by Asher B. Edelman

What we are offered as a regulatory scenario is, once again, cronyism! We are presented with a plan that will be unmanageable and permit the same abuses as those that brought on the crisis guided and managed by the same folks who were in control before the crisis and remain in place now. Saving the banks while accompanied by the same set of managers and businesses is an exercise in futility. It adds nothing to the economy that the government is not already funding except undue risk. A solution is clear; though, I imagine, abhorrent to the bankers.

1. Commercial banks should be restricted to those functions which have to do with the gathering of deposits and lending in a prudent manner. A Trust (that means TRUST) department could well fit in. Trading for their own accounts, except as it relates to gathering deposits and lending must become a NO NO. The divestiture of all other business must begin now while the government is still funding and there is the spirit in Congress and among the American people to reform the system.
2. Insurance companies need to go back to good old underwriting and investing. An open book on what is insured, even through derivative transactions, needs looking after by a central regulatory agency.
3. Investment banks and brokers should be limited mostly to securities transactions as agent and the underwriting of equities and debt as principal. Derivatives and principal transactions should be completely transparent and “on the books”. Requiring Exchange trading of most or all derivatives will go a long way towards disclosure, fairness and safety.
4. Interest rates for credit cards, consumer finance and the lot should be capped at 3% over cost of money, at least over the next two years.  Defaults, late payments and the like should not carry penalties other than the cancellation of the financing, should such action seem prudent.
5. Small and medium size businesses should be able to borrow with government guarantees—the monies currently guaranteeing bank debt would do better in stimulating the economy as guarantees for productive enterprises than as subsidies for banks who either don’t utilize the monies at all or do so at egregious profit margins thus delaying any real recovery in the business cycle. Of course, there must be some risk on the part of the lenders, but that could be, perhaps, 20% of the loan principal left without guarantee.

All financial institutions must be required to maintain adequate reserves and no financial institutions, including hedge funds, should be permitted to utilize more than three times leverage. Should these programs be put in place now there must be a mechanism to review the results and amend the plans as we go with a total review after a five year hiatus from the fumbling foolishness we are presented with currently.