The Easy Recipe for Financial Reform

Enter your email address:

Enter the recipients' email addresses, separated by commas:

Message:

Win McNamee / Getty Images After all the health care hostility, will there be an outbreak of bipartisanship on an even more important bill? Robert C. Pozen, author of Too Big To Save? How to Fix the U.S. Financial System, proposes solutions for the financial reform bill.

Chris Dodd, chairman of the Senate Banking Committee, is retiring in the fall, and he would like the Senate to pass a bipartisan financial reform bill as part of his legacy. Although the House has already passed its version of financial reform, the Senate still must resolve at least four controversial issues before it can pass financial reform. Here are my suggestions for dealing with these sticking points. (A fuller version of my arguments can be found in my new book, Too Big To Save? How to Fix the U.S. Financial System.)

1. How to Prevent Systemic Risks

The administration has proposed to give the federal regulators the power to reduce the size of existing megabanks—the 19 institutions with more than $100 billion in assets—to prevent them from engaging in systemically risky activities. Most notably, the administration recently backed the so-called Volcker rule, which would prohibit banks from engaging in "proprietary trading." This means buying or selling securities for the bank's own account, as opposed to executing securities trades for the bank's customers.

The odds are 60 to 40 that financial reform legislation will pass before the November elections this year.

However, banks often buy securities for their own account in order to reduce their risk exposures—for example, options or futures to hedge against possible losses in securities held in their portfolios. Banks also build up an inventory of bonds as part of their role as market makers—providing liquidity for their customers or other investors who wants to buy or sell these bonds. Moreover, proprietary trading by banks was not a primary cause of the losses that led to the bailouts by the federal authorities. Therefore, many foreign nations will not adopt the Volker rule so it will be easy for U.S. banks to avoid in their overseas operations.

A more sensible approach would be for Congress to focus on bank capital—the cushion that allows banks to absorb losses without becoming insolvent. The relatively low requirement of capital to assets was a major cause of the failures of many Wall Street firms during the financial crisis. Thus, Congress could mandate a higher capital requirement for very large banks, and could authorize the bank regulators to impose restrictions on excessively risky activities at specific banks.

2. When to Bailout Banks

Even with higher capital requirements, a few megabanks will inevitably get to the brink of insolvency. And if these megabanks are deemed "too big to fail", they are likely to be bailed out by the federal government. Since October of 2008, the Treasury has contributed federal capital to over 600 financial institutions in the U.S. This incredibly high—even reckless—number shows that we do not have a sensible definition of "too big to fail".

In my view, Congress should establish stringent tests for bailing out any financial institution. These tests should focus on the critical role of a few megabanks in processing financial transaction such as checks and wires: If the payment system were shut down, the U.S. economy would come to a halt. By contrast, banks are generally not crucial to lending in the American economy. Banks account for less than 25 percent of all credit extended in the U.S.; the bulk of credit is extended by non-bank lenders such as mortgage brokers and auto financing companies.

If the federal government decides to bail out a financial institution, the Treasury secretary and the Fed Chairman should publicly articulate their rationale for the decision so we can determine later whether this rationale was supported by the facts. In addition, the federal regulators should be directed to recoup any financial assistance to a troubled financial institution by assessing a fee on all megabanks. While some senators favor the assessment of such a fee starting next year, I believe that pre-funding would be unnecessarily burdensome and hard to calculate in advance.

View as Single Page 12 Back to Top March 2, 2010 | 1:19pm Facebook | Twitter | Digg | Share | Emails | print var OutbrainPermaLink=document.location.href.replace(document.location.search, '').replace(/\/\d+\/$/,'/').replace(document.location.host, 'thedailybeast.com'); var OB_Template = "The Daily Beast"; var OB_demoMode = false; var OBITm = "1255455386150"; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ''; document.write(str); } Politics, Financial Reform, Senate Banking Committee, Chris Dodd, Health Care  (–) Show Replies Collapse Replies Sort Up Sort Down sort by date: frdmringstrue

