Financial reform now being considered would not have prevented the crisis

Marshall Auerback here.

Neither the Dodd Bill, nor the House version, will do much to prevent the abuses described in the SEC’s lawsuit against Goldman Sachs. Senator Dodd himself acknowledged this fact. Additionally, as Frank Partnoy has pointed out in a recent Financial Times piece, the legislation, as currently drafted,  would do nothing about recently publicised accounting abuses at Lehman Brothers and other banks.

The banks’ inaccurate financial statements have generated howls of protest but no successful litigation. As a long time market practitioner who believes in well functioning free markets, I also view with alarm the development of a variant of crony capitalism and "heads I win, tails you lose" casino speculation that represents "finance" on Wall Street today. Like Partnoy, I also believe that Congress could and should use the threat of litigation to reform derivatives and off-balance sheet transactions.

Below is a letter to Congress which I have co-signed.

April 14, 2010

The Honorable Harry Reid                            The Honorable Mitch McConnell

United States Senate                                     United States Senate

Washington, D.C. 20510                               Washington, DC 20510

Dear Senators Reid and McConnell:
Nineteen months after the most devastating financial crisis since the Great Depression, our financial system remains at risk.  Neither the bill passed earlier this year by the House, nor the one currently under consideration in the Senate would have prevented the crisis.  Without serious restructuring, they will not prevent a future crisis.

Sound financial markets are the bedrock of a strong economy.  Over the last decade, under both Democratic and Republican leadership, our financial sector moved away from core market principles – transparency, competition, free flow of information and the essential discipline of failure – that allowed the US economy to thrive.  Restoring the integrity of our financial markets and providing the foundation for economic recovery, requires re-committing to these principles.

We, the undersigned, call on you to fulfill the responsibilities of your position by joining together in non-partisan cooperation to pass legislation that AT A MINIMUM would have prevented the crisis we just endured.  Such legislation must include ALL of the following reforms or be considered incomplete:

  1. Eliminates a perpetual system of government sponsored corporate bailouts financed by the government or private industry.
  2. Increase minimum capital requirements for banks to no less than 8%.  Apply additional risk-weighted capital requirements for:  a) risk concentration, b) significant interconnectedness with other financial institutions and c) illiquidity which assumes a decline in collateral values.  Create standard metrics for these variables.
  3. Require on balance sheet reporting of all liabilities with disclosure of related material information including all contingent claims (including but not limited to swaps, SIVs and VIEs).  Provide a private right of action for failure to comply and for knowingly aiding and abetting securities fraud.
  4. Require all standardized derivatives to be traded over exchanges and central clearinghouses with pricing transparent to market participants include a strong presumption that most existing OTC transactions would be standardized. Require all inter-bank and inter-dealer contingent claims (including but not limited to derivative and swap transactions) that cannot be standardized to be reported on a daily basis to a regulated transparent clearinghouse.  Mandate significant and consistent margin and regulatory requirements across standardized and OTC contingent claim transactions. 
  5. Create standardized Pooling and Servicing Agreements and mandate the timely availability of electronically usable loan level information for asset backed securities,covered bond and similarly structured transactions prior to sale.  Provide a private right of action and personal liability for sponsors of securitized underwritings. 
  6. Establish a timeline for the resolution of Fannie Mae and Freddie Mac.
  7. Mandate that credit rating agencies be subject to the same legal standards as other market participants.
  8. Mandate a separation of the roles of Chairman of the Board and CEO for regulated financial institutions.

Without these reforms, our economy remains at risk.

We would like to meet with you at your earliest convenience to discuss these concerns. 


Marcellus Andrews

Barnard College

Marshall Auerback

Senior Fellow, the Roosevelt Institute

Global Portfolio Strategist, RAB Capital

Dean Baker

Co-director, Center for Economic and Policy Research

Dan Berger

Managing Principal, Berger & Montague, PC

William Black

Associate Professor of Economics and Law, University of Missouri-Kansas City

Former senior financial regulator

Margaret Cannella

Former Managing Director and Global Head of Credit Research and U.S. Corporate Strategy,  JPMorgan

Timothy A. Canova

Betty Hutton Williams Professor of International Economic Law, Chapman University School of Law

Jim Chanos

Founder and President, Kynikos Associates

Bowman Cutter

Senior Fellow, the Roosevelt Institute

Former Managing Director, Warburg Pincus

Raj Date

Chairman and Executive Director, Cambridge Winter Center

Barry Eichengreen

Department of Economics, University of California

Thomas Ferguson

Professor of Political Science, University of Massachusetts, Boston

Senior Fellow, the Roosevelt Institute

Jerome S. Fons

Advisor, K2 Global Partners

Former Managing Director, Moody’s Investors Service

Michael Greenberger

Law School Professor, University of Maryland School of Law

Former CFTC division director

Teresa Ghilarducci

Schwartz Professor of Economic Analysis, the New School University

Geoffrey Heal

Paul Garrett Professor of Public Policy and Corporate Responsibility, Columbia Business School

Leo Hindery

Chairman, the US Economy/Smart Globalization Initiative, New America Foundation

Arjun Jayadev

Fellow, Roosevelt Institute

University of Massachusetts, Boston

Rob Johnson

Senior Fellow and Director of the Project on Global Finance, the Roosevelt Institute

Former Chief Economist, Senate Banking Committee

Ethan Kaplan

Columbia University

Mike Konczal

Fellow, the Roosevelt Institute

Jan Kregel

Levy Economics Institute of Bard College

Robert Kuttner

Former Chief Investigator, Senate Banking Committee

Co-editor, the American Prospect

Henry C K Liu

Chairman, Liu Investment Group

Dariush P. Maanavi

Former Managing Director and Head of Corporate Equity Derivatives, Merrill Lynch

Jeff Madrick

Senior Fellow, the Roosevelt Institute

Editor, Challenge Magazine

Jamie Mai

Founder and President, Cornwall Capital

Frank Partnoy

Professor of Law and Finance, University of San Diego

Robert E. Prasch

Professor of Economics, Department of Economics, Middlebury College

Robert Reich

Professor of Public Policy, Goldman School of Public Policy, University of California Berkeley
Former U.S. Secretary of Labor

Josh Rosner

Managing Director, Graham Fisher & Co

Peter Solomon

Founder and Chairman, Peter J Solomon Company

Walker F. Todd

Attorney and economist

Former legal and research officer, Federal Reserve Banks of New York and Cleveland

Lynn Turner

Former Chief Accountant, Securities and Exchange Commission

Lawrence J. White
Professor of Economics, Stern School of Business, New York University

Randall Wray

Levy Economics Institute, Bard College

  1. Anonymous says

    What keeps total market risk from redlining? Is it the requirement for risk-weighted capital reserves? Banks will stop taking on risk because reserve requirements will become too much of a burden? Will that be enough to keep overall market risk down, or are you only addressing the bank portion of the problem?

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