I submitted my new chapter for the paperback version of Bailout Nation (July 6, 2010). It contains a checklist to evaluate the upcoming — and as of yet, still ill defined — re-regulation of the financial sector.

I tried to keep it realistic, discussing issues such as derivatives regulation, capital requirements, and leverage.

However, I kept wistfully thinking about the real fixes that were needed — the things that I would do if I had unlimited power (trust me, that’s something you don’t want to see). I avoided (or only mentioned in passing) these politically impossible fixes.

But that doesn’t mean we can’t put them in a wish list . . .

1. Investment Houses Partnerships: Goldman, Morgan Stanley, Merrill Lynch — turn them back into partnerships. That means the partners all have unlimited joint and several — meaning personal — liability for any losses.

2. Public Track Records of Pundits: I was astonished to see the same terrible advice on the TV during the entire market collapse. The spokesperson for a trillion dollar firm recommended buying the dip — the whole way down! Buy Dow 14k, buy 13k, buy buy buy at 12, 11, 10. All the way down. But there was never any mention of the prior horrific calls.

My impossible solution? Mandate that all TV and radio stations reveal the most recent appearance forecast, stock picks, and commentary.

3. Return to the Specialist System: The Nasdaq-afication of the NYSE turned out to be a terrible mistake. We want human specialists matching orders, making a market, stepping in during a collapse.

4. Encourage More Short Selling:  Just about every major scandal of the past 2 decades has been uncovered by shorts. The Uptick rule is fine, but all of the other limitations on short selling are counter-productive.

5. Outlaw Bank/Investing Firm Lobbying: At the very least, the TARP money should have come with a 2 year moratorium. In the future, I would like to see extreme constraints on lobbying dollars –  (Hey, I told you it was a wish list).

6. Campaign Finance Reform: We used to call the purchase of politicians’ votes graft. Today, it is called campaign donations. The corrupting influence of money in politics has led America to a very sorry political state. The solution is a constitutional amendment for public financing of elections — to get the corrupting influnce of money out of DC.

7. Not-For-Profit Exchanges: The exchanges have foregone the individual investor. Instead, they are chasing fees from high frequency traders and hedge funds.

8. Decimalization: Give up the decimals, and return to fractions. This would allow investment houses trading desks to earn a decent profit. And that might reduce their need for reckless speculation.

9. Corporate Whistle Blowers Fund: A legitimate incentive to discover and blow the whistle on various companies. The IRS does this — a percentage of any fines and recovery get paid to the person who discovered the wrongdoing.

These are the effective things that a benevolent dictator/philosopher king could easily implement, but in our messy, corrupted democracy, they don’t stand a chance . . .

Category: Bailout Nation, Bailouts, Credit, Legal, Regulation

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.

65 Responses to “Impossible Wall Street Fixes”

  1. Bomber Girl says:

    So, if you were offered the “one ring to rule them all” you’d turn it down?

    Love the wish list although as you indicate, hard to see any of these ideas coming to fruition. One might hope at least that short-selling could be accepted as an important part of keeping the business cleaner with just the simple uptick rule in place to slow down the slaughter.

  2. Owen Money says:

    Bring back mark to market accounting. Additionally, no taxpayer money used to buy MBS through the Fed or the GSEs. It’s funny how a few trillion dollars here and there skews the valuations of the financials.

    ~~~

    BR: I totally agree, though I suspect its going to eventually happen.

    Also, make accountants liable for their fraud enablement.

  3. The Window Washer says:

    Decimalization? I like it.

    Didn’t see that one coming. Nice of you to give them something, but once you’re our Enlightened Despot you can be magnanimous.

    Also I think the partnership issue is an obvious one than no one wants to talk about.

  4. bill carpenter says:

    If we just got #6 all the others would take care of themselves.

  5. crutcher says:

    What does undoing ” Decimilization” have to do with finacial reform? Reintroducing an inefficient means of expressing fractions of whole numbers will, according to BR,

    “allow investment houses trading desks to earn a decent profit” and “reduce their need for reckless speculation.”

    WTF?? Investment houses game the differences how? and BR encourages this?

    Surely, the format in which fractions are expressed shall have a deep an enduring legacy as regards reckless leverage practices.

    Weak shit.

  6. Robespierre says:

    10) Put SEC prosecutors/regulators on commission. They should get a % of whatever is recovered when successfully catching a firm at fault. The % should double if criminal convictions. This way there is a very strong incentive to “serve” and the regulatory agencies stop being revolving doors. This is a free-market way to regulate industries.

  7. MarketFox says:

    Incorrect on the “Specialists Comment”…

    The exchanges need to be defragmneted…

    The exchanges do not need an uptick rule….The short supply should be limited by number of shares outstanding….and size limits….via electronic tag….

    The exchange needs to become universal …seamless….worldwide….

    A transaction cost including the bid ask spread should not exceed 20 cents per 100 units of any asset…

    The exchange is just order matching software….

    The specialist system would be like no longer allowing jets…only props…..just rediculous….

    Exchanges need to be far more liquid….no dark pools….no outside the exchange matching of any kind…

    One singular exchange….one electronic regulator…in the currency and language of choice….

    A Chinese that wants to make a $10 transaction would pay the same as a large hedge fund making a $1 million transaction….

    Making money off of delivering paper…the bid ask spread ….the typical brokerage model is over…..

    No more derivatives….It was derivatives that caused the meltdown….

    The exchange should just be plain vanilla stocks and bonds worldwide….

    The market in its current structure cannot be regulated or monitored properly….and is a justifiable cause of distrust….worldwide…

    KISS….

    Margin should be from 1:1 to 10:1 at the customers choice on vanilla stocks and bonds….