"The sack of these United States by the Fed is the greatest crime in history. Through the Fed the people are losing the rights guaranteed to them by the Constitution. Their property has been taken from them without due process of law. What is needed here is a return to the Constitution of these United States. The old struggle that was fought out here in President Jackson's time must be fought all over again. The independent United States Treasury should be reestablished and the Government should keep its own money under lock and key in the building the people provided for that purpose. Fiat currency, the devise of the swindler, should be done away with. The Fed should be abolished and the State boundaries should be respected. Bank reserves should be kept within the boundaries of the States whose people own them, and this reserve money of the people should be protected so that the International Bankers and acceptance bankers and discount dealers cannot draw it away from them. The Fed should be repealed, and the Fed Banks, having violated their charters, should be liquidated immediately. Faithless Government officials who have violated their oaths of office should be impeached and brought to trial. Unless this is done by us, I predict, that the American people, outraged, pillaged, insulted and betrayed as they are in their own land, will rise in their wrath, and will sweep the money changers out of the temple." Congressman, Louis T. McFadden May 23, 1933 He died mysteriously on October 3, 1936 http://federal-reserve.net This was 77 years ago! And this travesty is still going on! That's why our country is broke!

Flag It | Permalink | Reply 3:17 pm, Mar 2, 2010 SharnCedar

All this talk will be irrelevant once we have gone through another 10 years or more of stag-pression. The jobs ain't coming back, and the bankers ain't giving up a dime of their stolen money. So it will be death for them, not reform. We are coming for those bastards in 5 or 6 years, and that's how it is going to play out. Personally I'm just biding my time until the mob moves on New York, then I'll get my pitchfork and I'm ready to go. Still got a few years to let the hate build, I reckon. And its building. There cannot be forgiveness - that opportunity is past.

Flag It | Permalink | Reply 11:09 pm, Mar 2, 2010 $('#c_total span').html('2'); $('#c_total').show(); Share this comment on Facebook

Thank you. As a first time user, your comment has been submitted for review. It can take anywhere from a few hours to a day or two for your comment to be reviewed, depending on the time of week and the volume of comments we receive.

Please log in to leave comments.

The Photo That Could Doom the Democrats

by Peter BeinartInfo

Peter Beinart, senior political writer for The Daily Beast, is associate professor of journalism and political science at City University of New York and a senior fellow at the New America Foundation. His new book, The Icarus Syndrome: A History of American Hubris, will be published by HarperCollins in June. Follow him on Twitter and Facebook.

X Close

Hurt Locker Blows Up

by Nicole LaPorteInfo

Nicole LaPorte is a West Coast reporter for The Daily Beast. A former film reporter for Variety, she has also written for The New Yorker, the Los Angeles Times Magazine, The New York Times, The New York Observer, and W.

X Close

Real Housewives, Real Hatred!

by Rebecca DanaInfo

Rebecca Dana is a senior correspondent for The Daily Beast. A former editor and reporter for the Wall Street Journal, she has also written for the New York Times, the New York Observer, Rolling Stone and Slate, among other publications.

X Close

Reconciliation Is a Go

House will first pass Senate bill.

Paterson Broke Ethics Law, Says Panel

For taking free Yankees tickets.

Grand Jury to Indict Edwards

For using campaign money to pay mistress.

The Pay Czar's New Rules

by Robert PozenInfo

Robert Pozen is the author of TOO BIG TO SAVE? How to Fix the U.S. Financial System. He is Chairman of MFS Investment Management®, and was formerly president of Fidelity Management & Research Company. He is a senior lecturer at Harvard Business School and has contributed numerous articles to the Wall Street Journal, the New York Times, and the Financial Times.

