Let's Solve The Economic Blowout!

Proof that we never lack for good ideas, we just have a shortage of will, here comes the esteemed regulator William Black, with a fine example of what we could do, if somehow, we were not unable to by the capture of the fine American corporations who make up most of the political landscape in this fine nation. Here it is, read and ponder the vast difference between this and our esteemed President's latest remarks to third world countries:

William K. Black's Proposal for “Systemically Dangerous Institutions”

William K. Black, Associate Professor of Economics and Law at the University of Missouri – Kansas City, and the former head S&L regulator, has written the following fantastic new proposal concerning the giant, insolvent banks. Posted/reprinted with Professor Black's permission.

William K. Black
Associate Professor of Economics and Law
University of Missouri – Kansas City

blackw@umkc.edu

September 10, 2009

The Obama administration is continuing the Bush administration policy of refusing to comply with the Prompt Corrective Action (PCA) law. Both administrations twisted a deeply flawed doctrine – “too big to fail” – into a policy enshrining crony capitalism.

Historically, “too big to fail” was a misnomer – large, insolvent banks and S&Ls were placed in receivership and their “risk capital” (shareholders and subordinated debtholders) received nothing. That treatment is fair, minimizes the costs to the taxpayers, and minimizes “moral hazard.” “Too big to fail” meant only that they were not placed in liquidating receiverships (akin to a Chapter 7 “liquidating” bankruptcy). In this crisis, however, regulators have twisted the term into immunity. Massive insolvent banks are not placed in receivership, their senior managers are left in place, and the taxpayers secretly subsidize their risk capital. This policy is indefensible. It is also unlawful. It violates the Prompt Corrective Action law. If it is continued it will cause future crises and recurrent scandals.

On October 16, 2006, Chairman Bernanke delivered a speech explaining why regulators must not allow banks with inadequate capital to remain open.
http://federalreserve.gov/newsevents/speech/bernanke20061016a.htm

Capital regulation is the cornerstone of bank regulators' efforts to maintain a safe and sound banking system, a critical element of overall financial stability. For example, supervisory policies regarding prompt corrective action are linked to a bank's leverage and risk-based capital ratios. Moreover, a strong capital base significantly reduces the moral hazard risks associated with the extension of the federal safety net.

The Treasury has fundamentally mischaracterized the nature of institutions it deems “too big to fail.” These institutions are not massive because greater size brings efficiency. They are massive because size brings market and political power. Their size makes them inefficient and dangerous.

Under the current regulatory system banks that are too big to fail pose a clear and present danger to the economy. They are not national assets. A bank that is too big to fail is too big to operate safely and too big to regulate. It poses a systemic risk. These banks are not “systemically important”, they are “systemically dangerous.” They are ticking time bombs – except that many of them have already exploded.

We need to comply with the Prompt Corrective Action law. Any institution that the administration deems “too big to fail” should be placed on a public list of “systemically dangerous institutions” (SDIs). SDIs should be subject to regulatory and tax incentives to shrink to a size where they are no longer too big to fail, manage, and regulate. No single financial entity should be permitted to become, or remain, so large that it poses a systemic risk.

SDIs should:

1. Not be permitted to acquire other firms

2. Not be permitted to grow

3. Be subject to a premium federal corporate income tax rate that increases with asset size

4. Be subject to comprehensive federal and state regulation, including:

a. Annual, full-scope examinations by their primary federal regulator

b. Annual examination by the systemic risk regulator

c. Annual tax audits by the IRS

d. An annual forensic (anti-fraud) audit by a firm chosen by their primary federal regulator

e. An annual audit by a firm chosen by their primary federal regulator

f. SEC review of every securities filing

5. A prohibition on any stock buy-backs

6. Limits on dividends

7. A requirement to follow “best practices” on executive compensation as specified by their primary federal regulator

8. A prohibition against growth and a requirement for phased shrinkage

9. A ban (which becomes effective in 18 months) on having an equity interest in any affiliate that is headquartered in or doing business in any tax haven (designated by the IRS) or engaging in any transaction with an entity located in any tax haven

10. A ban on lobbying any governmental entity

11. Consolidation of all affiliates, including SIVs, so that the SDI could not evade leverage or capital requirements

12. Leverage limits

13. Increased capital requirements

14. A ban on the purchase, sale, or guarantee of any new OTC financial derivative

15. A ban on all new speculative investments

16. A ban on so-called “dynamic hedging”

17. A requirement to file criminal referrals meeting the standards set by the FBI

18. A requirement to establish “hot lines” encouraging whistleblowing

19. The appointment of public interest directors on the BPSR’s board of directors

20. The appointment by the primary federal regulator of an ombudsman as a senior officer of the SDI with the mission to function like an Inspector General

An Ominous Sign...

