7 Ways to Really Take the Ax to Wall Street
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1. Banks should only be allowed to lend directly to borrowers and then service and keep those loans on their own balance sheets. There is no further public purpose served by selling loans or other financial assets to third parties, but there are substantial real costs to government regarding the regulation and supervision of those activities. Goodbye CDOs, synthetic CDOs and the slew of profitable but dangerous financial casino games banks so love.
2. Banks should not be allowed to have subsidiaries of any kind. No public purpose is served by allowing bank to hold any assets "off balance sheet." A bank should be a bank and not a hodgepodge of hidden accounts designed to fool investors, build up leverage and gamble away with impunity.
3. Banks should not be allowed to accept financial assets as collateral for loans. No public purpose is served by financial leverage. This should put an end to highly leveraged, Ponzi-like financing schemes that have become commonplace within the banking community
4. Banks should not be allowed to lend off shore. No public purpose is served by allowing any banks to lend for foreign purposes. The Cayman Islands should be a resort for people, not bank slush funds.
5. Banks should not be allowed to buy (or sell) credit default insurance. Credit default swaps are financial insurance on bonds that might go bust – think Greece. Auerback wants to eliminate banks from this highly profitable game. Banks that rely on government insurance to protect depositors have no business playing in the markets that buy and sell risk.
6. Banks should not be allowed to engage in proprietary trading or any profit-making ventures beyond basic lending. Unfortunately, the big banks are addicted to proprietary trading. That’s because the big money comes from trading for their own accounts – which is the plushest of all their casinos. MF Global, under Jon Corzine’s reckless leadership, was so addicted to proprietary trading that it seems to have used its clients' money as a piggy bank to cover its losses. More regulation will never end these games. But what would work is Auerback’s call for simply banning any and all proprietary trading by banks.
(Hot off the wire: Reuters reports that in the last days before MF Global went under, it sold hundreds of millions in assets to Goldman Sachs, the investment bank that Corzine once headed. But apparently, MF Global did not receive payment from Goldman Sachs, when the transaction was cleared through JPMorgan Chase. We don’t know as yet which bank pocketed that money. But this transaction might help explain what happened to the missing client money.)
7. Abandon “too-big-to-fail” and “systemically important” doctrine in favor of a “too-big-to-save” and “systemically dangerous” approach. They should be broken up, so that they are not "too big to fail." Guarantee the deposits and punish the shareholders. Break the power of finance once and for all. Amen!
Even if you don’t agree with every point, you’ve got to admit that Auerback pushes us to think really big, and rightfully so. After all we’re talking about how to save democracy from the plutocratic rule of elite financiers.
When I wrote The Looting of America in 2009, I was naïve. I thought the crash had so scared the political and economic establishment, that massive financial reforms would be the order of the day, just as in the Great Depression. I didn’t expect Wall Street to so quickly buy up both political parties for a song and get back to the lucrative business of financial gambling as if nothing much had happened at all. (And then they even have the nerve to shift the national conversation to how the rest of us should pay for the debts run up due to the crash they caused!)