    Ratings will be made available through third party wiki style format….available to all participants….

    No minimum account size….All can play the game with efficiency….
    To press an electronic button costs nothing…..

    I have heard dumb remarks before….but going back to the inefficient front running specialists crap is one of the dumbest suggestions I have ever heard….

    And since a stock exchange is just software….and entrants should be boilerplate…..perhaps the exchange should be centered in a non US and more neutral location….ie Switzerland…..in order to instill worldwide confidence….

    Since GS…JPM etc…own the US Govt….

    Are you listening….BATS ……..

  8. Mike in Nola says:

    Number 5 is a non-starter based on the ruling of our non-activist wingnut-dominated Supreme court giving corporations all the free speech rights of real people.

    Unfortunately, this just is too close to the truth to be funny anymore:
    http://murrayhillweb.com/pr-012510.html

    BTW, the video linked on that Murryhill page is great:
    http://www.youtube.com/user/murrayhillcongress

  9. Hey, I said it was a wish list~!

  10. GrafSchweik says:

    Actually BR, your wish list summarizes quite nicely reforms it would be worthwhile going to the mattresses for…

    Besides, it would be “business, not personal”.

  11. lalaland says:

    adding tax reform (simpler and way tighter, especially for multinationals) and rubbing magic genie lamp furiously……

  12. dsawy says:

    1, 2 – OK.

    3. In addition to your proposal, (which I support), I’d like to see the elimination of all dark pools and all ECN’s. All transactions should be seen by all traders on the public exchanges. There should be no special exchange for the big houses – all investors and traders should be treated the same, and that means all investors/traders should be able to see each other’s trades. This is the only way to effect fair price discovery.

    4. OK.

    5. I don’t know how you’d accomplish this, but I have an idea (see next point).

    6. Public campaign funding would just open the door to more mischief by incumbents. They’d set up the amount of financing, the qualifications, etc. If it were true public campaign financing, then we’d have to put up with no small number of nutjobs trying to run because it wouldn’t cost them anything. Every time we try to address campaign finance, the incumbents stack the deck for themselves.

    Instead of public financing, I’d like to see campaign finance addressed with a Constitutional amendment, towit: Only those individuals who are eligible to vote in an election may donate to a candidate or a cause in said election. We could cap the donation, but in all cases, making reporting of the donation(s) by the individual be mandatory, at all amounts.

    No corporations, unions, PAC’s, non-profits, etc should be allowed to donate to campaigns *or* run campaign ads. Only individual voters, and only in elections where they may vote. eg, a voter in New Jersey needn’t worry about his donation being swamped by donations from NYC – because only NJ voters can donate to candidates and issues in NJ elections.

    Personally, I think a $10K limit per voter, per candidate or issue, per election cycle, feels “about right.” The media corporations would howl at this, saying it is too low to buy much campaign ad time on TV, but that’s my point as well: I’d like to see candidates forced into spending smarter, not shouting more and carpet-bombing the mass media.

    7. I think exchanges should make a small profit, and this profit should be put into a trust for maintenance, modernization, etc. There should also be provisions for money set-asides for investigations and enforcement of exchange rules.

    The exchanges should be viewed as utility co-ops. I know most of you are in urban areas, but you should look at how the rural electrical co-op tends to function as the template for how exchanges work.

    8. OK – but this assumes that you get 3 implemented. I’d combine #3 and #8 into one bullet point.

    9. OK.

    To this, I’d add:

    1. Like the Nevada casinos, there should be a black list of people who are no longer able to trade or execute trades if they’re found guilty of cheating the investor or system. The “Black Book” in Nevada lays out a number of people who may not set foot on a gaming property – at all, at any size of property. We should have a similar book of people banned from our markets.

    2. Leverage allowed on the exchanges should be the same for all players. If the big i-banks can get 10 or 20 to one, why can’t I?

    Or let’s put that another way: If I’m limited to 2:1, then so should they.

    3. Derivatives should be standardized (no more bespoke derivative contracts) and traded on open exchanges.

    4. Get rid of ETF’s that try to provide equitization of futures contracts – eg, “MOO.” If you want to trade futures, trade futures. Get rid of these ETF’s with hidden time decay in them.

    5. Get rid of all ETF’s that try to double or triple the move of the underlying.

    6. Enforce accounting standards for all listed corporations. If they don’t mark-to-market, they can’t be listed. If the corporation doesn’t meet the requirements for listing (eg, I’m talking about Fraudie and Fannie), get them off the exchange.

  13. I’m coming from a non-day trader perspective

    Encourage More Short Selling

    Does that include naked shorting? I couldn’t sign off on that if so

    [BR: Short selling means borrowing shares and selling them. Naked shorting is against the law, but tolerated by big BDs for the fees they generate]

    Decimilization

    HA! Not on your life! I already get scalped enough on the bid/ask spread (especially in the options and low volume stocks). There is no need for the little guys to pay another participation ‘tax’ just to invest

    How about 24 hour markets except on holidays? That would eliminate the pre-market games that go on when the little guys can’t add liquidity to the action

  14. peterpeter says:

    Larger spreads (the smallest spread was a “tiny” 1/16th, – 6.25 cents) and human market makers / specialists who have in the past colluded to raise those spreads to 1/8ths and higher, is your wish list???

    Is this some sort of joke?

    The only people who should support that are the now out of work former floor traders who used to gouge clients. Barry, were you trading in 1996? [[BR: I was a green trader back in ’96]

    http://www.justice.gov/opa/pr/1996/July96/343-at.html

    When this was settled, it was the largest ever class action settlement ($1B).

