Real Change is Needed to Avert Another Financial Crisis
The Financial Crisis Inquiry Commission has been holding hearings to find out how and why the financial crisis occurred, and (presumably) make recommendations to Congress about what is needed to prevent a reoccurrence. At the same time, Congress has already passed a version of regulatory reform that delegates many key rules to regulatory agencies. Wall Street lobbyists are working hard on those agencies to water down and stifle any meaningful reform.
Below is a list of some of the actions we believe are needed to address and the system-wide failures that occurred. We hope that the Financial Crisis Inquiry Commission will urge Congress and regulatory agencies to enact adequate protections in these areas.
The financial industry has received trillions of dollars in public support. Despite their claims to be free of strings attached to TARP money, Wall Street continues to benefit from strings-free government guarantees and a host of other benefits and programs conferred on the financial sector. The people who caused the financial crisis should bear the financial burden of recovery – not the taxpayers. The bonuses that Wall Street executives are paying themselves as a result of government funds should be recovered through taxation or other means.
The too-big-to-fail financial institutions should be broken up into multiple pieces. The financial system will be less subject to systemic risk if financial institutions are smaller. In addition, there is good reason to believe that such a move would enhance shareholder value.
Glass-Steagall should be reenacted. Deregulated financial institutions seized the opportunity to operate like high-risk hedge funds with disasterous results. The financial system will be safer and for investors and less subject to systemic risk if there is a separation between heavily regulated activities of insurance companies and depository institutions, on the one hand, and speculative, investment bank activities on the other. Glass-Steagall provided such separation and should do so again.
The "business judgment" rule should be legislatively abolished. It because it has been used as a safe harbor for the irresponsibility and complicity of boards of directors that were paid to look the other way. This common law doctrine purports to shield directors from personal liability as long as they acted honestly and in good faith and took reasonable steps to inform themselves. Such a showing has often come in the form of “not knowing” that the company was being mismanaged after relying on third-party reports that were, in truth, inadequate and little more than window dressing. Directors owe fiduciary duties to the company to competently and rigorously oversee management and rein it in where appropriate. Those duties need to be taken more seriously and directors should be held accountable when the do not.
Reportedly, five banks own four fifths of all outstanding derivatives in the United States. The “notional” value of these banks’ derivatives exceeded $190 trillion in the first quarter of 2009. While managers attempt to rationalize their derivatives trading as hedging against risk, they are used primarily as a speculative tool in the hope of generating obscene personal wealth with other people’s money. Despite the financial collapse, massive speculation by the banks in exotic derivatives continues. The boards of directors of these banks should eliminate this speculation and mismanagement.
Because large financial institutions, particularly Wall Street banks, have had such severe problems, and because mismanagement is often associated with disrespect for regulatory requirements, these firms should be required to adopt best practices for robust regulatory compliance programs, including creation of external monitors and protections for whistle-blowing employees.
Mandatory arbitration is an abusive practice that should be eliminated. One thing we have learned is that government regulators are unable to keep Wall Street honest. That job requires the assistance of aggrieved customers acting as private attorneys general through the courts, not through a mandatory arbitration system that is funded by and beholden to Wall Street.
While this list is by no means all-inclusive, we believe it would go a long way toward reducing the risk of another system-wide crisis.
