Euro Envy

September 01, 2008, 1:00 a.m. EDT 3 Min Read

The reputation of the U.S. as a supercharged economic engine and unapologetic bastion of capitalism has taken its lumps of late. The subprime crisis leading to the credit crisis leading to the banking crisis has more than a few in China, Russia, etc., chuckling that the free market philosophy the U.S. has relentlessly pushed down everyone else's throats isn't the magic elixir that's been advertised. Americans themselves are in a period of self-doubt, worried that the economic solutions introduced by the Reagan revolution to solve the economic malaise of the 1970s have run their course and new ideas are needed. For the first time in a very long time, Wall Street financiers and Washington regulators seem inclined, if not downright eager, to look overseas for market solutions.

Which brings many to the growing fixation with goings-on in Europe. Call it euro envy. The Old World, it seems, is suddenly chock full of new ideas. To trace where all this envy started, begin with the euro itself. Since 2002, when a euro would buy 90 U.S. cents, the dollar has steadily lost value until now the euro buys about $1.55. The streets of New York aren't just filled with European tourists but with European house hunters.

Whether or not the clout of the euro has had a knock-on effect, the reality is that European financial products and regulatory regimes are getting a lot more respect from the U.S. Last fall, the Office of the Comptroller of the Currency approved a final rule implementing the Basel II Capital Accord, an international standard for banking regulators to set capital requirements to guard against financial and operational risks at banks. U.S. regulators could maybe use some help there.

That OCC approval came before the banking crisis really got rolling. Since then the market has heard much about Treasury Secretary Henry Paulson's affinity for a "principles-based approach" to regulation as practiced by the U.K.'s Financial Services Authority (FSA), as opposed to the "rules-based" approach in the U.S. that gets mired in details and loopholes. There's also longing among many for the simplicity of a single super-regulator, such as the FSA, instead of the balkanized regulatory regimes in the U.S. that at times prompt banks to switch charters, create fiefdoms that outlive their usefulness (the Office of Thrift Supervision is the commonly cited example), and operate without adequate resources and funding to effectively enforce the rules anyway.

But the euro envy doesn't end with its regulatory approach. U.S. finance types are looking across the pond for capital-raising techniques as well. At a time when many banks are scrambling to repair balance sheets, and when traditional sources of funding are drying up, bankers are taking a closer look at a European tactic virtually unheard of stateside: "rights issues." Rights issues are a pretty simple concept. A company offers the right to buy additional shares, directly, pro rata, and at a discount to existing shareholders. Last month, BankAtlantic in Fort Lauderdale, FL, announced a rights offering of 50 million shares, one of the first by a U.S. bank in decades.

The U.S. financial wizards are even turning to Europe to remedy the problem at the heart of today's financial mess: securitization. In August, Paulson announced with fanfare an agreement with four of the countries biggest banks to create a market for so-called "covered bonds," again popular in Europe, which can be backed by pools of mortgages. But the quality of those mortgages are tightly controlled, unlike the bad old CDOs that got U.S. banks into such trouble, and they must stay on a bank's balance sheet.