    Additionally, the higher spreads and human intervention meant less trading volume, which in turn meant higher per share FINRA/SEC/Exchange fees… so you would not only increase the spread per share from as low as a penny on active names now to something at least 6 times higher… but you would also pay a much higher per share commission.

    If my costs per share transacted are going to go up, at least it should be directed towards lowering the fiscal deficit. It should not go to human market makers, who were far more onerous than their machine replacements.

  15. robert d says:

    Barry,
    about 3 years ago I requested that you, a widely-followed pundit, tell your readers about your
    investing results…..your company’s and your personal accounts. we took the matter off-line and
    basically you said that your lawyers would not allow you to publicize your annual results. You also
    wrote to me and I agree that every investor has their own objectives and risk toerance (Rule 405…suitability). now you offer number 2 as one of your dreams.
    please explain. thank you.

    ~~~

    BR: We run individual managed accounts — not a hedge or mutual fund. As such, they are all somewhat different depending upon their risk tolerances, when they started, plus what the client insisted on buying or selling themselves.

    Unlike a mutual fund, we do not have a uniform return that we are legally permitted to advertise. (Plus, none of the managed asset accounts are audited like a hedge fund). My compliance department does allow to provide a rough range of the private account performance (i.e, long/short down single digits in 2008, up double digits in 2009, this year up single digits YTD). And we can include our Asset Allocation model returns in our brochures.

    But we are not permitted to cherry pick the best give returns nor add them all up into an average. This is pretty standard compliance stuff. We have been discussing seeding a model account, running it along with the rest of the accounts, and auditing it as a “standard account.”

    Note that this is very a different issue from Blackrock’s Bob Doll telling people to buy the whole way down.

  16. mhosseini says:

    I agree with all of your suggestions in general and hopefully one day we will see at least some of them get implemented. I specially agree with your second suggestion regarding “Public Track Records of Pundits”. After all that has happened some financial news TV stations bring in the person from GS for her market analysis (I was wondering if they ever check her record). But I think they are just “Filling the Gap” in programming. But I guess worse is the guy from Federated Funds that runs a so called Balanced Fund that was down close to 50% in 2008. I guess there is a new definition of “Balanced Fund”.
    I just like to take an issue with your suggestion regarding short selling even though I agree with the overall premise. My problem with that is some Short Sellers at some points may be able to gang-up against some companies (there might be even a good reason) and it may affect overall market condition at least for certain period of time. Unless there was a way to control it’s effect on the overall market.

  17. 8. Decimilization: Give up the decimals, and return to fractions. This would allow investment houses trading desks to earn a decent profit. And that might reduce their need for reckless speculation.
    ~~
    yes, and to say nothing of the horrific intellectual Fraud that ‘decimalization’, itself, is..

    the PV of wide-ranging Organizations, with multitudinous moving parts, based on obfuscated Accounting disclosures, figured to the sub-fraction of cents?

    Please, that single idea could be the basis of a Book delineating the wide-spread Innumeracy affecting/afflicting all of us..

    It was, merely, a ruse to make it easier for the Computers to trade..
    ~~

  18. KidDynamite says:

    how about this – ONE market center: one big dark pool of liquidity. only the inside market is shown – bid/ask only, no size. ONLY limit orders are allowed to be entered. pure, simple, easy, efficient, liquid, fair. I’m out of adjectives. it’s good – trust me. electronic – no specialist.

  19. Andy T says:

    Barry,

    At what point are you going to come clean and admit that you’re actually a very leftward leaning person with S#cialistic tendencies?

    I mean c’mon man…except for #4 and #9, what you’re describing are “command and control” diktats that seem to be in violation of the U.S. Constitution…

    Who are you(we) to determine which businesses can and cannot lobby or donate bucks to politicians? Who are we to mandate profits for investment firms by bringing back decimalization? Who are we to determine which firms can become public and who cannot?

    It’s kind of a crazy list BR….

    ~~~

    BR: I believe that if we as taxpayers are going to be on the hook for the cost of future bailouts, than we can take steps to avoid that fate.

    That is not a function of Socialism, it is the definition of a Democracy.

    Humans get to vote, not companies. Humans get free speech, not corporations. Humans get to contribute to political campaigns, not S&P500 members.

    If that makes me pro-Human, and anti-Corporatocracy.

    That you seem to be reduced to yelling SOCIALIST each time taxpayers try to protect themselves from the banksters says volumes more about you than it does about me . . . !

  20. Andy T says:

    Some of my posts must have contained objectionable words, though it seemed pretty tame….

    Anyway,

    It seems like a lot of the things on the this list are “command and control” type diktats BR. You’re basically determining which firms can lobby and which cannot. You’re also creating rules that increase profits for some firms at the expense of customers. You also are dictating which firms can be corporations and which cannot. Except for #4 and mabye #9, your “wish list” seems extremely “left-leaning” and mostly unconstitutional….

    But, you’re still a Libertarian, right?

    ~~~

    BR: If by Libertarian, you mean I am against government intervention in matters of morality, then yes. I have no problem with legalizing drugs, gambling, assisted suicide, etc. I am against government intervention in matters of birth control, abortion, end of life decisions, etc.

    And you know I was against the government bailouts of Citi, AIG, Bear, Fannie, etc.

    The government should provide for the common defense, education and welfare of its citizens. This means low taxes, balanced budgets. no overseas adventures, minimal military usage (except when absolutely necessary). All of the post WW2 policing we still maintain overseas, wars of choice (Viet Nam, Iraq) are not what our government should be spending our blood and treasure on.

    But I sure dont believe we need to sit around and wait for the next round of raping and pillaging by the banksters.

  21. drey says:

    #2 seems like overkill. If one allows one’s investment decisions to be influenced by the Ben Steins and Jim Cramers of the world they will soon be separated from their hard earned dollars. You can’t protect people from their own failure to be properly skeptical and intellectually rigorous, nor should you try.

