This last weekend, SNL-Saturday Night Live had a great skit lampooning US Treasury Secretary Timothy Geithner and his largely futile efforts to get the US Banking crisis stabilized let alone under control. The skit started with one of those press conference settings, “Geithner” at the podium under the seal of the US Treasury Department. First, “Timothy” spent not a few moments clarifying the fact that the current financial fiasco was inherited from 8 years of carelessness by the previous administration. Then “Tim”, played impeccably by Jason Sudeikis , admitted some of the current financial plumbing work was … uhh not really working. So then the number 1-800-IDEAS? starts drift across the bottom of the screen. And sure enough, “Tim” announces a $420 Billion reward for anyone who has “a sure fire cure for this financial mess we’re in”. The skit went on in hilarious fashion spoofing some of the lamebrain financial clean-up ideas. And it is in that spirit that I advance a few more Modest Financial Proposals for Tim and Barack’s consideration.
Fiduciary Trust or Let The Rubes Fall Where They May
Like the Hippocratic oath which for doctors sets the standard of “do no harm”, Fiduciary Trust implies the same for financial agents. However, financial agents have an added proviso that their clients’ financial well being trumps all else. But as we have seen with such financial players as Bernie Madoff, Terry Stanford, Countrywide Financial, Wachovia, WAMU and unfortunately thousands of others, Fiduciary Trust has all but been abandoned. Financial trust is in shambles. To restore some fiduciary trust to the financial industry all financial institutions must:
1)not have any “own account” transactions for any employee or any advisers paid a fee by the institution;
2)not have any cashout limits or penalties or informational transaction fees to clients for any portion of their holdings;
3)must have a Refund Fund available for any plan that charges greater than 4% of any clients holding for annual compensation/fees to the Financial trust/fund/adviser. Contributions to the Refund would be made based on three factors – 1)the volatility or risk of the portfolio – the greater the volatility, the greater the contribution to the Refund; 2)the size of the financial institution, the larger the institution the larger the contribution, and 3)the larger the payout to the financial institution by clients the the larger the contributions. This Refund should be managed by the FDIC.
Financial Transaction Transparency – The Problem of Shadow Markets
One of the most intransigent problems throughout the current financial crisis has been the inability of financial institutions or regulators to understand what exposures various institutions have to the wide range of “toxic or soon-to-be toxic” assets. The whole problem confronting markets is that they are no longer efficient because information on the status and nature of markets and their players are hidden. Of course this lack of transparency works to the advantage of financial players who are trying to get an “information and modeling” advantage in the market place. So they are working almost in clandestine mode to put in place and generate payouts to themselves with Perpetual Money Making Machines whose critical advantage is their corner on a specific financial information market. Its like insider trading but exists now primarily in the unregulated, nearly opaque and exotic commodities and complex (and ill understood by most players)financial derivative and other specialty financial instruments markets.
1)All financial markets must be public markets – no more shadow markets.
2)Those markets may be private markets but they must be able to provide to the public and regulators all current transactions – and to regulators all past transactions and reconciliations from the beginning of the markets including tracking all changes in instruments, fees, and policies.
3)Those markets in turn must pay a quarterly regulatory fee to the SEC for its policing services. The fee must be reflected in the charges made to market players and must be proportional to each organization’s size and frequency of transactions on the market.
Inability to Self-Regulate or Greed Will Prevail
If any 3 things that become obvious in the current financial meltdown they are 1)financial organizations will not self regulate (see the Lehman bankruptcy, the Bear Sterns Failure, the Rating Agencies failure to value properly mortgage-related financial instruments, Long-term Capital Management failure, S&L Failures followed by Resolution Trust, etc, etc); 2)financial organizations will not only tolerate but promote conflict of interest financial processes and instruments (see the Rating Agency’s payment schemes, Investment Banks co-mingling with Investment Brokerage operations, recruitment of government regulators in the same specialty fields less than 6 months after leaving government work, etc, etc); 3)greed will always prevail over the well being and integrity of the financial community and its processes(see the Niall Ferguson’s book The Ascent of Money). Finally given the increasing size and frequency of financial bubbles requiring National government’s interventions to prevent collapse of major financial institutions(Moral Hazard Type bailouts),the following controls and insurance should be enacted for financial institutions:
1)all financial institutions must maintain a capital leverage ratio to be determined quarterly by the SEC and FDIC. The capital leverage ratio will be inversely proportional to the risk profile and size of the institution. For this and other regulatory services the financial institutions must pay a quarterly fee proportional to their risk/volatility profile and their financial size.
2)all financial institutions must pay into an Insurance fund for recovery costs in case of a financial bubble. Emphatically, these quarterly payments must be proportional to the risk/volatility of the financial institutions assets but disproportionate to the size of the financial institution (the moral hazard or “cannot-be-allowed-to-fail” premium, the bigger the size of the financial the disproportionately greater the fee).
SummaryAs you can see these are Modest Financial proposals in the Jonathan Swiftian terms. These are not complex, Brobdingnagian measures that nobody can understand much less hope to implement. Rather they have the simplicity of Occam’s KISS Razor – of two paths to an end, take the simplest. In that spirit I will not be expecting the SNL’s $420B payment for the ideas, but rather I, like billions of others worldwide, look forward to a lot less turmoil and publicly funded rescuing of the financial markets.