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Candidates' debate
Substance over style
Financial reform must-haves
How 'little guys' are being robbed
Unemployment falls as 652,000 give up
Ban financial derivatives
Debunking the federal pension myth
Cost of inflation-free bank bailout
Answers to questions: HERE

You can pin the entire debacle of the last couple of years on two very bad pieces of legislation at the start of the decade -- both of which had HUGE bi-partisan support (thus the reason neither party can point the finger without implicating themselves) that rested on top of failure to apply common sense anti-trust law and a corrupt ratings system that gave AAA ratings to bundled garbage made possible by the SEC that brought you Bernie Madoff.  The following are 5 ideas that must be included in any financial reform serious about preventing a Bailout Nation Part Deux:

The list:

1. Restore Glass-Steagall (undo Gramm-Leach-Bliley from 1999).
2. Outlaw credit default swaps (undo the Commodity Futures Modernization Act of 2000).
3. Reform the ratings agencies so they are paid by the purchasers of securities, not the issuers.
4. Reform the SEC that turned the ratings agencies into a government sponsored oligopoly with a 1973 rule change, and increased permissible leverage from 15:1 to 30-40:1 with a 2004 rule change.
5. Enforce existing antitrust law from 1994 prohibiting any one bank from owning more than 10% of the nation's deposits. Banks routinely are either exempted from this or exploit loopholes.

The list explained:

FIRST:  Even the Volker Rule in its purest form stops short of outright prohibiting FDIC insured depositories from engaging in securitization, and the watered down version places limits only on investment banking activity.  A little history is in order:  FDIC and Glass-Steagall's firebreak between commercial banking and investment banking were created in unison, to work together.  You can't have FDIC insurance without the break, or you are subsidizing risk, and if you subsidize something, you get more of it.  Securitized loans perform worse than portfolioed loans. This should come as no surprise because the belief that you are "spreading" risk, or more appropriately unloading risk, degrades underwriting scrutiny.  The 1968 bystander apathy experiment is a good explanation of the psychology behind it: essentially, you feel only fractionally responsible for the outcome.  

SECOND: Credit Default Swaps (CDS's) are legalized, institutional gambling that is specifically exempted from state and federal gaming laws. CDS's were were illegal for the 93 years leading up to the Commodities Futures Modernization Act of 2000.  Trying to regulate them or trade them on an exchange is laughable.  It is akin to saying bankers can bet on sports as long as it is transparent.  CDS's were instrumental in gaming the ratings agencies into AAA ratings and adding fuel to the fire of shirked risk responsibility from securitization.  CDS's allowed MIT physicists and Harvard MBA's to mathematically engineer theoretically risk free investments built atop 580 credit scores with no equity and stretched income.

THIRD:  As it is now, the ratings agencies' pay structure is a huge conflict of interest.  They are paid by the companies who design and issue the securities getting rated.  Naturally, the investment banks issuing these securities shop for the highest rating. And as the AAA ratings on bundled 580 credit scores with no equity and stretched income attest, the agencies were recklessly eager to earn their business. Prohibit payment by the issuer so that the PURCHASER of securities pays for the rating.  That will change the motivation from shopping for the loosest rater into shopping for the most realistic.

FOURTH: With a 1973 rule change, the SEC turned the 5 ratings agencies existing at the time (since consolidated into 3) into a government-sponsored oligopoly.  Moody's, Fitch and S&P enjoy average profit margins of 50%; you don't find that in a competitive market place.  The 1973 rule change required broker-dealers who dealt in securities to get those securities rated or face a higher reserve requirement.  The caveat was that it had to be a rating from a "qualified" ratings agency and then went on to anoint 5 lucky companies the government-sponsored oligopoly status.  Open up the ratings agencies to real competition paid for by the PURCHASER of securities.  Those tasked with keeping the state teachers' pension fund safe and solvent will find the good agencies.  I cannot over-emphasize how important the bogus AAA ratings were.  Most wealth on this planet is governed by covenants prohibiting the investment in any security less than AAA. Without the AAA ratings on these mortgage-backed securities and all the various financial derivatives and CDS's layered over them, there simply would not have been enough money involved to make this a "bring the world to its knees" event.  Front page news for a while, yes. Financial Armageddon, no.

FIFTH: Just about every major bank in the US (and every one of the big 4) is either exempted from or exploits loopholes through a 1994 anti-trust law prohibiting any one bank from holding more than 10% of the nation's deposits.  There has been some too-big-to-fail talk addressing capping deposit size as a percent of GDP, but there's no need to re-invent the wheel when we already have a good law on the books -- a law that is being flagrantly ignored (albeit silently and without public awareness). Limiting the size to 10% of total deposits ends too-bit-to-fail. 

The framework of what is currently on the table is a public placebo to give politicians the ability to run for re-election as being "tough on Wall Street" while substantially leaving intact the casino rules created over the last decade.