Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
When Will UK Coronavirus Crisis Imrpove - Infections and Deaths Trend Trajectory Analysis - 8th Apr 20
BBC Newsnight Focuses on Tory Leadership Whilst Boris Johnson Fights for his Life! - 8th Apr 20
The Big Short Guides us to What is Next for the Stock Market - 8th Apr 20
USD Index Sheds Light on the Upcoming Gold Move - 8th Apr 20
The Post CoronaVirus New Normal - 8th Apr 20
US Coronavirus Trend Trajectory Forecast Current State - 7th Apr 20
Boris Johnson Fighting for his Life In Intensive Care - UK Coronavirus Crisis - 7th Apr 20
Precious Metals Are About To Reset Like In 2008 – Gold Bugs, Buckle Up! - 7th Apr 20
Crude Oil's 2020 Crash: See What Helped (Some) Traders Pivot Just in Time - 7th Apr 20
Was the Fed Just Nationalized? - 7th Apr 20
Gold & Silver Mines Closed as Physical Silver Becomes “Most Undervalued Asset” - 7th Apr 20
US Coronavirus Blacktop Politics - 7th Apr 20
Coronavirus is America's "Pearl Harbour" Moment, There Will be a Reckoning With China - 6th Apr 20
Coronavirus Crisis Exposes Consequences of Fed Policy: Americans Have No Savings - 6th Apr 20
The Stock Market Is Not a Magic Money Machine - 6th Apr 20
Gold Stocks Crash, V-Bounce! - 6th Apr 20
How Can Writing Business Essay Help You In Business Analytics Skills - 6th Apr 20
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20

Market Oracle FREE Newsletter


Financial Reform, Three Ways to Fix Wall Street

Politics / Market Regulation Apr 14, 2010 - 05:49 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleMartin Hutchinson writes: The financial-reform bill introduced by U.S. Sen. Christopher J. Dodd, D-CT, seems likely to pass both houses without all that much alteration.

And that should immediately raise our suspicions. After all, the U.S. financial-services business has a very effective lobby, so if there isn't huge opposition to the legislation, it probably won't achieve all that much.

It won't fix Wall Street.

But there's another issue here: It's also not clear to me that we know just what we want the financial-reform initiative to achieve. By that, I mean: What banking-sector reforms would we implement in an ideal world, to reduce the danger from the sector while preserving the essentials of a free market?

Sen. Dodd's bill focuses on a number of changes, none of which seem likely to provide a solution to the financial sector's most-serious problems. It includes elements of the "Volcker Plan," which aimed to prevent banks with deposit guarantees from doing "proprietary trading."

But the legislation gives regulators the power to impose regulations - which will presumably allow the banking lobbyists to ensure nothing effective is done. It provides an orderly liquidation mechanism for failing big banks, which doesn't solve the "too big to fail" problem, but still may alleviate it, depending on the final details. It provides for a consumer financial protection agency, but gives control to the U.S. Federal Reserve, which suggests the agency will be ineffective.

Finally, Dodd's bill provides investors with some ability to denounce excessive pay packages, but without full control.

In other words, the financial-services-sector reform bill suffers from the opposite problems that weaken the recently enacted healthcare-reform legislation. Far from shaking up the system completely and transferring huge power to the state, the financial-services legislation is likely to achieve very little, and not solve the problems it is supposed to address. Also, unlike the healthcare plan, I predict it will pass fairly easily with bipartisan support.

The bottom line, unfortunately, is that the bill will not solve the problems of Wall Street. That is a pity; there are a number of legislative actions that would go a long way to do so - by and large, those are the ones that have met with hysterical opposition from Wall Street's lobbyists.

First and foremost, we need a "Tobin tax" - a small tax on transactions, at some tiny percentage of their value. Much of Wall Street's income these days is gained by "fast trading," where investment banks place electronic-trading terminals in the stock exchange and take advantage of ultra-rapid information about order flows. Sorry, but that's insider trading, just as it would be if they traded on insider knowledge of next quarter's earnings. It's pure rent extraction - Wall Street is sucking value out of the system, about $20 billion a year in total - without providing anything of value in return.

You can't make it illegal, because market-makers have always used their order-flow knowledge as part of their business, but you can tax it enough to make it unprofitable. The margins on this business are tiny, so a tax of 5 cents per share on equities and equivalent amounts on bonds and derivatives should be ample, and 1 cent would probably be enough. It needs to be enforced across all major domiciles, though, to keep the business from just migrating.

An additional advantage of a Tobin tax would be to tilt the playing field back away from trading and towards value-added businesses. Wall Street institutions hate the idea - more than any other tax - because they can't pass it on to their customers. The tax would simply reduce the unearned profits Wall Street extracts from those clients.

Second, we need a provision that enforces proper risk management. The "Value at Risk" (VAR) system and its derivatives don't work, because they rest on incorrect assumptions about price movements. Moreover, these systems can be "gamed" by traders who invent new securities - such as collateralized debt obligations (CDOs) and credit default swaps (CDS) - which appear benign under the VAR system, but actually carry huge, unrecognized risks.

As my forthcoming book "Alchemists of Loss" (jointly written with Professor Kevin Dowd) points out, there are litmus tests that can identify these pathological products and flag their excessive risks. Regulators need to insist that the banks use those tests, and then adjust their risks accordingly. The result would be to force very low trading limits on CDOs and CDS, putting those economy-killers out of business.

Third, we need a "too-big-to-fail" regimen - but with real teeth. The simplest form of this is, once again, a tax - this time on agglomerations of assets that exceed about 2.5% of gross domestic product (GDP), or about $400 billion.

If that tax were set at 0.1% per annum, it would become more economic for the behemoths to spin off some of their operations and slim down to a reasonable size.

As of Dec. 31, there were four "traditional" commercial banks with assets in excess of $1 trillion. Following those four, in order, were:

•Goldman Sachs Group Inc. (NYSE: GS) at $849 billion.
•Morgan Stanley (NYSE: MS) at $771 billion.
•And then a huge gap before the next two houses, U.S. Bancorp (NYSE: USB) and PNC Financial Services (NYSE:

PNC), both under $300 billion. We need to slim the behemoths down to a size where a bankruptcy won't take the entire financial system down with it.
That collection of three quite simple changes would revolutionize the system, though ideally tighter monetary policy and limitations on deposit insurance (which would reduce the encouragement it gives to speculate with taxpayers money) would be added to complete the package.

Don't hold your breath hoping that these three provisions will become reality, however: Whether they are Republican or Democrat, the Wall Street lobbyist army has far too much political control for that to happen.

Source :

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules