The Map and the Territory by Alan Greenspan — FIVE | FINANCE AND REGULATION1

1. 1. Greenspan argues that the 2008 financial crisis shattered his belief that market aberrations from rationality were merely economic noise, revealing a systematic propensity in human nature.
2. 2. Greenspan concludes that financial managers cannot be trusted to maintain adequate equity buffers, necessitating tighter regulatory capital standards.
3. 3. Greenspan warns that the Dodd-Frank Act may create the largest regulatory-induced market distortion since wage and price controls in 1971.
4. 4. Greenspan advocates for higher capital, liquidity, and collateral requirements, including contingent convertible (CoCo) bonds that automatically convert to equity when capital falls below a threshold.
5. 5. Greenspan notes that the share of U.S. GDP from finance and insurance rose from 2.4% in 1947 to 7.9% in 2012, driven by demand for intermediation in an increasingly complex economy.
6. 6. Greenspan argues that the failure of risk managers to account for shadow banking and fat-tailed risk distributions contributed to the underestimation of systemic risk.
7. 7. Greenspan estimates that regulatory equity capital requirements should rise from 10% to 13-14% by 2015, based on CDS market responses to TARP.
8. 8. Greenspan criticizes the 'too big to fail' subsidy, estimating it gives large banks a funding advantage of 40-80 basis points, and proposes splitting up Fannie Mae and Freddie Mac.
9. 9. Greenspan recommends allowing large institutions to fail via a special bankruptcy facility with limited taxpayer funds, and requiring CoCo bonds to reduce moral hazard.
10. 10. Greenspan observes that the partnership structure of pre-1970 investment banks discouraged excessive leverage, and suggests replicating partnership incentives in modern regulation.
11. 11. Greenspan argues that regulators cannot consistently forecast crises, and that private counterparty supervision remains the first line of defense, despite its failure in 2008.
12. 12. Greenspan concludes that the complexity of modern finance makes traditional loan examination impractical, and regulators must rely on counterparty surveillance and generic capital buffers.