Wall Street Reform: Part 1

The contents of this post will eventually, soon, be formulated in a letter to the President and my representatives but I thought that I would pass it by you, dear reader, first.

American citizens are rightfully upset at the behaviors in the financial markets and businesses that put our economy in near collapse and resulted in massive government bailouts, bailouts that sent a message to the banks that profits were to be privatised and risk was to be socialized. In this environment there is little to no incentive for banks to mend their ways.

The belief in the bankers and the market as espoused by Alan Greenspan was by his own admission wrong.

What is needed is new regulation and a restoration of some controls that were repealed in the misguided belief that free markets were self-regulating. Among the regulations that should be strongly considered are the restoration of Glass-Steagall, the total elimination or strict regulation of financial derivatives and credit default swaps (CDS), and a complete rework or elimination of the rating agencies.

1) The original 1932 Glass-Steagall act that separated commercial from investment banking should either be reinstated or an improved version should be developed and passed.

2) Derivatives in the financial markets are nothing more than legalized gambling made worse by the fact that there is no real collateral in the contract. Many have warned against the dangers of derivatives including Brooksly Born in the PBS Frontline broadcast “The Warning.” If these risky instruments can not be eliminated then they should be regulated so that there is an open market for them and their liabilities should appear as part of the bank or investment company balance sheet.

3) CDSs as we have come to realize are insurance contracts. These contracts have been abused as gambling instruments where speculators can buy into a CDS without having any interest in the entity being insured. Sometimes there are referred as a naked CDS. It’s like buying fire insurance for your neighbor’s house.

4) It was a shocking revelation to many that the rating agencies that the government sanctioned and whose ratings determined the value of bonds was a sham. It is unreasonable to expect a fair and impartial bond rating when those requesting the rating are paying the agencies. The continuation of this conflict of interest can no longer be tolerated.

The bottom line is that we need to restore our banking industry to the model of community commercial banks. Fortunately we now have the FDIC to insure deposits and protect depositors from poor bank management. Depositors funds should never again be heavily leveraged to gamble on unsecured investments especially instruments like derivatives.

That’s my view, what’s yours?


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