Here's a highly interesting video on one person's response to the typical predatory bank and credit card industry; the fact that someone has decided not to pay their credit card bill is not particularly newsworthy, nor the fact that this particular bank (Bank of America) has jacked up the interest rate to 30% or so. Instead, ponder what might happen to the system (well, some are saying that it's happening already, and who is Chaos to disagree?) if more than a small percentage of people starting feeling and acting like this. Hmmm. Well, anyway, check out this tiny snapshot of where we are:


Oh, and if you want more evidence of predatory behavior, look no further than this article on how banks take advantage of people overdrawing their account with debit cards. The bank knows at the instant of the transaction that the amount requested is more than the individual has in their account, but they don't decline the transaction, just assess the victim (uh, Chaos means the customer) a nice, fat fee.

The Real Mother's Day...

Chaos has long suspected that Mother's Day (and Father's Day as well, for that matter) are simply degraded "hallmark holidays" that benefit primarily the floral and greeting card industries by taking advantage of human herding behavior (google it) and inertia, while sucking the meaning out of the whole enterprise. Here's the real history of mother's day...in brief, this started out in the late 1800's as a way of protesting inhuman working conditions, morphed slightly into an antiwar event, then gradually declined into yet another commercial holiday. The piece contains a recommendation to support the Ploughshares Fund, either monetarily or by signing an online request to rid the planet of nuclear weapons. Try that one on for size, instead of a purchased bauble or cheaply bought sentiment. Though it may be ultimately futile, it least it won't be supporting a deeply corrupt and exploitative system.

To The People Of Costa Rica, Regarding CAFTA

Chaos is aware that your country has been struggling with a dilemma, specifically, whether or not to become the last signatory of the Central American "Free" Trade Agreement. Chaos, in vast admiration for the national character, values and good judgment of the people of Costa Rica, would nonetheless humbly offer the following advice:
Reject this agreement. There is no mystery as to its consequences, no matter how rosy the promises being made to you. The purpose of this agreement is to enrich the few at the expense of the many ("few" refers in this context to multinational corporations). Even better, for the price of a plane ticket or the few clicks of a mouse, you can see the future of your country under this odious treaty in the country of Mexico today. Ever wanted to be forced to leave your homeland and illegally cross the US border to find work? This agreement will ensure it. Care to give up your family farm and move to the city, there to reside in a vast shantytown, and eke out a living performing degrading labor in a sweatshop factory, or beg on the streets for subsistence? Vote yes on CAFTA. We have a saying in Estados Unidos de Tejas, where Chaos currently and temporarily resides: "you got to dance with what them that brung ya." Costa Rica, what brought you to this dance was your strong history of real democracy, your rejection of militaristic jingoism, your commitment to education, and your ecological awareness. Cede not your sovereignty in these things in exchange for false promises of economic benefit. Perhaps other parties to this agreement think they will gain economic development, but they are not you. Look around the world today and try to find examples of the shining promises of benefits to all that proponents of this scabrous document would have you swallow without question. Chaos begs you to read the scandalous history of free trade imposed on the Second and Third World, and recall the murderous behavior of the US multinationals (United Fruit, ITT, and many others) in Latin America. Proponents of this fraud are counting on you to forget the lessons of the past. Do not permit this. It is no accident that the US has made this a priority. Think well upon these things and do whatever it takes to resist.

The Predatory Society

An interesting theme to life in the Empire has recently bubbled up into Chaos' consciousness...along with some recent items in the media, of course. The first, oft-commented upon here, is Michael Moore's Sicko, wherein the healthcare industry (and Chaos is quite deliberate in word choice here) takes full advantage of those customers who have little or no power to fight back. This last is not an unreasonable interpretation of people's experiences depicted in the film. Further, Chaos recently viewed a somewhat similar documentary dealing with the credit card industry, Maxed Out, in which individuals who have gone bankrupt (made more difficult by the changes pushed through by the same credit card companies) are then targeted by these same companies, simply because their track record establishes them as the prime candidates for more irresponsible running up of debt. Finally, this article in the nation's paper of record reveals that private investment companies have bought up chains of nursing homes, insulated themselves from liability by creating networks of interlocking corporate entities, and then cut services and staff, resulting in unnecessary deaths among the "customers." This theme of the predatory society is, to Chaos' experience, new, and has attracted the attention of some rather esteemed people. To add to the commentary, Chaos notes that a good deal of the Empire's economy is now devoted to impoverishing the lower and middle classes through the machinations of these greedy corporations. How long can you gamble, readers, that you will not find yourself caught in one of these nefarious schemes that masquerade as "services?"