Having failed miserably to build a Windows operating system that worked 100%, 100% of the time, Microsoft hit upon a brilliant strategy: build a system that definitely didn't work.
The strategy works this way.
First a Microsoft bigwig, usually Bill Gates, announces that the company will deliver a version of Windows that is the greatest advance since the printing press and will revolutionize the way that we all communicate, work and live together. Though the planned delivery date is often years away, Microsoft customers will reluctantly suspend disbelief to give the company one last chance.
Invariably, the project is delayed, first by months, then by years, but so what - still worth waiting for.
After some time, Microsoft announces that a 'beta' version will be released to selected customers. This is pure genius, the beta release definitely won't work but why spend money on your own staff, when you can get your customers to find problems for you. When the beta version is released to the geekocracy, the blogsphere is awash with plaudits and criticisms but, hey, any publicity is good publicity.
After some time, Microsoft finally announces a 'release date' and, like kids at Christmas, customers get excited about the arrival of the new software. About the same time, computer manufacturer announce that their hardware is 'ready' for the new system. In this situation, 'ready' is techno-speak for "this new operating system is such a dog that you will need a brand new computer that is at least twice as fast and big as your existing one to even get to the sign-on screen".
At last the great day arrives, and you queue for the new system, take it home, unwrap and load it up on your (new) computer. Then you find that your favourite software doesn't work; in this case 'backward compatible' does not mean compatible - just backward. After a fortnight or so, of (re) purchasing and loading software that used to work, the system is back (almost) to what it was before - though you tend to be disappointed by reality of the promised revolution in the way you work and communicate. Often the new system (like Windows Vista) is just plain annoying.
Then there is a 'ping' - you have email!
The email is from Microsoft and it warns you that the universe will implode and life as we know it will cease to exist, unless you immediately apply a mandatory 'security patch'. Of course, you do. But that is not the end, every day it seems that a new shock-mail arrives and, now frightened silly by newspaper articles on the end of civilization, you apply the latest patch. And so on for months.
Heaven forbid that you do not apply one of these patches because, for example, you have a life and a job to do. But beware, if you have to call Microsoft for what is laughingly called 'support'. After hanging on the phone for hours, a disembodied voice will first ask you "what patch level are you on?" But if you answer anything less that "version 2.43617/A/r142" the response will be "cannot help - get on the latest patch level". After some time, you give up trying to keep up and put up with the periodic 'dead green screen' and the galling loss of hours of work when your system crashes.
Just when you are getting ready to consider getting an Apple Mac, Microsoft announces that it is delivering a new PC operating system that will be the greatest leap forward since yada yada. Having wasted so much time and money on the current system, you again suspend disbelief and so the cycle continues. You rationalize that Microsoft must be doing something right, as Bill Gates is, once more, the richest man in the world.
Has the Basel Committee been taking lessons from Microsoft?
In November 2008, the Basel Committee announced what was, in effect, a new approach to issuing regulation. The announcement said that it was nothing less than a "comprehensive strategy to address the fundamental weaknesses revealed by the financial market crisis related to the regulation, supervision and risk management of internationally-active banks": - can't argue with that?
All sorts of promises were made. Among the many features to be found in this new super-duper Basel (so far un-numbered), were "strengthening the Basel II framework; enhancing the quality of Tier 1 capital; building additional shock absorbers [wow!] into the capital framework; strengthening supervisory frameworks to assess funding liquidity at cross-border banks; leveraging Basel II to strengthen risk management and governance practices at banks; promoting globally coordinated supervisory follow-up exercises to ensure implementation of supervisory and industry sound principles."
Suppressing the obvious question: "wasn't that exactly what Basel II set out to do?' in these trying circumstances, one can only wish the Committee well.
But the sting is in the tail. Instead of the tried and (very) tested Basel method of long consultation and detailed review the new approach would be snappy and up-to-the-minute. The Chairman of the Basel Committee, Nout Wellink, announced that the committee "expects to issue proposals on a number of these topics for public consultation in early 2009 [i.e. just a few weeks away]... and other topics will be addressed over the course of 2009." I.e. Basel will, from now on, be working at Internet speeds.
True to its promise, the Basel Committee did not let the Alpine pastures grow under its feet but issued the first in the new line of 'express proposals' in January 2009 - great turn-around, given that Christmas fell in between.
The timetable for this first set of jet-powered proposals is certainly aggressive. Comments on the proposals must be made by mid April and some parts are due to be implemented by 1 July 2009, less than 3 months away, with much of the remainder by year-end. Compared to the glacial pace of Basel II, this timetable is positively instantaneous.
And what about the regulatory changes proposed?
The new regulations range from the far-reaching to the relatively trivial.
For example, in Basel II, the issue of 'reputational risk' was barely touched (except to note that it was not covered under Operational Risk). The first set of the new express proposals requires banks to take reputational risk out of the 'too hard basket' and include this risk in its capital adequacy assessment, by end of 2009? Shouldn't be too difficult - eh?
At the other end of the spectrum, the new proposals mandate a slight change in the so-called Credit Conversion Factor (CCF) for "short-term eligible liquidity facilities within the securitisation framework would be changed from 20% to 50%". If only we had known that all we had to do was to change this simple factor instead of spending trillions on economic stimulus because securities had become illiquid. In future, maybe we should change this factor on a weekly or even daily basis, maybe we can get this factor from our local regulator over Reuters and cut out the risk manager altogether.
If it succeeds, what will this new 'always on', Generation Y approach to regulation look like?
First, new regulations will be promulgated by Twitter. And, instead of regulators being gray men in gray suits, the new breed will wear their baseball caps back-to-front and carry skateboards - respect to IRB, Dude.
And, in future, when a risk manager rings their regulator for clarification on some obscure point, they will be informed by their (slightly foreign sounding) call center 'regulation agent' that the firm's capital charge will have to be increased immediately because they have not downloaded the latest table of beta factors for their Standardized Approach to Operational Risk.
The new motto of regulators has become "Don't think - Do!" As Andy Warhol said: "As soon as you have to decide and choose, it's wrong. And the more you decide about, the more wrong it gets" [could have been an observation for Basel II also?].
However, when looking at Basel's new approach, the question that must be asked is: 'Given the cataclysm of the Global Financial Crisis, what is the purpose of tinkering at the edge of existing (discredited) regulation?'
This is not rearranging deckchairs on the Titanic; this is rearranging cushions on deckchairs on the Titanic while taking orders for dinner.
Optimistic but, honestly, a waste of (everyone's) time.