    Buyer beware.

  22. darekkkk says:

    I am afraid that nothing change as long as Wall Street will be supported by FED.
    FED policy giving a free puts to Wall Street will encourage bubbles. The same with zero rate policy.
    Bailouts and discount window money will encourage to overleverege. Small speculators care about leverege or they are out of business. Giant institutions know that they always can borrow from FED .
    For a competition reason big Wall Street banks should be split. Their dominant role in a derivative makes them “market makers” in the literal sense.
    Dow’s 1000 points drop shows that using futures you can do almost everything with the market. Favourite Wall Street game is stop loss chasing

  23. ps_fedex says:

    I wouldn’t be surprised if BR is running for an office on liberal platform not in a distant future. :)

  24. PeterR says:

    No. 1 is not broad enough in my opinion.

    The legal entity “corporation” should be dropped (incl. LLC’s etc.) altogether. All businesses should be sole proprietorships or partnerships.

    All business owners (incl. shareholders) should be personally liable for a company’s actions.

    Cloaking a company’s actions within a corporate identity shield, and the “limited liability” it provides, is an idea whose time has come to an end. Personal responsibility would take care of the problems we have seen in irresponsible corporate deeds.

    This would bring some changes in corporate actions and ethics!

  25. dougc says:

    In 1987 the specialist walked away from market making. No way you can create a system where there will always be a reasonable market.
    If 70% of trading is based on computer algorythms and they are using the same information, I expect we will see more than a 1000 pt DOW drop. if a 7500 e mini sale did that much damage, when the computers say sell who will buy 1000000 e mini? mutuals are all in; in the past the individual was the last buyer but they realize that this is a casino.

  26. bergsten says:

    (A repost from May 9th– but as long as we’re dreaming…)

    Eliminate ALL of the exchanges. We don’t travel by horseback anymore and we have instant communication — there is no need for these groups to get a piece of every trade for negative value.

    Setup an “eBay-like” entity (or three) where, instead of goods, stocks can be bought and sold. Another (or three) that hold the ownership records.

    Any stocks can be bought or sold — public or private. Any buyer — institutional or retail can participate. No leveraging (credit to buy must be sought elsewhere). You can only “short” what you actually own.

    Companies post daily numbers on their “eBay” listing. They can lie all they like — but they’ll get rated, by the buyers. Companies can offer to sell or buy as much stock as they want.

    No more “brokerages” — though people can act as financial managers/agents and can setup their own entities to create funds (which would also be bought/sold on “eBay” too).

    The current system is fundamentally broken — it’s time to throw it all out!

  27. LLouis says:

    Make them, and all companies and individuals in U.S., pay reasonable federal income tax, eliminate all means of fiscal evasions (illegal and legal, Bahamas, Bermuda, the Cayman Islands…).

    I was ” shocked ” recently to learn while watching the Jon Stewart show that ExxonMobil didn’t pay any fed income tax in U.S. in 2009, the biggest american corp contributes nothing ” despite record profits of a whopping $45 billion ”.
    But then a company spokesman declared ” that once its final tax bill is figured, Exxon will owe a substantial 2009 tax liability.”
    General Electric did even better with a tax benefit of $1.1 billion !
    These numbers came from Forbes, but the income statements of these two includes ” Income Tax Expenses ” of $15B for Exxon and and $1B for GE.

    http://thinkprogress.org/2010/04/06/exxon-tax/
    http://finance.yahoo.com/q/is?s=XOM&annual

  28. Bomber Girl says:

    Andy T – not sure if the wish list sounds as much left wing as nostalgic.

  29. ironman says:

    On Item #2 (Public Track Record of Pundits), might I suggest using the plus-minus statistic from hockey or basketball – I’ve been trying it out for predictions made since January 2008 and it seems to work pretty well so far.

  30. Andy T says:

    Bomber Girl….

    Maybe….But here’s the telltale sign. If that whackjob DeDude comes out here and “hoorays” that list, then we’ll know for sure….

  31. cognos says:

    You are suffering from the naivete I expect more from your readers…

    1. “Turn them back into partnership” — Why is this not feasible? The answer is really SIMPLE and FINAL.

    Its just a size issue. The major investment BDs today stand ready to buy/sell $10B at a SINGLE TRADE in some instances. People here dont understand that many debt, mortgage and structure products markets trade in “yards” or $1B regular size lots. That is why one cannot separate “prop” from “market making”. Its not all some 100 shares of GOOG. Duh!

    A) This cannot be done by a private partnership. Its would be very difficult to have a private parnership equity pool support these trade sizes.

    B) Even if you did have sufficient private partner equity… Once you are going to be in the market for $500B in debt financing on short-term, medium-term, long-term basis to finance all that trading, the market is MUCH MORE comfortable with the ability to (if nec) RAISE more equity through stock. Not to mention the enormously increased disclosure and transparency that comes from being a “public” firm.

    Its just silly to suggest. Very very silly idea.

    Why dont you simple require i) a certain % of employee ownership, say 50%? or ii) specific disclosure of the % of employee ownership and restrictions on selling shares?

    But again, these are kinda silly. Industries of all kinds go through tough periods — tech, commodities, etc. Sometimes public shareholders win big, other times they lose. But overall the public markets work. Risk and reward… right?

    I see NOTHING different about “trading firms” than say… “auto companies” or “insurance companies”.

  32. engineerd1 says:

    My God! What a waste of unlimited power. Most of the problems you are trying to fix were created by the last bunch of philosopher kings as they strove in vain to “fix” the problems of their day. There is nothing you are whining about which wouldn’t be fixed or made moot by pulling the teeth of government and restoring market discipline.

