The NewYork Times in an editorial today has published its bottom-line financial reforms. This past week Takethe5th also listed the financial reforms and prosecutions that had to be implemented to dispel the notion that Congress had been bought out by Wall Street. After all, Financial Industry lobbying and campaign contributions have exceeded $110 million for the 1st quarter of 2010. And Wall Street rarely pays for nothing. So here is the Takethe5th recommendations and the corresponding NYTime editorial recommended financial reforms just below:
1)Get top financial institution managers, their board’s and their shareholders skins in the game – Contingency capital in the form of publicly traded debt that has specific debt to equity ratio [and/or other risk measures] triggers which causes the debt to be converted into capital. This would dilute the value of existing shares and would act as clear signal that the institution is in danger and thus shareholder and clients would take note. Managers could easily game this by various share options schemes and immediate cashouts. So Corkers Clawbacks from financial institutions top managers and board members [SEC or Fed clawsback 90% of total compensation for the past 5 years from the point of a financial institution’s failure for all existing and one-time managers in that period]. This should work like the Sarbannes Oxley provisions – with top managers total compensation on the line, accounting shennigans have declined sharply – ditto for the gambling ethos that permeates Wall Street now. A third skins-in the game mechanism, original lenders must retain 10% of the debt amount which cannot be covered by derivative and other write-off the books mechanisms. This reduces the “toxic acid” hot potato game that was and is still so prevalent in the current “money game”.
NYTimes has no compensation or minimum commitments by financial institutional lenders.
2)Eliminate Shadow Markets with substantial derivative reforms – Synthetic derivatives in which neither party has any exposure to the underlying financial securities [open financial gambling currently in the multi-trillions of dollars]would be prohibited. All remaining derivatives would have to be traded on open exchange[s] where all parties, terms and conditions for both parties would be available for public scrutiny. Every effort would be taken to make both of these provisions an international standard. International financial institution and any of their subsidiaries that do persist in trading synthetic derivatives or outside public derivative exchanges would be banned from all US and other cosigners financial markets.
DERIVATIVES The central reform of the multitrillion-dollar derivatives market would move most derivative trades, currently executed as private contracts, onto fully regulated exchanges. Banks have fought the change because it would impair their profits — and they have succeeded in carving out many exemptions. More proposed exemptions are expected, like for pension funds that use derivatives. The Senate needs to pare back the exemptions in the existing bill, not add more.
The Senate also should adopt an amendment by Maria Cantwell, a Democrat of Washington, that would make it easier for regulators to crack down on market manipulation in derivatives.
One of the most divisive issues in the Senate bill is a provision that could force big banks to spin off their lucrative derivative dealings. The provision was added to the bill late in the game, without hearings. Opponents fear that it would push derivatives deals into hedge funds or other entities that would be harder to regulate. Supporters say that the bill would adequately regulate derivative dealers wherever they are.
The Senate debate, and hearings that can be scheduled before the House and Senate produce final legislation, can help settle the issue. One thing is already sure: Unless senators close loopholes in derivatives rules and give regulators more powers to police the markets, they should not even think about removing the provision.
3)Reduce the too big to fail exposure – Institute 2 Bank Taxes. There would be two bank taxes. The TBTFT-Too Big ToFail Tax would be levied on all banks and financial institutions with total assets [including all subsidiaries] greater thaat amount to more than 4% of US GDP[thats all of the top ten banks in the US]. These monies would be used to first initiate the Resolution Trust Fund [whose assets would be devoted medium to small business loans] and then maintain it overtime. This is equivalent to the G20 IMF proposed FSC -Financial Security charge tax being proposed by the IMF to the G20 first ministers. The second bank tax should be the IMF FAT-Financial Actvities Tax which each country could target to their most pressing domestic financial needs.
TOO BIG TO FAIL Senators said Tuesday that they had reached an agreement on how to pay for seizing and dismantling big banks whose imminent failure could destabilize the system, but that doesn’t confront the more difficult issue of how to cut big banks down to a less threatening size. The Senate bill calls on regulators to impose higher capital requirements on riskier institutions. The aim is to make size and complexity so expensive that banks opt to restrict their size, but the new rules are unlikely to be enough.
The Senate bill also imposes needless delays on the enactment of the so-called Volcker rule, which would bar banks from making risky market trades for their own accounts and from owning hedge funds and private equity funds. Senators Carl Levin of Michigan and Jeff Merkley of Oregon, both Democrats, have an amendment to enact the Volcker rule without undue delays or tinkering.
Even that may not be enough. Democrats Sherrod Brown of Ohio and Ted Kaufman of Delaware propose size caps on banks that include limiting non-deposit liabilities to no more than 2 percent of gross domestic product. That would provide a necessary backstop against bailouts and decrease the political power of banks.
4)Eliminate Investment Banks access to the Fed Discount rate Window – this was a rushed provision of the TARP bailout that clearly then Treasury Secretary Hank Paulson as a former Goldman Sachs CEO should have but did not put an expiry date and limited access on. This was a mistake and the Fed Window should be closed as soon as possible to Investment Banks.
NYTimes does not comment on this issue
5)Expand the Financial Bailout Prosecutions – There are 3 most trying cases. First is that Goldman Sachs fraud charges are the tip of the iceberg – they could easily be applied to the other 7 major banks [especially their hastily attached subsidiaries as in the case of Household Finance and Washington Mutual]. Second, is the malfeasance on the part of the major credit rating agencies that left AAA ratings on junk toxic assets to the point that they were practically defaulting. How, when and why were such toxic ratings allowed to persist is the most pressing investigation of the these financial times. Third, Lehman Brother up to its moment of failure was able to transact some Balance Sheet funny business that has both grave accounting and financial implications if the misdeeds are allowed to go un-prosecuted. Despite the defunct nature of Lehman, the parties involved should be brought to a reckoning to guarantee that such manipulations are not perpetrated again.
There are other big fights in store — on consumer and investor protection, regulation of hedge funds, support for regulatory agencies and reform of credit rating agencies. Each of them will test how serious the Senate, particularly the Democrats, are about this reform effort.
Both the NYTimes and Taketh5th agree that TooBigToFail and Derivatives Trading are at the root of reforms. Both views advocate simple, measurable rules and clear no holds barred [or more worrisome, loopholes allowed] restrictions so that there can be little doubt for Lawmakers and Regulators as well as Financial Institutions when lines are being crossed. Takethe5th wants more Institutional and Management Financial Skin in the Game, especially Republican Senator Corker’s clawbacks on top management’s total compensation when a financial institution fails [this would help to justify the unmitigated growth in total compensation for the Wall Street executive suites]. But notably, like the Obama administration, the NYTimes demurs on Federal prosecutions – only implying tighter controls for the rating agencies; not prosecutions. This list will be used as the starting point for comparing with the final Financial Reform enacted by Congress.