Thursday, October 15, 2009

What Financial Reform Should Look Like and Doesn't

--- by Hugh

According to this post, the White House is kicking off its push to sell its financial reform package. The problem for us, not so much the Obama Administration, is that there is no reform, and certainly none of the needed reforms, among the proposals. The one positive component is the Consumer Financial Protection Agency (CFPA). It is a good idea that has already been considerably weakened. Barney Frank has been circulating a draft supported by the Administration which would eliminate the CFPA from requiring financial services providers from making available simple “plain vanilla” versions of their products or that their communications with their clients be “reasonable.” The abandoning of such products in mortgage writing led to the bubble and bust which drove our economy over the cliff. If there cannot be reform here, there really will be reform nowhere. In other words, even the centerpiece of Obama financial reform is a hollowed out consumers agency.

Obama’s reform plans do not address any of the fundamental failures and dysfunctions which characterize the casino capitalism that has severely damaged much of our economy and threatens to push it into depression. Last year in December 2008, I wrote out a list of proposals which, unlike Obama’s non-reform reforms, were meant to address and fix our financial and economic situation. I have added to it over time. With the Administration bringing up the subject of financial reform, I thought it would be a good time to revisit what reform would really look like.

Nationalize banks and or bank holding companies, i.e. put them through bankruptcy

1. Re-initiate normal lending, i.e. local community based lending practices
2. Evaluate toxic assets (at mark to market pricing) and solvency
3. Remove discredited executive leadership
4. Recapitalize and re-privatize or set up as a public utility for vanilla banking activities
5. Reduce fees
6. Initiate forensic audits of financial institutions, investigate and prosecute fraud at all levels (both fraud in lending and control fraud)
7. Enforce Prompt Corrective Action to place financial institutions into bankruptcy or receivership regardless of size
8. Require bondholders to share in losses in any re-organizations

Audit the shadow banking system, especially Money Markets

Nationalize the Fed (it is currently working for the benefit of banks and not the wider economy)

1. Eliminate conflicts of interest
2. Remove the Fed’s de facto use by the Executive as its own funding instrument and return the power of the purse to Congress
3. Bring the Fed into line with the Constitution
4. Yearly audit and publication of the Fed’s activities; increase monthly and quarterly reporting requirements
5. Require that the Fed can only take on to its balance sheet assets that are marked to market

Nationalize the ratings agencies and consolidate them into a single independent entity

1. Eliminate conflicts of interest (they are currently paid by those they provide ratings to)
2. Make explicit that ratings do not substitute for the fiduciary responsibility of investment and financial institutions

Homeowners and the housing market

1. Offer a re-issue option on mortgages (all types on first residences) with a cramdown based on pre-bubble values (approx. 40-50% discount on face value, varies by market) at long term fixed rates.
2. Foreclosure moratorium
3. Allow conversion to renting
4. Future mortgages must follow truth in lending requirements, verify applicants creditworthiness and information, and disclose all fees and costs in advance
5. Establish a warrant system for mortgage writers with proof of insurance and/or reserves


1. Must be registered with the CFTC to be legally enforceable and must trade on a federally regulated US exchange
2. Reserve requirements and limitations on leveraging
3. Limitations, not on net positions, but on overall nominal ones

Collateral Debt Obligations (CDOs)

1. Simplify contents to a single asset class
2. Define ownership of the underlying assets
3. Ban re-rating sub-tranches upward and spinning them off into new CDOs
4. Ban movement of individual “mortgages” within a CDO
5. Ban CDO squared

Credit Default Swaps (CDSs)

1. Nullify naked swaps
2. Amortize risk on equity backed types
3. Phase out and convert to regular insurance


1. Increase margin requirements
2. Ban non-commercial traders
3. Monitor for excessive speculation: High volume trade notifications and total exposure reporting by traders

Special Investment Vehicles (SIV)

1. Must be kept on balance sheet. (This effectively eliminates them.)
2. Must be marked to market


1. Re-imposition of Glass-Steagall
2. Limits on size of banking and insurance institutions: Any institution which is too big to fail is too big. Increase anti-trust investigations and actions
3. Re-institution of the uptick rule to prevent predatory shorting of a company’s stock
4. Ban naked shorts; and CDS used to undermine a company (another reason to get rid of them)
5. Sliding scale of fees on trades that increases with volume to decrease volatility and tamp down on speculative plays by hedge funds (and investment banks trading on their own account)
6. Limitations on direct executive compensation, limit bonuses, limit stock options and draw out any payouts
7. Require independent boards of directors
8. Make both CEOs and board members criminally liable for criminal activities of the company and civilly liable for losses unless reported immediately to regulators and with relinguishment of control
9. Redefine and limit the meaning of corporations as legal individuals
10. Ban investment banks from trading on their own account
11. Outlaw frontrunning done with fast computers
12. Reinstitute mark to market in accounting; disallow mark to model
13. Disallow write downs of debt in accounting
14. Disallow booking the projected profit of a contract at its beginning but phase it in over the life of the contract
15. Registration and reporting for hedge funds and private equity firms
16. Close the revolving door between government and the financial community; a 3 year rule either way
17. Completely revamp and restructure the SEC to emphasize professionalism and independence in investigation and monitoring; codify minimum funding levels
18. OTC (over the counter) exchanges must be independent or set up by another independent exchange; no OTC exchange can be owned or controlled by a market participant
19. Forbid insurance companies from re-insuring internally or through shells
20. Transparency, transparency, transparency

