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How a Regulatory Makeover Can Fix the Financial Crisis

Politics / Market Regulation Jan 19, 2009 - 11:09 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleShah Gilani writes: Open Letter to President-Elect Barack Obama: How a Regulatory Makeover Can Fix the Financial Crisis

Mr. President-Elect:

The people of the United States have spoken. Their collective voice resonates loudly and overwhelmingly in praise of your vision and promises for America the beautiful.

Over the many voices, the chorus of a common refrain resounds: There is nothing we as a people cannot do if inspired by confidence in our president, honest and transparent democratic government, and equal opportunity in pursuit of our happiness.

Fundamental to our pursuit of happiness is confidence in the viability, integrity and safety of our capital markets institutions. The public's confidence and reliance upon these institutions to create employment opportunity, to provide protection of the many from the greed of a few, and to shepherd our savings and nation's wealth have been dangerously undermined. The internal threat to our way of life and future is the crisis of confidence we face in restoring manifest integrity, safety, and viability in our economy.

With the mandate of the people you have an opportunity to override the self interest of entrenched politicians, the inordinate influence of lobbyists and the disturbing greed of vested interests. The old walls of crony capitalism are held together by self-serving, self-policing and self-destructive regulatory bodies. The inability of the present system of regulation to deal with the complexities of expanding capitalism and protect us from inordinate concentrations of systemic risk has been tragically demonstrated. It is time that the crumbling walls of regulation are replaced with a new singular, transparent, effective and dynamic regulatory apparatus. I believe the attached outline for such an apparatus serves as a prospective model towards engineering effective regulatory architecture.

Upon your inauguration and ascendancy to the highest and most powerful office on earth, your message and promise of change will resound and echo throughout the world. There may be no better change to make than to repatriate confidence in the American capitalist model and dispel the crisis of confidence gripping our nation by immediately exercising your mandate to change the regulatory apparatus essential for economic growth. Change is your promise, and God willing, it will be your legacy.

Congratulations on achieving the American presidency. The whole world is with you.


Shah Gilani

Money Morning Plan for Engineering an Effective Regulatory Architecture

[ Editor's Note : Money Morning Contributing Editor R. Shah Gilani, a retired hedge fund manager, is a noted expert on the U.S. credit crisis .]

By R. Shah Gilani

Contributing Editor

Money Morning/The Money Map Report

Overview : The United States must engineer a new transparent , non-partisan , “ systemic-centric,” economy-oriented regulatory apparatus that facilitates innovation in capital formation , product efficacy , public protection and open, fair and equal market access .

I. General Architecture :

  1. The United States Economic Council : Establish The U.S. Economic Council under the Executive branch. Council members will consist of:
  • U.S. Treasury Secretary (Chairman of the Council).
  • Chairman of the Federal Reserve Board.
  • President of the New York Federal Reserve Bank.
  • Comptroller of the Currency.
  • Chairman of the FDIC.
  • Chairman of the Federal Association of State Insurance Commissioners.
  • Chairman of the U.S. Capital Markets Commission.

The U.S. Economic Council would oversee and have both approval and veto power over all rules and regulations established by the U.S. Capital Markets Commission. The Council would represent the U.S. in global regulatory agreements and disputes.

B. The United States Capital Markets Commission : Establish a six-member U.S. Capital Markets Commission, consisting of:

  • Chairman of the Capital Markets Commission.
  • Equity Markets Commissioner.
  • Credit Markets Commissioner.
  • Commodities Markets Commissioner.
  • Derivatives Markets Commissioner.
  • Currency Markets Commissioner.

II. Specific Guidelines :

Market Commissioners : Market Commissioners would be respected industry professionals with demonstrable records and expertise in their respective market segments. Market Commissioners would be elected by a vote of those they regulate, where eligible voters would be determined by registration of individuals pursuant to licenses to transact business in their respective market disciplines. Holders of multiple licenses in different market disciplines would be free to vote per each pertinent license.

Market Commissioner Terms and Pay : Market Commissioners terms would be for two years and staggered. Market Commissioners would be limited to two terms. Market Commissioners would not be paid but exercise their duties as public servants.

Chairman of the Commission : The Chairman of the Capital Markets Commission would be elected by a vote of the U.S. Economic Council, and would be an established and recognized “academic” who wasn't already actively involved in any market segments, for at least five years.

Commission Chairman Terms and Pay : The Chairman would serve a four-year term. The Chairman would be limited to three terms. The Chairman's pay would be market based.

III. Operation :

The U.S. Capital Markets Commission would blend the offices, personnel and resources of the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authority (FINRA) and all peripheral regulatory bodies.

The Commission would have regional offices run by career-oriented regulatory professionals. Individuals holding an executive – or in any way a judicial – position with the ability to make or influence findings of guilt or innocence, or to levy any fines or penalties in any matter, before any jurisdictional body empowered by the Commission, would be ineligible to be hired or compensated by any company or individual subject to Commission rules or regulations for five years subsequent to their Capital Markets Commission employment.

The Commission would be funded by fees and transaction charges levied upon regulated companies, markets and individuals. The Commission would establish a rules-based – vs. a principles-based – architecture. The Commission would incorporate:

1. A transparency committee.

2. A products committee.

3. A ratings committee.

4. A licensed persons committee.

5. A public-trust committee.

6. A fair and orderly markets committee.

7. A systemic markets oversight committee.

8. An international regulatory coordinating committee.

The mandate of the U.S. Capital Markets Commission would be to establish market efficiencies and opportunities enforced by rules and regulations for transparency in product creation, ratings integrity, market fairness, public protection and systemic-risk mitigation.

[ Editor's Note : Nearly 3 million readers have perused Money Morning Contributing Editor Shah Gilani's essays on the ongoing U.S. credit crisis. Earlier this year, the one-time Wall Street insider sent an open letter to U.S. Treasury Secretary Henry M. “Hank” Paulson Jr., in which Gilani detailed a bailout plan that would have cost taxpayers nothing . Readers forwarded that Money Morning plan to their congressional representatives, asking that they support Gilani's well-crafted initiative.

Once again we're providing an electronic list of the elected representatives – and their contact information – and urge you to support the “Money Morning Plan for Re-Engineering Financial-Services Regulation.  Just click here to get that listing of your state's representatives.

Later this week, Gilani will host a post-Inauguration " Web summit " that talks about the pending regime change in Washington and what it means for investors in the coming months.

The session this Thursday (Jan. 22) - entitled " The Regime Change in Washington Triggers War on Wall Street " - is free of charge to investors who register in advance. It will start at 7 p.m. EST.

Those who tune in can expect to get candid insights not available on your favorite cable-TV finance show or in the business section of your local newspaper.

“Wall Street doubletalk got us into this crisis; I hear more excuses than straight talk. Most of the dialogue is noise," said Gilani, the editor of the " Trigger Event Strategist " and a commentator who is known for his deep connections inside the investment-banking world of Wall Street. "The truth may be difficult to swallow, but without hearing it, there's not much hope for finding the right way out of the maze."]

Money Morning/The Money Map Report

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