Well, for starters, the government could do the following:
1. Banks may not trade in bespoke investments off an open market.
2. In the debt market, “credit default swaps” may not be sold without evidence that the seller is able to make good on the contract. Furthermore, CDS are not able to be bought by someone who don’t hold a debt instrument the CDS is supposed to insure.
3. Banks could be required to hold 15% Tier-1 capital.
4. Banks can’t operate in insurance products, and insurance companies can’t operate in banking markets. This would prevent a repeat of AIG.
5. Investment banks can no longer be publicly traded. They have to be partnerships, the way they used to me. This puts all the partners’ capital at risk when they want to do goofy and high-risk trades.
6. Eliminate CDO’s, CMO’s, CDO^2’eds and other synthetic bond products.
7. Eliminate the pay-for-rating bond rating system. All bond ratings should be rolled into a fee paid by bond buyers, thereby making the ratings agencies much more interested in preventing defaults.
8. Restore mark-to-market accounting for banks. Ignore those who claim that bank positions are “too complicated” to “mark to market.” If they’re too complicated or too illiquid to mark to market, then either eliminate the product, make the market more visible and liquid or eliminate both. When an investor or regulator picks up the financial statements of a bank, the accounting therein should not be based on mathematical fairy tales, and that’s what the current “mark to model” accounting is.
9. If banks become so large as to threaten the national economy with their reckless behavior, then they’re too large to be allowed to exist, period. The Congress needs to recognize that our national economic sovereignty takes precedence over the profits of multi-national banks.
10. Borrowing from the Fed’s discount window becomes public after 30 days. No exceptions.
11. Banks originating loans or bonds must keep at least 10% of all new issues. This way, if the crap they’re peddling will go bust, it hits them as well.
Those are just a few ideas off the top of my head. NB that nowhere in there did I talk about limiting profits, limiting salaries or anything else of the sort.
I agree with all the points you make.
How is that small Government?
If Congress were serious about their job of regulation to prevent harmful and abusive practices, your proposals are all no-brainers. And not a single one of those regulations impedes legitimate capitalization practices. But then again, we know Congress, both Rats and Pubs, care almost nothing about our country, but instead care most about being re-elected. And being re-elected requires prodigious campaign baksheesh paid by the foxes to the hen-house keepers.
Really, your proposals are nothing but anti-gambling provisions, because the practices your proposed regulations seek to rein in are indeed nothing more than gambling and serve no legitimate financing purposes.
And while we’re at it, we should fix the abusive practices in the stock market, where 70% of all trade positions are held less than a second. After all, almost current stock market practices have no legitimate finance purpose and serve only as a form of gambling. Here’s a few proposed regulations (I’m sure you can come up with some others):
1. All stock positions have to be held for at least one business day.
2. No trade order that has been placed can be cancelled for at least one minute.
3. All futures contracts require physical delivery upon expiration.
4. No futures put contract may be sold unless you own the underlying commodity.
5. Naked put and call options are illegal.