    My list, though equally quixotic, is smaller and has the added virtue of being Constitutional.

    1) Abolish ALL federal taxes in favor of consumption tax, same rate for everyone for everything, adjusted to provide about 500 billion a year in 2010 dollars. This should be enough for defense, treasury, and state, the only departments we need.

    I may have overstepped the bounds of financial sector re-regulation, but then so did you.

  33. scarlo says:

    Regarding Campaign Finance Reform:

    To the point, I think it would be a good idea to in some way encourage a Political Representatives Ethics Charter (PEC). It could include, but not be limited to requirements such as (off the top of my head here):
    • Basic exam to achieve certification
    • Annual attestation
    • Annual CE credits
    • Representative website displays, prominently, who they strive to serve
    • Representative website displays, prominently, complete donors list & archive

    I’m hoping the benefits to such a system are quickly self evident. But a quick benefit list would be something like:
    • Publicly identifiable intent
    • Recourse for reps who don’t serve those they promise to
    • Unified vision of basic political ethics
    • Increase public sense of trust
    • Decrease corruption and conflicts of interest in the process

    If campaign finance is going to be uncapped (free market driven), I think something like this should be promoted to self regulate the industry.

    Sound familiar? It should because many other positions which require public trust (nurses, insurance agents, brokers, lawyers, doctors, dentists, etc) are required to pass similar requirements in order to become licensed. The above charter would not, unfortunately, start out being a requirement but could evolve into something on the order of a new status quo.

  34. The Curmudgeon says:

    Since none of this has any hope of coming to fruition without a complete dismantling of the existing financial system, I’d say that the best thing we could do is let it burn to the ground the next time we get a spark. It’s headed that way anyway, but with the actions of the past two years, when it sparks next time, we’ll (the taxpayers) be the ones that get burned.

    The financial system is a cancer on the well-being of the US economy . Cancers are deadly because they won’t die until they kill their host. And that is where this cancer is leading us. We had a chance to wipe it out in 1998, and then again in 2008, but each time we fed it instead of killing it.

  35. tawm says:

    Am halfway thru reading Markopolos’ No-One Would Listen tome, and think it would help to raise the quality of government regulators (as opposed to merely adding more bureaucracy). Through adequate compensation, career incentives and firewalls from political interference, encourage experienced, intelligent and motivated people to act as true public servants.

  36. Expat says:

    How about shooting every other Wall Street banker…pour encourager les autres. I would suggest the same for our elected officials but that would possibly be illegal and arouse the curiosity of the Department of Kidnapping and Waterboarding for Fun and Profit.

  37. wilcotaru says:

    Wall street will never be fixed. It is going to crash.

    I found some interesting investment related articles here as well:

    http://shari-mattingly-bevan.com/blog/?cat=5

  38. Bomber Girl says:

    I agree with tawm about the upping the quality of regulators. As for upping the quality of Congress, I would suggest we move to a system more like the one we use for jury duty. Every citizen up for duty periodically, one year service. No lobbying money allowed.

  39. Thor says:

    “My impossible solution? Mandate that all TV and radio stations reveal the most recent appearance forecast, stock picks, and commentary.”

    We can already do this now – the technology to have this type of information available from and linked directly through your TV is very nearly here.

  40. snapshot says:

    http://www.marketoracle.co.uk/Article19536.html

    I’m surprised you didn’t mention the rating agencies. According to the article, even though legislation is going forward, rule 436(g) insulates the agencies from liability. ….back to square one.

    ~~~

    BR: The above is my impossible wish list, The rating agencies will likely be fixed in some matter

  41. jlj says:

    i like #1, why not update Sox to talk care of it but include all exec management. Or make all execs take long term stock options, that upon dicovery of fraud or bankruptcy is converted into debt = to all outstanding debt of company. Exec is reponsible for all debt & has to cover it with all assets of himself and wife, including pensions and retirement accounts except for $500K!

  42. ACS says:

    The real problem is not elections but rather reelections. It is the ability to stay in office for multiple terms that drives the legal bribery we call campaign finance. Limiting everyone to a single term in any office will solve that problem and also likely encourage a completely different group of people to seek office. Knowing it is not a potential lifetime job will keep out those who seek to profit from office or use the revolving door. Maybe we will get some regular people who actually want to come from the real world, do some good, and then return. Don’t give me the arguments about voter choice or experience because most people vote by name recognition and if there are only 535 people who can run things then we have a BIG problem.

  43. Dennis says:

    Andy T –

    Are you sure you know what Socialism is? (i.e., ownership and administration of the means of production and allocation of resources)

    Cause what you are accusing our host of ain’t it.

    I gotta agree with BR — perhaps it would be best if you were to look up the word in a dictionary.

  44. icm63 says:

    WHAT ..dont mention the fony accounting methods use.

    FASB.. bring back mark to market or near to it !

  45. snapshot says:

    http://www.bloomberg.com/apps/news?pid=20601170&sid=a7td7E8_4EeI

    Okay BR – Let’s take on this fiasco of a tax system….

