Financial Reform
Financial institutions must be held accountable for their stewardship of investment income. Criminal penalties should be enacted for individuals and financial institutions who engage in fraudulent activity which undermines the stability of the economy. Banks deemed “too large to fail” should be broken into smaller ones.
CAUSES:
America’s current financial crisis had many causes. Foremost among them were the abuse of a “shadow industry” of complex unregulated financial instruments and shortsightedness and excessive leverage at financial institutions “too large to fail.”[1] Some consumers were enticed by the financial industry to take mortgages they could not afford. America’s lenders, financial institutions and regulators must accept responsibility for their contributions to this financial catastrophe.
CONGRESSIONAL HEARINGS:
A full congressional investigation (not just a Financial Crisis Inquiry Commission) is needed to sort through some serious charges which included FBI warnings to the Bush administration of an epidemic of mortgage fraud made in September 2004 that went unheeded.[2] The public, who is footing the bill for the stock market collapse through lost billions in savings, bank bailouts, and stimulus plans, deserves to know what happened.
As Kansas’ next U.S. Senator, I promise to make financial industry reform one of my most important priorities. The U.S. Congress passed landmark banking and securities laws during the Great Depression. These laws (the Glass-Steagall Act among them) had protected our economy for more than 50 years before deregulation mania in the Reagan and Bush years led to their repeal. They should be reinstated with additional protections as well.
REFORMS:
As Kansas’ next United States Senator, I support President Obama’s goal of creating a more stable regulatory framework that is flexible, effective and is able to secure the benefits of financial innovation while guarding the system from excess.[3] To achieve this goal of balancing innovation with the need to prevent excessive risk, I will support the following reforms:
- TOO LARGE TO FAIL – Banks deemed “too large to fail” should be broken into smaller ones. I will also support legislation prohibiting commercial banks from gambling with the public’s money by engaging in risky Wall Street activities.
- CAPITAL REQUIREMENTS - Limiting Leverage – I support reforms requiring higher capital and liquidity requirements for all financial institutions, and even higher capital requirements for the largest and most inter-connected firms, to ensure greater stability of the entire financial system.
- CONSUMER PROTECTION – This crisis revealed the inadequacy of consumer and investor protections across a wide range of financial products from sub prime mortgages, to credit cards and annuities. Consumers must be protected from predatory lending practices, from excessive variable rate mortgages, and from and unfair practices in the credit card industry.
- REGULATING SHADOW FINANCIAL SYSTEM – Congress must develop a system to regulate and oversee the sale of exotic financial instruments, like derivatives and credit default swaps.[4] A derivative is a contractual transaction between a bank and a corporation seeking a “hedge” against a profit-eating business risk, in effect insuring a company against an event like a rise in interest rates or change in raw material costs. While these transactions serve practical purposes, they became extremely problematic when financial firms exposed themselves to catastrophic losses by buying and selling derivatives in an: (1) enormous scale, estimated to be as much as $590 trillion; (2) without transparency, where transactions are made in private away oversight; and (3) without setting aside sufficient capital cushion in case the gamble failed.[5] I will push for the creation of an exchange or clearinghouse where standardized derivatives, subject to strict definition, can be exchanged and regulators and participants can better assess which companies and banks have risked too much. Private transactions involving nonfinancial companies must also be included in the public exchange to ensure maximum visibility and to prevent banks from gambling too much behind closed doors. Non standardizable derivatives, not suitable for market exchange, should be subject increased liquid capital requirements.
- EXECUTIVE PAY – I support efforts to crack down on pay packages that encourage bankers to take excessive risks and I will fight to reduce the exorbitant salaries paid to executive of businesses bailed out using taxpayer dollars.[6] The government should encourage pay packages that reward executives for long term performance and cultivating stability, not short term profits.
- CRIMINAL PENALTIES - Financial institutions must be held accountable for their stewardship of investment income. This is why I will fight for criminal penalties against individuals and financial institutions who engage in fraudulent activity which undermines the stability of the economy.
RETIREMENT:
Retirement income, both public and private, must be protected with the full faith and credit of the American government. Financial Advisor magazine estimates that over $2.5 trillion in retirement funding went up in smoke in America’s most recent financial collapse. This figure represents $2,500 billion dollars in lost dreams for a comfortable retirement, for grandchildren’s educations, and for countless other uses.
[5] Benton Ives, “The Systemic Risk of Regulating Derivatives,” Congressional Quarterly, October 5, 2009.
