Regulation G

Wasn’t he, uh, one of Archie’s friends? Eh, maybe that was just “Reggie…” Okay, so Reg G is all about disclosure, largely as it relates to relationships that banks, holding companies, and savings and loans have with NGOs, or Non-governmental organizations or institutions.

The key driver of Reg G revolves around the opacity of bank filings as they relate to risk and exposure in volatile times. The obvious backdrop was the mortgage crisis of ‘08-to-’09...with a goal of having that, uh...not happen again.

Part of the issue was that a number of the banking terms were so complex that there was not a pre-existing GAAP, or Generally Accepted Accounting Principle measure for a way to talk about things like complex derivatives risk.

What does that mean? Bank A is hedging its mortgage exposure, because it believes that housing starts are a good proxy for the health of the economy. So they get an investment bank to create a liquid index, against which they can be short or long with leverage, and with derivatives, believing that these hedges will, in fact, give them life under dire situations like that mortgage crisis.

In fact, many of these hedges became so complex, and relied on non-GAAP terms, like EBITDA, where clever accountants can more or less make up whatever they want it to mean that Regulation G put the burden of clear disclosure on the effecting bank or institution such that if there was ever a problem, the judge about to put management in jail didn’t need a PhD in accounting to figure out, or be able to trace, the logic of whatever filings were made.

So when you think Reg G, think: Gee whiz, I actually understand what the hell they’re talking about...