  46. OT:

    BR,

    w/this art.: http://www.zerohedge.com/article/robert-khuzami-stands-lose-250000-if-he-pursues-action-against-deutsche-bank

    “When the SEC’a Robert Khuzami recently recused himself of pursuing an investigation against Deutsche Bank in regard to potential CDO malfeasance, a bank where it is common knowledge the CDOs flowed (and were shorted “where appropriate” by Mr. Lippmann and his henchmen) like manna from heaven, we were curious just how large the conflict of interest must be for him to not pursue his official duty. Luckily, we were able to answer this question when we recently encountered Mr. Khuzami’s Public Financial Disclosure Report for Executive Branch Personnel. It appears that Mr. Khuzami, who from 2002 to 2009 worked at DB, most recently as General Counsel, might have directly profited quite handsomely from the very activity he is now prosecuting Goldman, and other banks very likely soon, for engaging in. How handsomely? His 2007 bonus, 2008 salary and bonus, and 2009 salary added up to $3,804,537. This works out to about $1.9 million in comp per year. And let’s not forget that 2006/2007 was the peak years for DB’s CDO issuance. It sure seems Mr. Khuzami benefited nicely as a participant in precisely the kind of CDO gimmickry that he is currently all over Goldman for…”

    I’ll ask again, Didn’t you have + things to say about Khuzami? and, if so, how?

    how does this square: “2. Robert Khuzami is a bad ass, no-nonsense, thorough, award winning Prosecutor: This guy is the real deal — he busted terrorist rings, broke up the mob, took down security frauds. He is now the director of SEC enforcement. He is fearless, and was awarded the Attorney General’s Exceptional Service Award (1996), for “extraordinary courage and voluntary risk of life in performing an act resulting in direct benefits to the Department of Justice or the nation.”

    When you prosecute mass murderers who use guns and bombs and threaten your life, and you kick their asses anyway, you ain’t afraid of a group of billionaire bankers and their spreadsheets. He is the shit. My advice to anyone on Wall Street in his crosshairs: If you are indicted in a case by Khuzami, do yourself a big favor: Settle.
    http://www.ritholtz.com/blog/2010/04/10-things-you-dont-know-gs-case/

    w/the ZH piece?

    maybe, some things can be rethought upon the receipt of add’l info?

  47. Mike S says:

    Andy T – are you in your 30′s yet?

    And BR,

    #3 is insane. You cannot be really thinking that HFT is any worse than the specialist system. No way. look up the history of knight trading. They lost money on 1 day in 1999. 1 day.

    1 frackin’ day. Even HFT doesn’t do this well. I know this from talking to the controllers for firms like XXX, XXX and XXX. They are so secretive that their names won’t be listed as members, but let me assure you, their CTO’s are former goldman guys who left because they could make more money at these firms. Yeah, Getco is big, but they aren’t the best – not by a long shot.

    There was a big reason why the specialist posts were willed from father to son. The specialist system was 100 times at least more crooked than HFT. The specialist system was crooked for 100 years too. It was the biggest rigged game in finance. The specialists should be in jail. the things they were allowed to do would have sent any Chicago futures trader to jail. It was a crooked system that should have been banned, not supported.

    ~~~

    BR: I should not use HFT so glibly — I was referring to to co-located servers doing flash trading.

  48. Andy T says:

    @Dennis

    Yeah, I was being soft with the “socialism” word….

    Some of what he’s talking about here is command and control type stuff and supression of Free Speech…it’s probably more akin to Statism….

  49. Andy T

    You seem to be ok with unfettered corporate power.

    I see your Statism, and accuse you of Blankfeinism, Dimonism, Fuldism, ONealism.

    So you vote pro-Corporatocracy — I am an old fashioned supporter of people based democracy.

  50. lalaland says:

    Sooner or later republican and democrats will split and reform –

    moral libertarians with stringent regulation (government as watchdog for it’s citizens) (ritholzian)

    moral libertarians with laissez-faire (ron paul)

    social regulation* with laissez-faire (bushies/palin/christian right)

    social regulation* with stringent regulation (traditional democrats)

    I personally believe most Americans would be firmly in the Ritholz camp but are distracted by the whole “what’s the matter with Kansas” issues; we might be better off with more parties that represented smaller, more homogeneous ideals if only because the battlelines for hearts and minds would be clearer.

    *Social regulation is complicated here; I’m using it to describe Christionists generally within the bushies (since that was their power base). For the traditional democrats I mean the top-down approach like the Johnson-era programs, antipoverty, progressive taxation, etc. Both groups want to alter society but in radically different ways, obviously.

  51. peterpeter says:

    > BR: I should not use HFT so glibly — I was referring to to co-located servers doing flash trading.

    Barry,

    The only trades flashed are those sent to the exchanges which flash them (i.e. Direct Edge at this point).

    If someone places an order and wants a liquidity rebate without a route out fee, flashing their order helps them find a contra side trader without the expense of a route-out fee, which is why some people who give it thought choose to place their orders on EDGX…

    If someone else was previously unaware of what flash orders were and found out that they were blindly sending their order flow to EDGX, that EDGX is flashing their orders, and that those flashed orders could be anticipated because they were large blocks being broken up by an alg…. then you would think that the last year would have been sufficient time for them to make the 1 line code or config fix to send their orders instead to BATS or ARCA.

    At this point, anyone who is losing money because of their order flow being flashed (as opposed to actively deciding that it is in their best interest to flash their orders) is not competent to manage money. It’s like going to Vegas, finding that the roulette wheels have an extra green slot when you happen to play, and still more than a year later bitching about the roulette wheel rather than walking down the strip to the next venue.

  52. Robespierre says:

    So far there has been not a single word about prosecuting crime. It is almost that the debacle was all an accident. So here a few words of someone who in my opinion actually “gets it”:

    “In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case. Thank you.”
    by James K. Galbraith

    Must people fail to understand how grave it is that there has been no criminal indictments on this affair. However, I can assure you the main difference between a banana republic and a develop one is the strength and impartiality of its judicial system. So far the US is a banana republic.

  53. “…accuse you of Blankfeinism, Dimonism, Fuldism, ONealism.

