Specific Changes Needed Now To Fix The Financial Markets And The Economy

The following policy and regulatory changes that Christopher Cox, the SEC, and other regulatory agencies made and implemented from 2004 through 2007 need to be reversed after January 20th, 2009 or immediately. These policy and regulatory changes have destroyed the integrity and reliability of and confidence in our financial markets. The money sitting on the sidelines (approximately $13 trillion) in Money Market and Cash Accounts will not be re-invested back into the markets until these changes have been reversed and the proposed changes below implemented. I am recommending that all of the following policy and regulatory changes be made and implemented immediately by the new Administration:

1. The "Uptick Rule" on all securities (i.e., equities, ETFs, options, futures, and commodities) needs to be reinstated and implemented on all domestic and global exchanges and financial markets. Without the “Uptick Rule” in place, it creates an unfair and imbalanced playing field that favors the short sellers. This gives short sellers the ability to drive stock prices down to nothing. The exchanges are just as guilty and responsible for this problem as all others. The markets/exchanges were not meant to be casinos. New laws, oversight, regulation, and technology needs to be implemented and changed in order to solve these serious problems and abuses and restore integrity and order back to the markets. Get the "Uptick Rule" back in place and the markets will stop crashing. This one item is destroying good, healthy corporations.

2. The new SEC Chairwoman, Mary Schapiro needs to dump or get rid of the Mark-to-market accounting rule now. At the worst possible moment we as a nation chose to alter the way financial assets were evaluated -- through something called FAS 157. We required financial institutions to mark holdings to forced trades in illiquid assets -- mark-to-market accounting. The most powerful critic of this approach was William Isaac, the former head of the FDIC. His viewpoint is that the entire financial crisis -- the destruction of major financial firms, the huge bailouts, the destruction of retirement accounts, and the socialization of private companies -- all could have been avoided with a more measured approach to the needed reduction in leverage. This rule could have been changed by Christopher Cox, Hank Paulson, Ben Bernanke, or even by the president.

3. The SEC under Christopher Cox’s tenure and the exchanges relaxed the dynamic circuit breaker thresholds on all major securities, options, and futures exchanges to levels that are too high and therefore ineffective under current market conditions and volatility levels. The current three dynamic circuit breaker thresholds of Level One (10%), Level Two (20%), and Level Three (30%) should be reversed and reset back to the previous circuit breaker thresholds of Level One (2.5%), Level Two (5%), and Level Three (10%) for all exchanges and markets.

4. All ETFs should have the same SEC/FINRA/CFTC/NYSE/NASD reporting, filing, and regulatory requirements as Mutual Funds. ETFs will need to comply with all of the Rules and Regulations of the Investment Company Act(s) of 1933, 1940, and all their later amendments.

5. All ETFs should be converted back to Closed-End Funds. This means that you can no longer buy/sell/write options, derivatives, and/or short sales on ETFs.

6. All Ultra Short ETFs should be abolished or banned. These products do not perform as specified and their claims are fraudulent. They promote negative price fluctuations and volatility on the underlying securities and indices and perpetuate a disorderly and unreliable marketplace.

7. All of the additional changes made to the Commodity Futures Modernization Act (CFMA) between 2000 and 2004 need to be reversed. The legislation provided the certainty that products offered by banking institutions would not be regulated as financial futures contracts. It also allowed for the deregulation of financial derivative products (i.e., CDS, CDOs, etc.), which have been destructive to our financial markets.

8. The SEC from 2002 – 2004 relaxed net capital requirements and leverage restrictions for banks to a destructive level. The events leading up to the SEC's decision to relax its net capital rule for the largest investment banks began in 2002. In 2004, the SEC waived its leverage rules. Previously, broker/dealer net-capital rules limited firms to a maximum debt-to-net-capital ratio of 12 to 1. This 2004 exemption allowed them to exceed this leverage rule. Only five firms — Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley — were granted this exemption; they promptly levered up 20, 30 and even 40 to 1. SEC's Consolidated Supervised Entity ("CSE") program, which was established by the SEC in 2004 for only the largest investment banks. Indeed, these five investment banks were the only free-standing investment banks permitted by the SEC to enter the CSE program. A key attraction of the CSE program was that it permitted its members to escape the SEC's traditional net capital rule, which placed a maximum ceiling on their debt to equity ratios of 12-to-1, and instead elect into a more relaxed "alternative net capital rule" that contained no similar limitation. The result was predictable: all five of these major investment banks increased their debt-to-equity leverage ratios significantly in the period following their entry into the CSE program. That higher leverage, coupled with a high concentration of their assets in subprime mortgages and related real estate assets, left them exposed and vulnerable when market conditions soured in 2007-2008. For example, at the time of its insolvency, Bear Stearns' gross leverage ratio had hit 33 to 1, and press reports placed Merrill Lynch's debt/equity ratio at the time of its merger at 40 to 1. The following new net capital rule requirements should be instituted immediately: a). Insurance companies 2 to 1; b). Commercial Banks, mortgage companies, and all other similar entities 5 to 1; and c). Broker/Dealers, investment banks, and other companies in similar lines of business 10 to 1.

