A Short Citizen’s Guide to Reforming Wall Street

[Jefferson23]

Tuesday, April 20, 2010

Robert Reich


The real scandal isn’t the Street’s unlawful acts (i.e., Securities and Exchange Commission vs. Goldman Sachs) but legal acts that have reaped the Street a bonanza and nearly sunk the rest of us.

It’s good we finally have an SEC on which three out of five commissioners are willing to enforce laws already on the books. Hopefully other enforcement agencies (CFTC, FDIC, and the Fed) will follow suit. But we also need to make illegal the recklessness that’s now legal.

The Dodd bill now being considered in the Senate is a step in the right direction. Yet despite the hype, it’s a very modest step. It leaves out three of the most important things necessary to prevent a repeat of the Wall Street meltdown:

1. Require that trading of all derivatives be done on open exchanges where parties have to disclose what they’re buying and selling and have enough capital to pay up if their bets go wrong. The exception in the current bill for so-called “unique” derivatives opens up a loophole big enough for bankers to drive their Ferrari’s through.

2. Resurrect the Glass-Steagall Act in its entirety so commercial banks are separated from investment banks. The current bill doesn’t go nearly far enough. Commercial banks should take deposits and lend money. Investment banks should be limited to the casino we call the stock market, helping companies issue new issues and making bets. Nothing good comes of mixing the two. We learned this after the Great Crash of 1929, and then forgot it in 1999 when Congress allowed financial supermarkets to do both.

3. Cap the size of big banks at $100 billion in assets. The current bill doesn’t limit the size of banks at all. It creates a process for winding down the operations of any bank that gets into trouble. But if several big banks are threatened, as they were when the housing bubble burst, their failure would pose a risk to the whole financial system, and Congress and the Fed would surely have to bail them out. The only way to ensure no bank is too big to fail is to make sure no bank is too big, period. Nobody has been able to show any scale efficiencies over $100 billion in assets, so that should be the limit.

Wall Street doesn’t want these three major reforms because they’d cut deeply into profits, and it’s using its formidable lobbying clout with both parties to prevent these reforms from even from surfacing. It’s time for Main Street — Tea Partiers, Coffee partiers, and beer drinkers — to be heard.



http://robertreich.org/post/536290208/a-short-citizens-guide-to-reforming-wall-street

[truedelphi]

1. Sure is damn funny (not funny Ha Ha, but funny sad) that the

Dodd bill doesn't contain the most necessary of the corrections.

Reform without reform seems to be the game plan of the year. Must have something to do with those pesky lobbyists.

[Jefferson23]

5. Pesky indeed, take a look here, and consider signing:

PETITION: NO "TOO BIG FOR JAIL"

"PETITION: The U.S. Department of Justice should launch a criminal investigation of Goldman Sachs & other Wall Street companies who may have acted illegally while devastating millions of lives. Nobody on Wall Street is too big for jail."

The Securities & Exchange Commission filed a civil fraud case against Goldman Sachs, a great step toward Wall Street accountability. But it's up to the Justice Department to launch criminal investigations.

Rep. Marcy Kaptur (D-OH) is courageously calling for a criminal investigation into Goldman and other Wall Street companies that broke the law. Several others in Congress have joined her.

Now's the time for the public to speak up. Please sign this petition making clear that nobody on Wall Street is "too big for jail."

When we hit 10,000 signatures, we'll deliver it to the Justice Department. (We'll also deliver it to Rep. Kaptur to use as she persuades others in Congress to join this cause.)


http://act.boldprogressives.org/cms/sign/petition_wallstreet_criminal_pet/?source=luws-

[Jefferson23]

2. Reg Reform Bill Slammed By Dem Insiders, Economic Experts In Reid Letter (EXCLUSIVE)

A coalition of former regulators, left-leaning economists and Democratic insiders have slammed the Senate's version of regulatory reform in a letter to the parties' two leaders, warning that the current bill won't prevent a future financial crisis.

In a letter addressed to Senate Majority Leader Harry Reid (D-Nev.) and Senate Minority Leader Mitch McConnell (R-Ky.), 36 highly respected officials, including former Labor Secretary Robert Reich, and longtime Democrat and Obama adviser Leo Hindery, paint a dire picture of the state of legislation to fix Wall Street.