    So you vote pro-Corporatocracy — I am an old fashioned supporter of people based democracy.”–BR, above

    unless I’m not reading into, enough, I didn’t hear AT promoting the FedRes..

    w/o which: the Season of “Blankfeinism, Dimonism, Fuldism, ONealism.” would have been much shorter, if at all, and wouldn’t be, still, Flowering as we speak..
    ~~
    though, maybe more simply, this: “old fashioned supporter of people based democracy”, and a Pro-FedRes stance, to not equate..unless, of course, I’m mistaken, or not sufficiently deluded..

  54. Andy T says:

    Not at all Barry.

    I agree with everything you said in response to my 1.29 PM. I think that’s excellent.

    I’m surprised you can’t take the “next step” and just assume that people can be trusted with their own dollars. Honestly, your “wish list” is a little scary….it would be hard to identify you as a “Libertarian” based solely on those ideas.
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    “…turn them back into partnerships.”
    So, you’re saying the the STATE should just unilaterally force a corporate entity to alter it’s structure after the fact? Where does that sort of action stop? Who’s next?
    ——————–
    “Mandate that all TV and radio stations reveal the most recent appearance forecast, stock picks, and commentary.”

    What else should we MANDATE? Should we have all guests on any TV show reveal their political donation history as well? Should we have guests tell us their political affiliation? I mean, c’mon, afterall, that might reveal something about their investing bias. Right? Where do we stop on that slippery slope? What else should the STATE mandate to be revealed?
    —————–
    “We want human specialists matching orders, making a market, stepping in during a collapse.”

    What’s wrong with a collapse? Why shouldn’t we just let the market run it’s course? Nobody should need to “step in” during an collapse. Or, should the STATE guarantee to investors that the market cannot fall by more than XX %? Who would dictate the amount of decline that could be tolerated? What are we, the Karachi Stock exchange? Should we just close it down for a few days if we don’t like the results?
    —————-
    “In the future, I would like to see extreme constraints on lobbying dollars”
    Who else should the STATE constrain in terms of spending dollars? How much should banking/financing firms be ALLOWED to spend relative to the other firms? Should we constrain spending on the part of oil companies too? What about Liquor and Tobacco firms? Should be they “constrained” as well? Where does that stop? Should the STATE come up with a list of those who CAN donate vs. those who CANNOT donate?
    —————
    “The exchanges have foregone the individual investor. Instead, they are chasing fees from high frequency traders and hedge funds.”

    So, what do you suggest? Should we get the Red Cross to run an exchange? Or, should we get the STATE to run it? Yeah, I’m sure that would work better….
    —————-
    “This would allow investment houses trading desks to earn a decent profit. And that might reduce their need for reckless speculation.”

    This is quite possible the most ridiculous thing you’ve ever written or suggested. Seriously. So, should the STATE mandate the firms that “should” earn a decent profit and then guarantee said profit? WTF.
    —————-

    I get the “populist” tone your trying to strike. Seriously, we all get it. The Banksters are bad people and we never should have bailed out anyone out and yada yada yada yada….

    And, I agree with that. We should have let all the firms just go down the toilet.

    But, two wrongs don’t make a right.

    Interesting discussion, nevertheless, and it was quite revealing….

  55. Andy T says:

    lalaland:

    ” we might be better off with more parties that represented smaller, more homogeneous ideals if only because the battlelines for hearts and minds would be clearer”

    Amen to that Brother….

    I think that we’re heading for a multi-party type landscape over the next few decades. There are at least four different political ideologies that would each muster large votes, and I think you’ve identified them well…..

  56. Andy T says:

    MEH.

    “unless I’m not reading into, enough, I didn’t hear AT promoting the FedRes..”

    Indeed. For instance, I wasn’t the blogger who wanted to make sure that the FedReserve was preserved and that Congress had nothing to do with monetary policy….because they couldn’t be trusted.

    I think that was a certain Wall Streeter who happened to Blog….(heh heh)

  57. The Curmudgeon says:

    Damn, I missed a sorta good argument on socialism. If the best excuse for the myriad regulations being proposed is that the taxpayers get to decide, since we are on the hook, I’d say there’s a more efficient way to regulate things–socialize completely–making investment and commercial banking government agencies. We already do it w/ virtually the entire housing market (Fannie, Freddie and Ginnie now account for 90% of mortgage originations) yet pretend that we don’t. Besides, it seems sometimes that a bit less efficiency in the movement of electrons these days might not be such a bad thing. Maybe selling big blocks of futures ought be a bit more difficult. Make ‘em wait in line, like at the DMV, and maybe the financiers would find better things to do for a living.

    But this quasi-government, quasi-private twilight zone the financial/mortgage/banking system is in right now is a recipe for disaster.

    Of course, I’m in the libertarian camp, socially and fiscally. I’d say abolish the Fed, and let the markets do whatever they wish. The only function of the government in a financial market should be to provide the infrastructure (a court system) for enforcing valid contracts between private parties. Let competition take care of the rest.

  58. Robespierre,

    although James K. isn’t my favorite Galbraith, here:

    ““In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case. Thank you.”
    by James K. Galbraith

    the Younger is spot on.

    I guess that’s what when We got into– “Buying Brand Obama”
    by Chris Hedges

    Barack Obama is a brand. And the Obama brand is designed to make us feel good about our government while corporate overlords loot the Treasury, our elected officials continue to have their palms greased by armies of corporate lobbyists, our corporate media diverts us with gossip and trivia and our imperial wars expand in the Middle East. Brand Obama is about being happy consumers. We are entertained. We feel hopeful. We like our president. We believe he is like us. But like all branded products spun out from the manipulative world of corporate advertising, we are being duped into doing and supporting a lot of things that are not in our interest.