Consumer Credit

1. Re-imposition of anti-usury laws
2. Easing of personal bankruptcy laws
3. Limitation on credit card offerings
4. Debt repudiation without bankruptcy

Pension funds

1. Require adequate funding
2. Require pension funds to pursue low risk investments
3. Restrict or eliminate investments through high risk hedge funds

Tax policy

1. Rescind Bush tax cuts for the wealthy and re-institute high marginal tax rates
2. Take income caps off FICA (Social Security)
3. Treat capital gains as regular income for tax purposes
4. After current downturn is over, increase corporate taxation
5. Redirect tax cuts to lower and middle class Americans
6. Reward companies with tax breaks if they increase workers’ wages and living conditions, and if they become greener
7. Rescind tax subsidies for outsourcing


1. Single payer universal healthcare
2. Reconsideration of “free” trade agreements which allow for free flow of goods, jobs and capital but do not take into account environmental pollution, poor quality control, and lack of workers’ rights and safety in target countries
3. Large multi-year stimulus with a view to sustainable re-industrialization: nationwide broadband, levees for New Orleans, rebuilding highways and water systems, building wind and solar power, update the power grid, conservation, mass transit, better community planning, carbon reduction projects, basic research; aid for state deficits; education grants; food stamps; unemployment benefits; and green technologies (of which an auto bailout and requirement to move to smaller more fuel efficient cars would be a part)
4. Savings in defense spending: Withdraw from Iraq and Afghanistan, cut unneeded, goldplated weapons programs, reduce the number of overseas bases
5. Change the filibuster rule in the Senate to prevent gridlock
6. Mandatory public campaign financing


Blue_in_AK said...

Anchorage always sucks under conservative mayors. Is Sullivan trying to be Tom Fink or something?

Anonymous said...

What a predictably laughable proto-Marxist wish list. You want all that ?
Put your money where your mouth is and try living in North Korea or Cuba for a year. Still, I guess anything seems possible for the neo-communists when they're spending other people's money.

Susie said...

I can rarely get a comment to go through on this blog anymore; I don't know what's going on with trying to use the google account, chich works on other blogs just fine.
I'm just wondering who "Hugh" is and what his economic credentials might be.

Anonymous said...

Hugh seems to think that the likes of Charlie Rangel, Chris Dodd, Barney Frank and Harry Reid should run the country's banks. Because they did such a good job with Freddie Mac and Fannie Mae. It's not April 1st is it ?

ed-hardy jacket said...
This comment has been removed by a blog administrator.
Polarbear said...

We do want financial reform, but carefully. So far, the focus has been on stimulus, and we are just now starting to see positive results. Credit is now flowing again between banks, nationally and internationally. Banks are being very careful in extending credit to businesses, particularly small businesses, as they reassess how much credit they can safely extend in relationship to assets and other risks. Credit flow to Main Street is just now being restored. We are just now seeing the start of recovery of jobs in the automotive industry and suppliers, and in other industries. None of these positive developments are happening fast enough to satisfy us all. Certainly we still have problems, but the economy is turning to growth.

When hammered by a recession or depression, national market economies spend their way to recovered prosperity, and recover their debt from the increased value of assets they acquired during the downturn, and from taxes as productivity and profits recover. The process may be counter-intuitive, but that is the way it works.

Overall, I think the economic problem is better stated as, how do we dampen the tendency of market economies to repeatedly cycle upward to unsustainable value, followed by strong and rapid recession of value? In my opinion the answer is, by means of very carefully imposed regulation. I do not have any problem with examining every one of the items on Hugh's economic laundry list, so long as it is done carefully and deliberately. Quite a few items on that list would likely not stand scrutiny, but every one of them should be looked at.

The one thing which will destroy careful and deliberate changes in financial regulations is hyperpartisanship. As a citizen, it makes me nervous to see either the extreme-left or the extreme-right shaping the regulatory conversation. The notion that we are going to permanently nationalize all major banks is crazy (extreme-left). The notion that the debt accrued from stimulus funding will haunt our grand-children into poverty is equally crazy (extreme-right).

Anonymous said...

Common sense should tell you that we will not recover as long as we keep exporting jobs. The Walmart economic model is like eating your fingers if you are hungry. Save a few bucks on some cheap Chinese goods and next thing you know YOUR job has been sent to China.

How many central business districts in small town America has Walmart et al ruined?

Ask yourself who exactly is responsible for these lopsided trade agreements?

Where are we headed?

Anonymous said...

It's strange that those who are the loudest critics of US companies taking jobs abroad often turn out to be the biggest supporters of illegal immigration into the USA. Some consistency please !