Evaluating the Risk of a Risk Czar

The latest plan to fix the financial system, by creating some sort of regulatory “risk czar,” perhaps best exemplifies what the bailouts have been from the start: a breathtaking power grab which now has government choosing board members at Citigroup (C), determining bonuses at AIG (AIG) and picking the CEO at General Motors (GM).

The “systemic risk regulator” would give government the authority to identify, supervise and potentially seize any financial institution whose size, scope or indebtedness posed, in their view, “systemic risk.” Of course, like “predatory loan” or “toxic asset,” there is no objective definition of what systemic risk actually is. If a large pension fund is holding “risky” stocks, if a hedge fund takes an exceedingly large position in foreign exchange or if a private equity firm takes on an inordinate amount of estate-related debt, the government would theoretically be able to take over the firm.

Forget for a moment that Treasury Secretary Tim Geithner couldn’t foresee the collapse even as he was in the catbird seat as head of the Federal Reserve Bank of New York, or that the SEC, now seeking even more authority over hedge funds, failed to catch the biggest Ponzi scheme in history when it was literally dropped on their doorstep.

In reality, simply empowering a “systemic risk regulator” is what creates the systemic risk that bureaucrats claim to want to avoid. A free market quickly disciplines poor judgment, unlike arbitrary regulations that end up masking problems rather than correcting them. And while the failure of Enron or Amaranth didn’t cost taxpayers a dime, AIG, Citigroup and GM have cost billions, precisely because of Uncle Sam. As the government gets involved, the liability of failure is spread to the public at large instead of being confined to those who willingly accepted the risk.

It’s been a long while since semiconductors were legitimate growth stocks. But it’s worth noting that, as sectors go, they are among the most impressive components of technology right now, having popped sharply from their late 2008 lows. IShares S&P North American Semiconductors (IGW), which is up approximately 10% year to date, holds names including Applied Materials (AMAT), Texas Instruments (TXN), Analog Devices (ADI) and Altera (ALTR), and is worth a look for those considering a position in technology.

Will Semis Soar?

iShares S&P North American Technology - Semiconductor ETF  – 1 year

In recent weeks, the president has frequently warned that “reckless speculation puts us all at risk,” which is the justification he has used rolling out the biggest regulatory docket since the Great Depression.

Of course, all investment — all wealth creation — involves speculation, which is nothing more than a derogatory term for forecasting or judgment. And what the president doesn’t acknowledge is that when speculators fail, they alone bear the losses, even as society at large often benefits in the process.

For example, it was because of “reckless” speculation that we were able to enjoy Kozmo.com, the legendary online delivery service back in the dot-com era. Its investors lost gobs of money, but the company created over 1,000 jobs, satisfied thousands of customers and paved the way for FreshDirect.com, Peapod and other delivery services with stronger business models.

Trump International Hotel and Tower, Chicago 
March 26, 2009

And it was because of reckless speculation that Chicagoans are now enjoying the magnificent Trump International Hotel and Tower, the second tallest building United States. While investors have lost money — Trump himself is embroiled in a lawsuit to avoid paying debt on the building — the public has unquestionably benefited from the aesthetic beauty and commerce created by this stunning structure.