    What, for all our faith and hope, has the Obama brand given us? His administration has spent, lent or guaranteed $12.8 trillion in taxpayer dollars to Wall Street and insolvent banks in a doomed effort to reinflate the bubble economy, a tactic that at best forestalls catastrophe and will leave us broke in a time of profound crisis. Brand Obama has allocated nearly $1 trillion in defense-related spending and the continuation of our doomed imperial projects in Iraq, where military planners now estimate that 70,000 troops will remain for the next 15 to 20 years. Brand Obama has expanded the war in Afghanistan, including the use of drones sent on cross-border bombing runs into Pakistan that have doubled the number of civilians killed over the past three months. Brand Obama has refused to ease restrictions so workers can organize and will not consider single-payer, not-for-profit health care for all Americans. And Brand Obama will not prosecute the Bush administration for war crimes, including the use of torture, and has refused to dismantle Bush’s secrecy laws or restore habeas corpus…”
    http://www.commondreams.org/view/2009/05/04

    44 and his Band can play some nice Tunes, too bad they’re, only, able to orchestrate “(Much) More of the Same”.
    ~~
    AT,

    yes, this one: “wanted to make sure that the FedReserve was preserved and that Congress had nothing to do with monetary policy….because they couldn’t be trusted.”, from a PoliSci POV, is hard to reconcile..

  59. [...] Barry's wishlist for fixing Wall Street.  (TBP) [...]

  60. darekkkk says:

    I am from Poland so socialism for me is not just wikipedia definition.
    30 Years aflter the fall od the socializm in Poland i can see that socialistc ideas are coming back from the West this time.
    That’s I am against goverment interventions, boilouts and etc. In this i think that I fully agree with BR wchich blog I realy admire
    I differ in the convinction that regulations can solve the problem with Wall Street. There are often bad and should be changed but in my opinion the source ot the problem is different.

    From my point of view the biggest problem with socialistic economy was a central planning.

    Let’ s have look for the money market nowodays. Yo have a “market” in which FED tells what the price (interest rate) should be. For the half of the housing market responsible are GSEs. Goverment and FED tells which company should go bankrupt wich should not
    After financial crisis which had a source in money market as well as hausing i can often read that is the crisis of the capitalism.
    After 50 years of trying to regulate socialism in Poland i do think that you can not regulate socialism. You can not regulate absurd. One regulation will always require other. Goverment interventions will require other- the bigger one.
    Proper regulations are necessary but I do not see regulated socialism which works well in the long term.

    US economy which used to be the most free market economy in the world right now has a financial sector which is an enclave of socialism- that is for me the main problem.

  61. PatL says:

    CAN LOBBYING REDUCE IGNORANCE?

    I like the list…however, regarding #5 (limits to lobbying): given the general level of economic and market ignorance displayed by most members of Congress (and, presumably, staff members), the lobbying efforts of the financial firms does help (to some extent) to educate some of those people who are making policy and legislative decisions. I don’t know the right answer, but closing the door may cause even more harm than good. (It is gross to see so many feeding at the public trough, though.)

  62. AHodge says:

    Nice list. Needs to address core, which by Jim Chanos (and me) is
    • the nub of the crime — was simply taking aggressive marks on illiquid derivatives and hard-to-value securities, calling it profit, and paying yourself 50 cents on the dollar as bonus. You were stealing from your shareholders.

    Some market friendly reforms

    1. FIX ACCOUNTING, meaning massively retrain the entire financial accounting sector. Totally new rules for asset backed and other “structures” and insurance type products needing reserves. Make both sides of one deal price about the same $. You would
    a. solve of lot of the bonus problem ½?
    b. Not leave broke or stressed companies for us investors- concealed till the Minsky Moment by fake accounting.
    c. Know what your capital is. Careful making statements about needed capital. You don’t know that within 3% of assets with accounting now.
    d. Discourage leverage. Funders would likely not tolerate the crazy volatility of marked assets and 30/1 or even 8/1 leverage, especially if you….
    2. Credibly withdraw the now pretty solid 100% bond and funder GOVT GUARANTEE for anyone big.
    3. Some kind of serious NARROW BANKING, maybe only for corp loans held on books? And good resolution. (Congress not taking back that 2005 law allowing immediate liquidation of cap market positions is a key bellweather for me of whether the lawmakers are still wall st stooges and don’t want good resolution)
    4. Prosecute RATING AGENCIES, wipe out big three– withdraw the official support for ratings
    5. Realize losses and wind up the AGENCIES and the Fed and ginny mortgage paper. That roughly $1 trillion is already sunk.
    6. Jack Bogle has a nice list of CORP GOVERNANCE and fiduciary changes. How bout North Dakota corp law rather than Delaware? Shareholders vote on comp?

    Do these, and we will still have more cycles, but much less big, much less bad, and much less repeating the last one. How could even a libertarian, free marketeer or R object?

  63. [...] An interesting wish list of Wall Street fixes. (Big Picture) [...]

  64. [...] My impossible solution? Mandate that all TV and radio stations reveal the most recent appearance forecast, stock picks, and commentary. – Barry Ritholtz at The Big Picture [...]

  65. [...] The laughable “I-make-3000%-returns-with-every-stock-pick-and-never-miss” boasts unfortunately cloud the waters for readers to truly discern newsletter performance.  The Pundit scorecard will be the norm in the future. I was astonished to see the same terrible advice on the TV during the entire market collapse. The spokesperson for a trillion dollar firm recommended buying the dip — the whole way down! Buy Dow 14k, buy 13k, buy buy buy at 12, 11, 10. All the way down. But there was never any mention of the prior horrific calls. My impossible solution? Mandate that all TV and radio stations reveal the most recent appearance forecast, stock picks, and commentary. – Barry Ritholtz at The Big Picture [...]