire systems of finance don't develop in the gaps between these fiefdoms, which is exactly what has happened.

I'm not sure why I wrote this post, especially because I don't feel like taking it any further. I guess I've been thinking about this a lot and remember a very interesting day, like a year ago, when suddenly this insight about one underlying source of value splintering into a thousand different instruments, each with a different regulator, hit me like a ton of bricks....and found it interesting. Hopefully you will too? I dunno. I've also been sorta itching to write about the shadow banking system, mostly because it is such an awesome term, and because writing these things out helps me dig a little deeper into the details myself. Maybe I'll do that.

In the meanwhile, Disgrace by Coetzee was awesome. Now I'm onto reading essays, watching more Deadwood, and doing whatever the f I want because it's saturday and I need to relax.