X Close How Helena Became a Freak Hurt Locker Blows Up The Overmedicated Myth Emily Dickinson's Racy Side Celebrities Throw More Than Parties Betty White Death Hoax? Not Cool, Not Cool Baron Cohen's Oscar Skit Yanked Influential Shiite Cleric Stays Neutral in Upcoming Iraqi Elections Gillibrand and Pataki Running Neck-and-Neck in New York Senate Match-Up Democrat Barnes In a Competitive Race with Ga. GOP Governor Hopefuls Sarah Palin Does Stand-Up"”And Not Badly, Either Australians Go to Israel to Investigate Potential Misuse of Its Citizens' Information Europe's Shadow Economies a Boon in Crisis 'Bachelor' Winner -- Cruisin' for a Boozin' Children Services Back Today in Jackson Case Spencer Pratt's Dog Leaves Him in Stitches

Sign me up for The Daily Beast's morning email and breaking news alerts.

Sign me up for The Yes List, weekly cultural recommendations from The Daily Beast.

I'd like to recieve e-mail notifications as:

Text Only HTML

Sign me up for occasional special offers sent by The Daily Beast on behalf of select sponsors, and for occasional special offers from IAC companies.

Please register to manage your email preferences and comment on the site. Home |  Cheat sheet |  Buzz board |  Big Fat Story |  Blogs & stories |  Videos |  Galleries |  Crossword Sexy Beast |  Book Beast |  Hungry Beast |  Art Beast |  Giving Beast COPYRIGHT © 2008-10 RTST, INC. ALL RIGHTS RESERVED. SITE DESIGN BY CODE AND THEORY. This Web Accessibility icon serves as a link to download eSSENTIAL Accessibility assistive technology software for individuals with physical disabilities.

Partner Sites: Expedia| Hotels| Hotwire| Urbanspoon| Life123| LiveDaily| Reference

Email:

Sign me up for The Daily Beast's morning email and breaking news alerts.

Sign me up for The Yes List, weekly cultural recommendations from The Daily Beast.

I'd like to recieve e-mail notifications as:

Text Only HTML

Sign me up for occasional special offers sent by The Daily Beast on behalf of select sponsors, and for occasional special offers from IAC companies.

X Close Please register to manage your email preferences and comment on the site. THANK YOU Your account with The Daily Beast has been created. Username: First Name: Last Name: Postal/Zip Code: Country: United States Afghanistan Albania Algeria American Samoa Andorra Angola Anguilla Antarctica Antigua and Barbuda Argentina Armenia Aruba Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bermuda Bhutan Bolivia Bosnia and Herzegowina Botswana Bouvet Island Brazil British Indian Ocean Terr. Brunei Darussalam Bulgaria Burkina Faso Burundi Cambodia Cameroon Canada Cape Verde Cayman Islands Central African Republic Chad Chile China Christmas Island Cocos (Keeling) Islands Colombia Comoros Congo Cook Islands Costa Rica Cote d'Ivoire Croatia (Hrvatska) Cuba Cyprus Czech Republic Denmark Djibouti Dominica Dominican Republic East Timor Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Falkland Islands/Malvinas Faroe Islands Fiji Finland France France, Metropolitan French Guiana French Polynesia French Southern Terr. Gabon Gambia Georgia Germany Ghana Gibraltar Greece Greenland Grenada Guadeloupe Guam Guatemala Guinea Guinea-Bissau Guyana Haiti Heard & McDonald Is. Honduras Hong Kong Hungary Iceland India Indonesia Iran Iraq Ireland Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Kiribati Korea, North Korea, South Kuwait Kyrgyzstan Lao People's Dem. Rep. Latvia Lebanon Lesotho Liberia Libyan Arab Jamahiriya Liechtenstein Lithuania Luxembourg Macau Macedonia Madagascar Malawi Malaysia Maldives Mali Malta Marshall Islands Martinique Mauritania Mauritius Mayotte Mexico Micronesia Moldova Monaco Mongolia Montserrat Morocco Mozambique Myanmar Namibia Nauru Nepal Netherlands Netherlands Antilles New Caledonia New Zealand Nicaragua Niger Nigeria Niue Norfolk Island Northern Mariana Is. Norway Oman Pakistan Palau Panama Papua New Guinea Paraguay Peru Philippines Pitcairn Poland Portugal Puerto Rico Qatar Reunion Romania Russian Federation Rwanda Saint Kitts and Nevis Saint Lucia St. Vincent & Grenadines Samoa San Marino Sao Tome & Principe Saudi Arabia Senegal Seychelles Sierra Leone Singapore Slovakia (Slovak Republic) Slovenia Solomon Islands Somalia South Africa S.Georgia & S.Sandwich Is. Spain Sri Lanka St. Helena St. Pierre & Miquelon Sudan Suriname Svalbard & Jan Mayen Is. Swaziland Sweden Switzerland Syrian Arab Republic Taiwan Tajikistan Tanzania Thailand Togo Tokelau Tonga Trinidad and Tobago Tunisia Turkey Turkmenistan Turks & Caicos Islands Tuvalu Uganda Ukraine United Arab Emirates United Kingdom United States U.S. Minor Outlying Is. Uruguay Uzbekistan Vanuatu Vatican (Holy See) Venezuela Viet Nam Virgin Islands (British) Virgin Islands (U.S.) Wallis & Futuna Is. Western Sahara Yemen Yugoslavia Zaire Zambia Zimbabwe Date of Birth: Month 1 2 3 4 5 6 7 8 9 10 11 12 Day 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Year 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950 1949 1948 1947 1946 1945 1944 1943 1942 1941 1940 1939 1938 1937 1936 1935 1934 1933 1932 1931 1930 1929 1928 1927 1926 1925 1924 1923 1922 1921 1920 1919 1918 1917 1916 1915 1914 1913 1912 1911 1910 1909 1908 1907 1906 1905 1904 1903 1902 1901 1900 Email: Password: Re-type Password:

