Robert Reich: What Real Wall St. Reform Should Look Like:

[amborin]

Robert Reich: Here's What Real Wall Street Reform Should Look Like

The Dodd bill now being considered in the Senate is a step in the right direction........................Yet despite the hype, it’s a very modest step. It leaves out three of the most important things necessary to prevent a repeat of the Wall Street meltdown:

1. Require that trading of all derivatives be done on open exchanges where parties have to disclose what they’re buying and selling and have enough capital to pay up if their bets go wrong.

The exception in the current bill for so-called “customized” derivatives opens up a loophole big enough for bankers to drive their Ferrari’s through.

2. Resurrect the Glass-Steagall Act in its entirety so commercial banks are separated from investment banks. The current bill doesn’t go nearly far enough. Commercial banks should take deposits and lend money. Investment banks should be limited to the casino we call the stock market, helping companies issue new issues and making bets. Nothing good comes of mixing the two. We learned this after the Great Crash of 1929, and then forgot it in 1999 when Congress allowed financial supermarkets to do both.

3. Cap the size of big banks at $100 billion in assets. The current bill doesn’t limit the size of banks at all. It creates a process for winding down the operations of any bank that gets into trouble. But if several big banks are threatened, as they were when the housing bubble burst, their failure would pose a risk to the whole financial system, and Congress and the Fed would surely have to bail them out. The only way to ensure no bank is too big to fail is to make sure no bank is too big, period. Nobody has been able to show any scale efficiencies over $100 billion in assets, so that should be the limit.

Wall Street doesn’t want these three major reforms because they’d cut deeply into profits, and it’s using its formidable lobbying clout with both parties to prevent these reforms from even from surfacing. It’s time for Main Street — Tea Partiers, Coffee partiers, and beer drinkers — to be heard.

[LiberalAndProud]

1. Every one of those proposals are already written in amendment form.

The problem is, we can't move on the bill because the RepubliCons won't.

[SocialistLez]

2. Transaction tax anyone? NT

[lonestarnot]

3. Debate the fucking bill!

[amborin]

4. interesting comment on the proceedings:

"In the last 45 minutes of the testimony Josh Birnbaum (Co-head of the Structured Products Group (“SPG”) was asked a series of questions by Senator/Dr. Tom Coburn (R.Ok).

There was a document produced that was Josh’s year-end plea for bonus big bucks. A list of his accomplishments. Amongst the many swell things that Josh touted was his contribution to the accelerated use of the equities market in the SPG hedging and trading activity.

Bingo! Josh may have opened up to something that could blow up for Goldie.

Senator Coburn produced an internal Goldman report for the fall of 2007 that showed that Goldman had an open short on the stock of Bear Stearns. Coburn asked Josh if he was responsible for that short position.

After thumbing through the book Josh finds the report in question and looks back at the Senator, smiles, and says, “This is a firm wide report. I can’t determine if this is my department’s short position or not.”

Next Coburn asks, “How did you select the shorts you used?” Josh responded, “We had a macro view. I had a list of stocks that were correlated to the sub prime industry.”

For me this is a bit of a bombshell. It shouldn’t be. It was a perfect strategy for the sole reason that it worked. But consider the consequences.

In 2007 the SPG had gains from hedges of ~$3b and losses of ~$2b on write down of inventory. It was described that the hedges included (1) shorts on the ABX index (2) shorts on single name ABS (3) long CDS against a variety of single names and (4) they shorted common stock of companies that had a high beta to a downfall of the Sub-Prime/Alt.A market.

We know from the testimony Bear Stearns was on that “short” list. That entire list is public. I have not seen it so I will just guess that in the fall of 2007 GS was shorting the likes of New Century, WaMu, the mono lines, Countrywide, Bear Stearns, and Lehman. That list could have been broader; it might have included Fannie Mae and Freddie Mac, Citi, and BoA, even the likes of a Northern Rock or RBS.

One aspect of the collapse of 2008 was how destructive capital markets had become. The shorts pushed equities down so fast that managements and regulators lost control. The shorts were clearly predators. For me it was the shorts that destroyed the equity values. It was a near daily event.

My questions on this is (A) How much of this did Goldman do? (B) How much did the rest of the market do? (C) Did this exceptional demand for short interest in financial stocks accelerate the collapse of Bear, Lehman and all the others?

In the fall of 2007 the size of the Sub Prime and Alt.A market was many multiples of the market-cap of the financials that were the target of the short interest.

Essentially Goldman Sachs bought WaMu no-dock loans; against this they shorted Bear Stearns common. The hedge worked just fine. Unfortunately it cratered Bear Sterns and a few others and damn near took out the system.

As the broader disclosure of what happened in 2007-2008 (this ain’t stopping with Goldie) takes place we will see how much this predatory hedging actually upset the applecart. Its effect is unlikely to be zero.

I am conflicted on this. Hedging is only an option when selling can’t be done. Therefore hedging is integral to the capital market process. But there are degrees. I think that if one was long sub-prime ABS and hedged that risk with a short in the ABX index that is a commercial transaction and is part of risk management. However if this crosses over to where one could go long troubled mortgages and short the common stock of the Royal Bank of Scotland against it, I would say that is not a commercial hedge. I would call the later transaction a Prop Trade. It is a bet, not a customer transaction. I have no problem with prop trading. It should be funded with equity and there should be limitations. If that had been the case in 2007 that discipline would have constrained the growth of bad credit.

It is possible that the Goldman hedging strategy was predatory. It added to the systemic problems that later occurred. Possibly Senator Levin should ask a few questions on this line. I doubt that he will. I watched the proceedings and was convinced that the good Senator had no clue how things actually work.

snip

http://www.zerohedge.com/article/did-josh-birnbaum-make-slip-did-senators-catch-it?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29

[LiberalAndProud]

5. The good Senator is not alone.

I read the snip, I got the gist, but understanding the grist is beyond me.

[amborin]

6. LOL! un-rec crew in action

[kentuck]

7. K & R

:kick: