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 . . .
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.
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.
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.
If we just got #6 all the others would take care of themselves.
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.
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.
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….
Read Full Article »