or

Connect with facebook

Register using Facebook to share comments, stories, and other activity easily with your Facebook feed.

Sign me up for The Daily Beast's morning email and breaking news alerts. Sign me up for occasional special offers sent by The Daily Beast on behalf of select sponsors and for occasional special offers from IAC companies. Sign me up for The Yes List, weekly cultural recommendations from The Daily Beast. I'd like to receive email as: HTML Text Only

Username: Password: Email Address: Email Address:

Lost your password? Check the box, enter your Email Address above, then click Submit, and we'll email you a link to change your password.

Lost your username? Check the box, enter your Email Address above, then click Submit, and we'll email you your username.

Not Registered?

or

Log in using Facebook to share comments, stories, and other activity easily with your Facebook feed.

Please complete the information below to enhance your Daily Beast experience.

Display Name:(for comments) First Name: Last Name: Postal/Zip Code: Country: United States Afghanistan Albania Algeria American Samoa Andorra Angola Anguilla Antarctica Antigua and Barbuda Argentina Armenia Aruba Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bermuda Bhutan Bolivia Bosnia and Herzegowina Botswana Bouvet Island Brazil British Indian Ocean Terr. Brunei Darussalam Bulgaria Burkina Faso Burundi Cambodia Cameroon Canada Cape Verde Cayman Islands Central African Republic Chad Chile China Christmas Island Cocos (Keeling) Islands Colombia Comoros Congo Cook Islands Costa Rica Cote d'Ivoire Croatia (Hrvatska) Cuba Cyprus Czech Republic Denmark Djibouti Dominica Dominican Republic East Timor Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Falkland Islands/Malvinas Faroe Islands Fiji Finland France France, Metropolitan French Guiana French Polynesia French Southern Terr. Gabon Gambia Georgia Germany Ghana Gibraltar Greece Greenland Grenada Guadeloupe Guam Guatemala Guinea Guinea-Bissau Guyana Haiti Heard & McDonald Is. Honduras Hong Kong Hungary Iceland India Indonesia Iran Iraq Ireland Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Kiribati Korea, North Korea, South Kuwait Kyrgyzstan Lao People's Dem. Rep. Latvia Lebanon Lesotho Liberia Libyan Arab Jamahiriya Liechtenstein Lithuania Luxembourg Macau Macedonia Madagascar Malawi Malaysia Maldives Mali Malta Marshall Islands Martinique Mauritania Mauritius Mayotte Mexico Micronesia Moldova Read Full Article »