"Nineteen months after the most devastating financial crisis since the Great Depression, our financial system remains at risk," they write. "Neither the bill passed earlier this year by the House, nor the one currently under consideration in the Senate would have prevented the crisis. Without serious restructuring, they will not prevent a future crisis."

The signatories, which include former SEC Chief Accountant Lynn Turner, former Lehman Brothers Vice Chair Peter Solomon, former S&L investigator Bill Black, and former Senate Banking Committee Chief Economist Rob Johnson, cast blame for the buildup to the 2008 crisis on both parties. But the solutions, they insist, shouldn't be piecemeal. "At a minimum," they write, new rules guiding Wall Street practice should be guided by the principle that, if they had been in place at the time, they would have "prevented the crisis we just endured." The ones being considered fall short of that aim, they concluded.

The group goes on to list eight specific changes that "must" be included to make the bill being considered by the Senate acceptable. Some of them are broad -- and, Senate negotiators would argue, are already addressed in their bill. Others, however, are quite specific. And it will be telling to see which, if any, senators try to change the legislation around these principles when (or if) the bill comes up for amendment on the floor.

As it stands now, Republican lawmakers are insisting they can't support legislation without changes to its language. And at least rhetorically, the GOP has sounded alarms that the bill doesn't go far enough to prevent government intervention in future economic catastrophes. At the same time, however, McConnell and others have opposed reforms that they argue will hurt economic activity domestically (including tough restrictions on how derivatives are traded). So it's hard to imagine them considering any of the below suggestions put forth by the letter's signatories. Some of the suggestions, indeed, have critics within the Obama White House.

The eight suggestions are listed in the letter, below:

in full: http://www.huffingtonpost.com/2010/04/20/exclusive-dem-insiders-ec_n_544187.html

[Jefferson23]

4. The Gang of 36 Letter

April 14, 2010
The Honorable Harry Reid The Honorable Mitch McConnell
United States Senate United States Senate
Washington, D.C. 20510 Washington, DC 20510
Dear Senators Reid and McConnell:

Nineteen months after the most devastating financial crisis since the Great Depression, our financial
system remains at risk. Neither the bill passed earlier this year by the House, nor the one currently
under consideration in the Senate would have prevented the crisis. Without serious restructuring, they
will not prevent a future crisis.

Sound financial markets are the bedrock of a strong economy. Over the last decade, under both
Democratic and Republican leadership, our financial sector moved away from core market principles -
transparency, competition, free flow of information and the essential discipline of failure - that allowed
the US economy to thrive. Restoring the integrity of our financial markets and providing the foundation
for economic recovery, requires re-committing to these principles.

We, the undersigned, call on you to fulfill the responsibilities of your position by joining together in nonpartisan
cooperation to pass legislation that AT A MINIMUM would have prevented the crisis we just
endured. Such legislation must include ALL of the following reforms or be considered incomplete:
1. Eliminates a perpetual system of government sponsored corporate bailouts financed by the
government or private industry.

2. Increase minimum capital requirements for banks to no less than 8%. Apply additional riskweighted
capital requirements for: a) risk concentration, b) significant interconnectedness with
other financial institutions and c) illiquidity which assumes a decline in collateral values. Create
standard metrics for these variables.

3. Require on balance sheet reporting of all liabilities with disclosure of related material
information including all contingent claims (including but not limited to swaps, SIVs and VIEs).
Provide a private right of action for failure to comply and for knowingly aiding and abetting
securities fraud.

4. Require all standardized derivatives to be traded over exchanges and central clearinghouses
with pricing transparent to market participants include a strong presumption that most existing
OTC transactions would be standardized. Require all inter-bank and inter-dealer contingent
claims (including but not limited to derivative and swap transactions) that cannot be
standardized to be reported on a daily basis to a regulated transparent clearinghouse. Mandate
significant and consistent margin and regulatory requirements across standardized and OTC
contingent claim transactions.

