I mentioned earlier today that I had written up a list of financial reforms first in December 2008 and then with some modifications again in October 2009. It was suggested that I repost it, and the following is essentially the October list with a few additions. The key ideas are that financial and political reform go together. We will not have one without the other. The second is that the current system needs to be completely restructured to make it simpler, more transparent, and safer. Banking needs to be made dull again.

Bank Bankruptcy Force banks, bankholding companies and financial holding companies to prove they aren’t bankrupt and can survive without government backstops. If they can’t, put them into bankruptcy and restructure them

1. Re-initiate normal lending, i.e. local community based lending practices
2. Evaluate toxic assets 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
Bring Money Markets under greater scrutiny: reporting requirements, compensation, risk portfolio, reserve requirements

Nationalize the Fed (it is currently working for the benefit of banks and not the wider economy)
1. Eliminate conflicts of interest: take the Fed away from its control by banks and
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

Eliminate the ratings agencies and consolidate their function 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 mitigate 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 and synthetic CDOs
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

Private Equity
Purchased assets must be held a minimum of 5 years to penalize gutting and asset stripping

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. Limit corporate lobbying and campaign contributions
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 and/or limit 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. Repeal McCarran-Ferguson’s anti-trust exemption for insurance companies
21. Ban dark pools, private exchanges where the buyers, sellers, and the price they agree upon in large block trades are not communicated to public exchanges (and so have an impact on price) until after the deal is done, presenting markets with faits accomplis.
22. 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

A Consumer Financial Protection Agency with real power to require plain vanilla instruments and ban or limit abusive practices

Pension funds
1. Require adequate funding and more realistic projections for future payouts
2. Require pension funds to pursue low risk investments
3. Restrict or eliminate investments through high risk hedge funds

Tax policy (essentially dismantle the paper economy which acquires excess capital and uses it to fuel destructive bubbles)
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

International
1. 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
2. Harmonization of standards for banking, insurance, and exchanges
3. A new Bretton Woods to reconsider currency relationships: the Chinese peg to the dollar, the troubled Euro, reliance on the US dollar as the world’s reserve currency

Other
1. Single payer universal healthcare
2. 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)
3. Savings in defense spending: Withdraw from Iraq and Afghanistan, cut unneeded, goldplated weapons programs, reduce the number of overseas bases
4. Change the filibuster rule in the Senate to prevent gridlock
5. Mandatory public campaign financing

These are my ideas for reform and those I have gleaned from others. If you have other suggestions, please feel free to make them in the comments.

Hugh

Hugh

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