Most Popular
1. Dow Max Drawdown Bear Stock Market 2022 - Accumulating Deviations from the Highs - 21st Feb 22
2.Putin Starts WW3 in Ukraine, Will Use Tactical Nuclear Weapons, China Prepares Taiwan Blitzkrieg - 28th Feb 22
3.World War 3 Phase 1 - Putin WINS Ukraine War! - 25th Feb 22
4.INVESTORS SEDUCED by CNBC and the STOCK CHARTS COMPLETELY MISS the BIG PICTURE! - 10th Feb 22
5.Will There Be A 2024 US Presidential Election? - 3rd Mar 22
6.Gold and SIlver, Precious Metals Sector Is at a Terrific Buy Spot - 6th Feb 22
7.Why Putin Wants the WHOLE of Ukraine - World War 3 Untended Consequences - 6th Feb 22
8.Dow Stock Market Expected Max Drawdown 2022 - 19th Feb 22
9.Stock Market Calm In the Eye of the Inflation Storm - 4th Mar 22
10.M = F - Everything is Waving! Stock Market Forward Guidance - 7th Mar 22
Last 7 days
Why APPLE Could CRASH the Stock Market! - 21st May 22
Why Is Crude Oil Ignoring US Inventories? - 21st May 22
Here is Why I’m Still Bullish on Gold Mining Stocks - 21st May 22
THE INFLATION MEGA-TREND QE4EVER! - 20th May 22
US Real Estate Investors – Is There An End In Sight? - 20th May 22
How Technology Affected the Gaming Industry - 20th May 22
How To Set And Achieve Reasonable Goals For Your Company - 20th May 22
How Low Could the Amazon (AMZN) Stock Price Fall? - 19th May 22
Bitten by FANG? Clocked by Cryptos? -- 'Air Pockets' Everywhere - 19th May 22
Northern General Hospital Orthopedics Fractures and and Ankle Clinic Consultations Real Patient Experience - 19th May 22
Cathie Wood Goes All in on Teladoc, ARKK INSANE Noob Investing Strategy! - 17th May 22
This is Anything but Positive for US Housing Market - 17th May 22
What Should We Do If There Is No Fed Monetary Policy Pivot? - 17th May 22
All Possible Ways to Earn Free Litecoin - 17th May 22
How low Could the Amazon Stock Price Fall? - 16th May 22
Cathy Wood ARKK INSANITY There is NO Coming Back! - 16th May 22
NASDAQ 100 Stock Market LOWER LOWS & LOWER HIGH - 16th May 22
Sanctions, trade wars worsen US inflation - 16th May 22
AI Tech Stocks Earnings BloodBath Buying Opportunity - 14th May 22
Futures Contract – Trading Crude Oil With USO - 14th May 22
How to Get Kaspersky Internet Security for 80% Discount! Do not Pay Renewal Price! - 14th May 22
Sagittarius A* Super Massive Black Hole Monster at Centre of Our Galaxy REVEALED! - 14th May 22
UK Public Debt Smoking Inflation Gun - 13th May 22
What Happens When the Stock Market Dip Keeps Dipping? - 13th May 22
Biden Seeks Inflation Scapegoats; Gold Advocate Wins GOP Primary - 13th May 22
Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - 12th May 22
The War on Gold Ensures the Dollar’s Downfall - 12th May 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Financial Reform, Three Ways to Fix Wall Street

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

By: Money_Morning

Politics

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 : http://moneymorning.com/2010/04/14/financial-reform-2/

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: customerservice@moneymorning.com

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 http://www.MarketOracle.co.uk - 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