The President’s Press Secretary Robert Gibbs is saying that the White House does not want to veer from the principles behind financial regulatory reforms just as the candidate Obama did not, earlier on the Troubled Asset Relief Program (TARP) before the election and later on health care.
The trouble with TARP was not the principle. It was the structure of the program. Likewise, the problem with the health care bill is not the principle. It is the substance of the bill that cannot deliver what it claims in a fiscally sound manner. This same predicament could befall the financial regulatory reform which is pending in the Congress. Therefore, it would be better, as this President learns by doing (Jon Meacham of Newsweek calls it on the job training in a recent editorial), to clean up the substance of the pending legislation so that it can implement the principles effectively.
Communicating with the President therefore entails critiquing the bill in the context of his principles. As much as the White House appears to be concerned about the public anger against Wall Street and wants to make consumer protection the headline of its principles, it must not confuse institutional design with the principles. The principle is the abstraction to which regulatory and institutional designs must adhere. So, I rearranged and rewrote the principles that were available on the White House website providing my suggestions for realizing each principle in practice.
The reform proposal can be found here.
Reform will close loopholes and require tough new rules and greater transparency from investment advisers, financial brokers and hedge funds – holding them accountable while protecting investors and businesses.
All financial market instruments shall be traded in open exchanges only.
Reform will put in place tough new capital requirements, rigorous standards and supervision that to make sure that no financial institution is capable of bringing down the economy.
The Board of Governors of the Federal Reserve System, under the aegis of an amended Federal Reserve Act (FRA) shall be authorized by the United States Congress to implement the following:
• All bank risk ratings maintained by the Federal Reserve’s bank surveillance supervisors such as CAMEL ratings shall be made public by the Federal Reserve.
• The Basel regime of bank supervision and capital levels shall expire the day the reform is signed into law. All financial market institutions, without exception, shall be subject to a refundable, interest bearing contingency tax per a simple schedule, subject to periodic revision similar to tax rates at the discretion of the, to make financial firms save for a rainy day. The interest paid to the financial institutions shall be compounded at the prevailing federal funds rate.
• All private credit default swap (CDS) issuance shall be indefinitely suspended. Credit default swaps shall henceforth be issued by the Federal Reserve only and the Federal Reserve shall advise the Congress on the operational mechanisms of doing so by December 31, 2010.
• No institution shall be deemed as too big to fail or too interconnected to fail. All financial institutions shall be resolved if their first resort dependence on their rainy day savings, the Federal Reserve’s discount window or other similar facilities and any macroeconomic policy changes (in that order) cannot save the institutions. At the urging of the Federal Reserve or the new office combining the OCC and the OTS in the Treasury or the FDIC as pertinent and as determined by the Oversight Council, failing institutions shall seek partners through a standard Mergers and Acquisitions (M&A) process. In the event this last safety net fails, the institution shall be subject to bankruptcy proceedings. At all times, all depositors in thrifts, credit unions and commercial banks shall be protected by deposit insurance whose limits shall be determined by the United States Congress based on circumstances. Stock holders and other private investors shall not be protected by the tax payer.
Reform will strengthen oversight and aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefits the special interests at the expense of American families and business.
• The Securities and Exchange Commission (SEC) and the Commodities and Futures Trading Commission (CFTC) shall be merged to together oversee all financial activities on all open exchanges where henceforth all financial instruments will be trading.
• All hedge fund and private equity business shall also be overseen by the new agency by establishing public registration requirements for the businesses and trade and business activities outcome databases for data such as specific days of all trades, trade types, monies or other financial instruments involved and returns together with a public listing of all investors, counterparties and leverages.
• All financial markets regulatory agencies shall be merged into one separate agency together with consumer protection.
Reform will ensure that the American consumer is protected.