Have you ever wanted to to know what's going on in Wall Street in a 10 minute article? This is my story about how I got introduced to Wall Street and what I think we need to do.
Before deciding to run for Congress and before I worked at IBM, I went to NYU Stern. It is known by some people as an investment banker factory for its world class Finance program and location in downtown Manhattan. Every one of my classmates that wanted a job on Wall Street got one. But, what I learned at Stern while everyone else was becoming enamored with the huge paydays they would be receiving was how shady the practices on Wall Street are. I once had a class where the first day the professor said, "Hello, my name is Professor Okun, welcome to Private Equity. Oh, if there are any Democrats here, you can leave now. We don't believe in regulation." I had another class titled Investment Banking where the professor stoked the class into a enthusiastic fervor by describing Wall Street as a place where no matter what regulations "liberals put on us, we will lobby our way out of it and just do what ever we want." The crowd went wild, excited about the possibility of being on the inside of a club with limitless money and loose rules. I sat there in horror.
I fundamentally believe that banks and the American financial system is one of our nation's great strengths. Banks should be able to make money, and lots of it, but we have to take into account risk, even when they don't. We need to make sure that while they make money, that they aren't putting out economy at risk. Smart, simple regulations are important because they protect us and banks from what unregulated banks will do if left alone: take big risks, make big money, and occasionally totally collapse. I've split my solution into two parts, one where we repeal Dodd-Frank (the current [confusing] law of the land around Wall Street regulation) to replace it with something better, and another part where we keep Dodd-Frank but improve it. This is how we reform Wall Street:
Outside of Dodd-Frank:
1. Bring back Glass-Steagall to separate commercial and investment banking.
Glass-Steagall was 37 pages; Dodd-Frank is 848 pages. Which do you think has more room for legal loopholes, debate and ineffectiveness? Longer legislation is written that way to confuse not only regulators, but voters as well. If people don't fully understand how badly we are being taken advantage of, their silence will allow rule breaks to carry the day.
Glass-Steagall made sure that when investment banks did risky things, it didn't hurt the commercial side. This is a very good thing. I am a huge fan of President Clinton, but repealing this bill during the frenzy of the 90's was a very bad idea.
2. Ensure positions in the DOJ, SEC, and the Treasury are actually independent of Wall Street
"Antonio Weiss, the former investment banker at Lazard now serving as counselor to Treasury Secretary Jack Lew, acknowledged in financial disclosures that he would be paid $21 million in unvested income and deferred compensation upon exiting the company for a job in government. Weiss withdrew from consideration to become the undersecretary for domestic finance under pressure from financial reformers, but the counselor position--which does not require congressional confirmation--probably still entitles him to the $21 million. The terms of the award are part of a Lazard employee agreement that nobody has seen. "
3. Boost SEC and CFTC funding to better regulate the market
This is a huge area that Wall Street lobbyists work. They accept compromise in more strict regulation only if it comes with a scale-back in funding for enforcement agencies. This also goes back to point number 1: if we make really complicated legislation, we need more people to enforce and understand the minutia of it. If we make it simple, everything is more efficient and costs less.
4. Increase penalties for massive financial crimes.
It is unbelievable that someone could be responsible for millions of people losing thousands of dollars and gets the same penalty (or less) as someone who had marijuana in their pocket.
5. Eliminate Capital Gains tax and treat all income the same/eliminate tax loopholes for banks.
The banking sector is able to take the huge risks that almost crashed our economy because their compensation both at an individual level and a corporate level is different than you and I and our small businesses. If they pay their fair share and can't take advantage of lower tax rates at every turn, their business becomes more honest and transparent.
Inside Dodd-Frank Reform:
1. More effective implementation of Volcker Rule
To keep it very simple, the Volker Rule is a less effective form of Glass-Steagall hidden away in a giant bill. We need to focus on it and enforce it with vigor.
2. Joint board meetings between CFTC and SEC to improve coordination
You would think that the two groups charged with enforcement of regulation would meet and discuss what is going on and how they can work together to be more efficient. The reality is that they very rarely do. This needs to happen.
3. Better implementation of corporate "living wills"
Living Wills are firm-specific resolution and recovery plans. These are essentially a blueprint for winding down a troubled bank or ring-fencing the problematic parts of a firm without causing harm to retail depositors or the global financial system -- and without relying on government intervention. A responsible person with a family has a will; a responsible bank should have one too.