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

Derivatives

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

Futures

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

Regulation

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

Other

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