With Health Care now out of the way, we can get to what I consider to be the more important issue: Reforming Wall Street and the banking sector.
As I noted 6 months ago, the White House emphasis on Health Care over Finance was a significant tactical error. I would imagine with their weekend health care victory, the White House might push for finance reform. I expect they will see some significant traction.
I do not know what the political fall out from being for or against health care will be. But I can tell you that it will be much harder to oppose re-regulating banking. While the banks have succeeded in buying Congress, I think their attempts to stop a major overhaul of financial regulation will be far more difficult. Political opponents will paint anti-reformers as pro-banks and anti-family.
Ideally, what should that overhaul look like? I can identify at least six areas that need total overhaul:
1. The Ratings Agencies: The prime enablers of the crisis, their pay-for-play business model is a debacle. Their status as Nationally Recognized Statistical Rating Organization (NRSRO) should be stripped, and the space opened up for real competition.
2. Derivatives Must Be Regulated like all Financial Products: Put derivatives on exchanges; require counter-party disclosure and transparent open interest reporting. Capital requirements for trading is needed — and like other insurance products, there should be reserves for losses; Lastly, we should repeal the CFMA.
3. Regulate Non Banks lenders like Banks: The unregulated non-bank lenders were at the heart of this crisis. It doesn’t matter if you aren’t a depository institution, if you loan money, you must be regulated like any other bank PERIOD.
4. Reinstate Net Cap Leverage Rules: Over turn the SEC Bear Stearns exemption via Congress. Reinstate the former 12-to-1 leverage rules.
5. Eliminate Too Big To Fail: Nixon Treasury Secretary George Shultz famously said “If they are too big to fail, make them smaller.” Put caps on percentage of total US assets allowed. I suggest 1%. Break up insolvent, incompetent megabanks — like Citi and Bank of America. And I would carve up JPM as well. Separate the Depository Banks from the investing houses. (restoring Glass-Steagall will do that).
6. Do not give the Federal Reserve MORE Authority: The Fed should focus on monetary policy. They can work closely with whoever is ultimately the bank regulator — but I do not believe having them be be the prime over seer of banks can work.
7. Stop Regulatory Forum Shopping: The alphabet soup of various bank regulators OTS, FDIC, OCC, etc. should be replaced with one regulator. The FDIC is the only office that did a good job this entire crisis, put all regulatory responsibility under Sheila Bair’s office.
8. Overhaul the SEC: They need to have numerous improvements: Start by making them less of a law firm and more of a finance shop. Expand the hotline/whistleblower division, offer bounties for discovering and reporting fraud. Add a quantitative division to look for issues mathematically.
9. Reform Compensation: The system of privatized gains, socialized losses must be thwarted. Exec compensation is totally disconnected from their performance. Major overhaul from shareholders is needed. Require custodians — Mutual funds, pension plans, etc. — to vote their holdings (shares) as a fiduciary.
Essentially, I am advocating a “Do Over.” Reverse the past 3 decades of radical deregulation. The alternative is an even bigger financial crisis, and sooner than you imagine.
The next time around, I plan on watching it all unfold from St. Barts . . .
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.