A Different Plan for Righting the Financial System

John Hussman, fund manager of Hussman Funds, has an eight point plan for righting the financial system which differs rather dramatically from the present tack:

  1. Immediately vest the FDIC (or other regulator that has a strict consumer-protection mandate) with the authority to take receivership / conservatorship of distressed bank and non-bank financial institutions, including bank holding companies, in the event of insolvency.
  2. Require a significant portion of the capital of bank and non-bank financial institutions to be in the form of convertible debt (contingent capital)
  3. Abandon the misguided and dangerous notion of “too big to fail” by making regulatory receivership / conservatorship a credible threat, and encouraging insolvent financial institutions to exercise the option of voluntary debt-equity swaps as an alternative to regulatory intervention.
  4. Approve the Volcker Rule.
  5. Prohibit the use of credit default swaps except for bona-fide hedging purposes.
  6. Require the originator or arranger of securitized mortgage loans to retain a substantial unhedged equity exposure to every securitization deal.
  7. Recognize that “toxic assets” remain on bank balance sheets. They have merely (and most probably temporarily) been written up, in an environment where FASB rules provide “significant discretion” in the valuation of these assets, and where “off balance sheet” assets will not be required to be brought onto balance sheets until first quarter reports are released.
  8. Discharge and replace Ben Bernanke and Timothy Geithner.

Read the whole thing. I’ve just excerpted his topic headings.

His plan has a number of advantages including preserving the competitive position of U. S. banks, eliminating the moral hazard introduced by bank bailouts, and preserving the interests of bank customers and counterparties (at the expense of bank share- and bondholders). And despite my prejudice in favor of smaller institutions this plan seems like a pretty good one.

IMO there is no more important item on the agenda than straightening out the problems of the financial system. Unfortunately, I doubt that anything resembling Hussman’s plan will be adopted for the very reasons that it’s a good plan: it places the interests of customers and counterparties ahead of bank shareholders, bondholders, and regulators.

Hat tip: Henry Blodgett

2 comments… add one
  • Unfortunately, I doubt that anything resembling Hussman’s plan will be adopted for the very reasons that it’s a good plan: it places the interests of customers and counterparties ahead of bank shareholders, bondholders, and regulators.

    Any business should place the interests of its shareholders above that of customers, IMO. The responsibility of the firm is to its investors first, customers second. This is even true of banks.

    I know it is s a fine line here. After all, a firm with no customers cannot exist for long. But to put the interest ahead of the investors is also not a very good business strategy. There may come a time where the best thing from the investors stand point is to close up shop and liquidate. Staying in business past that point “for the customers” is just not going to work for very long.

  • steve Link

    Past FDIC heads, cannot remember which alas, have said that we do not know how to successfully break up the big, international banks. We do not have agreements set up with other countries that are adequate.

    I disagree on too big to fail. I favor smaller banks and fewer rules. Then, let them fail. If they are too big, they will always be rescued as the risk is too large to the system. Also too much influence.

    8) Not unless you have viable replacements.

    Steve

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