A Populist Plan for Reforming the Banking System

On another blog I responded to a challenge to describe an alternative to the approach Obama has chosen with Larry Summers and William Geithner. What I said there (with a little modification and expansion) is worth repeating here:

1. (After firing Summers and Geithner,) I would appoint Kansas City Fed Chief Tom Hoenig, who said that the "too big to fail" doctrine was a failure, as Chief Economic Advisor; and UMB President William Koenig, whose bank was well managed, avoided toxic debt instruments, and turned down Tarp money, as Secretary of the Treasury.

2. I would charge them to implement an FDIC/RTC style receivership plan immediately, to rid the banking system of toxic assets.

3. I would also charge them to implement the "good bank" proposal of William Buiter, by which capital is poured into new or existing good banks for future lending.

4. I would authorize $1 billion to hire lawyers and accountants to pore over Wall Street's and mortgage brokers' books, and institute mass prosecutions of any engaged in fraudulent activities, together with a requirement of disengorgement of phony profits.

5. I would institute a clearinghouse for CDO's to immediately get a transparent, free market to set an evaluation for them.

6. I would request that Congress pass a law voiding all Credit Default Swaps in which the insurance being bought was not on behalf of a party requiring that insurance for its direct business purposes, with the return of the deposit to the counterparty, for any event that had not yet happened.

7. Any financial institution deemed "too big to fail" would be broken up using antitrust laws.

8. I would request that Congress pass a law requiring that all debt or leverage of any sort being used by any business be reported to the FDIC (the purpose being to find out how much debt and leverage is in the system), and give the FDIC authority to rein in debt and leverage.

9. To deal with future "regulatory capture" such as the Bush Administration's SEC and Alan Greenspan at the Fed, I would have Congress pass a law vesting a sufficient number of States' Attorneys' General (e.g., half or more) the right to bring an Action in Mandamus in Federal Court to force Federal agencies to enforce existing laws and regulations, or else allow the States to enforce them until the Federal agency does its job.

That ought to make a nice start....



#9 is really good.

But why would you need a "good bank" if we protect the banks such as UMB. Receivership-type plan could take care of the "bad banks".

This is real reform

Great post NDD, I hope you won the challenge. These are common sense solutions predicated on an honest evaluation of where we are and how we got here. I have wondered for months why at least some of these were not implemented, even on a temporary basis, in conjunction with the repeated bailout measures.

What I suspect (and probably many others here would agree) however, is that Wall Street will write the "new" rules. The conspicuous involvement of Goldman Sachs at so many turns in the evolution of this crisis is a giant alarm, as far as I am concerned. Earlier today I posted this comment in another thread here. It is unconscionable to me that naked default swaps would, or should, be allowed.

All I heard from Geithner today at the HFSC hearings was an attempt to attain more power to act unilaterally and completely circumvent Congressional oversight. If I could add one other item to your approach, the Federal Reserve Act of 1913 should be revised and the FRB should become a part of the Treasury.

way to say it NDD!

I really like the idea of plain creating a universal default on all CDSes but I think there is going to be a problem. Many of the CDOs are based on the mark-to-market value of CDSes (which is insane by itself) so hell fine by me, but they should switch out those CDOs with historical data of the actual assets instead of the CDS values...
I think that could be done but they have all of this crap in software black box packages which no one understands (it appears). But they need to do something with that massive derivative shadow fictional money system right now so that assuredly sounds like a start to me..

and hell, is it possible to create an open exchange with the rest of these CDOs and let them find their own equilibrium without the CDSes daily values? Might be.

We have to deal with "Too Big to Fail"

financial conglomerates first before we re-regulate. It seems the Obama Administration is content with preserving the status quo.

#7 in the post above

Is indeed the most important, it seems to me. Interstate banking *needs* very heavy regulation.

And the only way to do that is to replace the attitude of too big to fail with Too Big To Succeed
Moral hazards would not exist in a system designed to eliminate fraud.

Maximum jobs, not maximum profits.