5. Create standardized Pooling and Servicing Agreements and mandate the timely availability of
electronically usable loan level information for asset backed securities, covered bond and
similarly structured transactions prior to sale. Provide a private right of action and personal
liability for sponsors of securitized underwritings.

6. Establish a timeline for the resolution of Fannie Mae and Freddie Mac.
7. Mandate that credit rating agencies be subject to the same legal standards as other market
participants.
8. Mandate a separation of the roles of Chairman of the Board and CEO for regulated financial
institutions.

Without these reforms, our economy remains at risk.

We would like to meet with you at your earliest convenience to discuss these concerns. To contact us,
please call Erica Payne at 212-481-8302 or email her at [email protected].

Sincerely,

Marcellus Andrews, Barnard College
Marshall Auerbach
Senior Fellow, the Roosevelt Institute
Global Portfolio Strategist, RAB Capital
Dean Baker
Co-director, Center for Economic and Policy Research
Dan Berger
Managing Principal, Berger & Montague, PC
William Black
Associate Professor of Economics and Law, University of Missouri-Kansas City
Former senior financial regulator
Margaret Cannella
Former Managing Director and Global Head of Credit Research and U.S. Corporate Strategy, JPMorgan
Timothy A. Canova
Betty Hutton Williams Professor of International Economic Law, Chapman University School of Law
Jim Chanos
Founder and President, Kynikos Associates
Bowman Cutter
Senior Fellow, the Roosevelt Institute
Former Managing Director, Warburg Pincus
Raj Date
Chairman and Executive Director, Cambridge Winter Center
Barry Eichengreen
Department of Economics, University of California
Thomas Ferguson
Professor of Political Science, University of Massachusetts, Boston
Senior Fellow, the Roosevelt Institute
Jerome S. Fons
Advisor, K2 Global Partners
Former Managing Director, Moody's Investors Service
Michael Greenberger
Law School Professor, University of Maryland School of Law
Former CFTC division director
Teresa Ghilarducci
Schwartz Professor of Economic Analysis, the New School University
Geoffrey Heal
Paul Garrett Professor of Public Policy and Corporate Responsibility, Columbia Business School
Leo Hindery
Chairman, the US Economy/Smart Globalization Initiative, New America Foundation
Arjun Jayadev
Fellow, Roosevelt Institute
University of Massachusetts, Boston
Rob Johnson
Senior Fellow and Director of the Project on Global Finance, the Roosevelt Institute
Former Chief Economist, Senate Banking Committee
Ethan Kaplan
Columbia University
Mike Konczal
Fellow, the Roosevelt Institute
Jan Kregel
Levy Economics Institute of Bard College
Robert Kuttner
Former Chief Investigator, Senate Banking Committee
Co-editor, the American Prospect
Henry C K Liu
Chairman, Liu Investment Group
Dariush P. Maanavi
Former Managing Director and Head of Corporate Equity Derivatives, Merrill Lynch
Jeff Madrick
Senior Fellow, the Roosevelt Institute
Editor, Challenge Magazine
Jamie Mai
Founder and President, Cornwall Capital
Frank Partnoy
Professor of Law and Finance, University of San Diego
Robert E. Prasch
Professor of Economics, Department of Economics, Middlebury College
Robert Reich
Professor of Public Policy, Goldman School of Public Policy, University of California Berkeley
Former U.S. Secretary of Labor
Josh Rosner
Managing Director, Graham Fisher & Co
Peter Solomon
Founder and Chairman, Peter J Solomon Company
Walker F. Todd
Attorney and economist
Former legal and research officer, Federal Reserve Banks of New York and Cleveland
Lynn Turner
Former Chief Accountant, Securities and Exchange Commission
Lawrence J. White
Professor of Economics, Stern School of Business, New York University
Randall Wray
Levy Economics Institute, Bard College

[truedelphi]

7. i am tagging your comments herre with this ianity -s o I can

read it tomorrow when I am awake.

[htuttle]

3. Excellent points by a very smart man, as always. But did he come up with the title?

Perhaps he's got a better sense of humor than I realized...

[Atticus]

6. Robert Reich? A "short citizen's" guide? Of course! nt