9. Credit Default Swaps (CDS), Credit Default Obligations (CDOs), and other similar financial derivatives should be abolished and ruled to be invalid and deemed worthless products/securities and unenforceable legal contracts by the Supreme Court. This would absolve and save all of our traditional banks, insurance companies, and other legitimate financial institutions from the financial obligations/debts they have on their books/financial statements for these unregistered products. The counterparties are domestic and global Hedge Funds, Private Money Managers/Investment Managers, Investment Banking Firms, Goldman Sachs & Co., Morgan Stanley, JPMorgan, Merrill Lynch, Barclays, and more who are seeking payments for these CDS and CDOs, which they own and created, and our government is bailing them out by paying them for these unregistered products/obligations. All that the Administration needs to do is have the Supreme Court rule that these products/obligations are invalid, worthless, and unenforceable legal contracts, and then have Goldman Sachs and all the other similar firms take a “big” loss and write them off their books as worthless. That is, they should take ownership and responsibility for their creation and mess and bear the costs. They made a lot of money in commissions selling, exchanging, modifying, and trading them domestically and globally for years.

10. All of these products are defined as securities--notes, stocks, preferred stocks, treasury stocks, bonds, debentures, options, investment contracts, certificates of deposit, warrants, rights, variable annuities, and collateral trust certificates—and are therefore required to be registered with the SEC. However, currently--fixed insurance policies, fixed annuities, futures/commodities contracts, financial derivatives, precious metals, Credit Default Swaps (CDS), Credit Default Obligations (CDOs), Exchange Traded Funds (ETFs), and Exchange Traded Notes (ETNs)--are not considered to be securities by the Supreme Court’s “Howey Decision”, therefore, they do not need to be registered with the SEC or anyone. This is a loophole that is open to abuse and needs to be closed immediately. All of these products definitely meet the criteria to be considered securities and therefore should be required to register with the SEC. There should be no exceptions. All of these products should have to be registered with the SEC as securities.

11. All Hedge Funds and Private Money Management firms doing business within the United States of America (USA) should have to be registered with the SEC and FINRA as a Registered Investment Advisor (RIA) and Fiduciary with no exceptions.

12. You need to reduce the highest total individual and corporate income tax rates from 35% (2nd highest rate in the World) to 25% to allow U.S. Corporations and Individuals to compete against other workers, companies, and countries around the globe. The three new tax rates on earned income would be 5% ($1 - $50,000), 15% ($50,001 - $200,000), and 25% ($200,001 or more). All dividend and capital gains income would be taxed at 10%. This will have the greatest impact on job creation, lowering the unemployment rate, stimulating the economy, and sustaining growth in the near and long-term.

13. The “Claw Back” law needs to be reinstituted immediately for all US corporations/companies and their Board of Directors, CEO’s, CIO’s, CFO’s, Senior Management, and all employees going back to the date that it was taken off or dropped. This “Claw Back” law should be retroactively applied to all cases and incidences from the date that it was dropped.

All of these key changes need to be made in order to bring order and integrity back to the markets, protect investors, and restore confidence in our financial system. These changes are immediate “hits” with huge positive impacts for your Administration, the economy, the markets, investors, companies, and economic recovery. Also, they require no multi-billion dollar bailout packages or additional funds to implement, simply, just smart policy and regulatory changes that can be implemented immediately with little effort or time. What we need now is solid, simple, and substantive solutions and that is exactly what I am proposing. If the above thirteen changes are made (i.e., action not words), you will see the markets and the economy rally beyond belief and confidence/hope return.

original post by SmartInvmtIdeas for The Motley Fool