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Managing Systemic Risk in the Financial Sector

Managing Systemic Risk in the Financial Sector

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Published by Lyle Brecht
Rescuing the nation’s financial system consists of four coordinated and linked restructuring actions: (1) reforming the Federal Reserve System, (2) providing liquidity to sound financial institutions, (3) nationalizing failing and zombie banks, and (4) reforming individual firm regulatory oversight along with adding new regulatory infrastructure capable of monitoring systemic risk to the economy.
Rescuing the nation’s financial system consists of four coordinated and linked restructuring actions: (1) reforming the Federal Reserve System, (2) providing liquidity to sound financial institutions, (3) nationalizing failing and zombie banks, and (4) reforming individual firm regulatory oversight along with adding new regulatory infrastructure capable of monitoring systemic risk to the economy.

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Published by: Lyle Brecht on Feb 19, 2009
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10/02/2010

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I don’t think this is just a financial panic;I believe that it represents the failure of a whole model of banking,of an overgrown financial sector that did more harm than good.
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RESTORING THE NATION’S FINANCIAL SYSTEMRestoring the nation’s financial system to long-term sustainability consists of fourcoordinated and linked restructuring actions: (1) reforming the Federal Reserve Sys-tem, (2) providing liquidity to sound financial institutions, (3) continuing to national-izing failing and zombie banks, and (4) reforming individual firm regulatory over-sight along with adding new regulatory infrastructure capable of monitoring sys-temic risk to the economy.
2
REFORMING THE FEDERAL RESERVE SYSTEMThe Federal Reserve shall set balance sheet
Reserves
requirements for all financialinstitutions and intermediaries in the U.S. that provide credit to markets (e.g.commercial banks, insurance companies, mutual funds, and nonbank financialfirms and funds that disburse credit in the
shadow banking
system such as hedgefunds and private equity firms, etc. whether onshore or offshore if they do busi-ness in the U.S. or hold funds either directly or indirectly from U.S. investors);The Federal Reserve shall no longer accept financial institutions using capitalinstead of reserves for ensuring the
safety and soundness
of their institution;The Federal Reserve shall henceforth provide complete transparency as to openmarket and other transactions it has with individual financial institutions begin-ning June 1, 2007 and continuing thereafter. Transaction information must bepublished on the Federal Reserve web site within 24 hours of the transaction oc-curring.PROVIDING LIQUIDITY TO SOUND INSTITUTIONSThe Federal Reserve shall establish interest-free
Liability Reserves
with financialinstitutions by purchasing sound financial instruments from credit making finan-cial institutions. A
Repurchase Agreement
between the Fed and the financial insti-
MANAGING SYSTEMIC RISK in the FINANCIAL SECTOR
LYLE A. BRECHT DRAFT 2.1 410.963.8680 - CAPITAL MARKETS RESEARCH -Saturday, October 10, 2009 Page 1 of 7
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Paul Krugman, “The Market Mystique,”
The New York Times
(March 26, 2009)
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“In a financial panic, the government must respond with both speed and overwhelmingforce. The root problem is uncertainty—in our case, uncertainty about whetherthe major banks have sufficient assets to cover their liabilities. Half measures combined with wishfulthinking and a wait-and-see attitude cannot overcome this uncertainty.” See See Simon John-son, “The Quiet Coup,”
The Atlantic
(May 2009).
 
tution would set a date by which the financial institution must buy back what itsold to the Fed at the same price it was sold to the Fed;
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This arrangement for creating liquidity would apply only to financial institutionsthat pass the U.S. Department of Treasury’s periodic
Stress Test
requirements forindividual firm solvency.NATIONALIZATION OF FAILING & ZOMBIE INSTITUTIONS
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Financial institutions that fail Treasury’s
Stress Test
and are ineligible to establish
Li-ability Reserves
with the Federal Reserve Bank shall decide if they wish to join the Na-tional Reconstruction Bank (NRB). Financial institutions who join the NRB shall besubject to the following terms and conditions:One hundred percent (100%) of the outstanding common shares of the bank shall be tendered to NRB at thirty-five percent (35%) of the market price for shares on January 2, 2009 or the date of joining the NRB, whichever is less. All preferredshares will be converted to common stock and be included in the tendering re-quirements. All outstanding warrants and unexercised stock options as of Janu-ary 1, 2009 shall be void;NRB shall have sole discretion to appoint boards of directors of mem ber banks;Executive compensation during the recapitalization payback period
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shall be lim-ited to total maximum compensation of $500,000 per annum (in 2009 dollars);
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For banks not choosing to join NRB that go bankrupt or are not able to meet theirreserve requirements as set by the Federal Reserve Bank at any time during thenext five years:an automatic clawback and mandatory disgorgement provision goes intoeffect whereby all executives and related parties who received more than$1,250,000 in total compensation during the five years prior to the bank-ruptcy or noncompliance event shall immediately owe all proceeds exceed-ing this amount to the NRB;
MANAGING SYSTEMIC RISK in the FINANCIAL SECTOR
LYLE A. BRECHT DRAFT 2.1 410.963.8680 - CAPITAL MARKETS RESEARCH - Saturday, October 10, 2009 Page 2 of 7
 
3
See Jane D’Arista, “Setting an Agenda for Monetary Reform” (January 2009), Political Econ-omy Research Institute, Working Paper #190.
4
 
Zombies
are financial institutions that only remain open for business by the provision of fed-eral loans, bailouts, guarantees, and/or tax relief.
5
The recapitalization period shall continue until retained earningsfrom operations are suffi-cient to repurchase all NRB held shares of the bank at the then current market price. No divi-dends shall be paid to common or preferred shareholders during the recapitalization period.
6
Adjusted yearly for purchasing power parity that includes salary, stock options, and benefits.
 
Any person not in compliance within 20 days of notification or who conteststhis provision shall owe the overage amount and a penalty amount, not-to-exceed 120% of the amount owed;Banks may choose to leave NRB affiliation at any time 180 days after their bal-ance sheets meet all regulatory requirements. Once a bank chooses to leave NRB,it may not return sooner than 24 months from the effective date of leaving;NRB, in its sole discretion will determine the timing for selling its common stock ownership in each bank choosing to join NRB, but in any case shall sell its sharesin the public capital markets within 10-years of the date at which the bank leavesthe protection of NRB;The option to join NRB is open for 90 days from the initial offering date. Thereaf-ter, any bank wishing to join NRB shall not be able to join until after 360 daysfrom the initial offering date has expired;The U.S. Treasury shall inject
reserves
 , subject to its discretion.REFORMING REGULATORY OVERSIGHT
Reserves
and other solvency, ratings, compensation, and securitization regulationsmust apply to all credit-making firms making up the financial industry acceptingsavings from U.S. citizens. including off-shore hedge funds, private equity forms,and other financial intermediaries whose insolvency or sale of risky securitiescould endanger the U.S. economy or that of other world allies of the U. S.;The sale of securities whose market category exceeds a certain amount ($X bil-lions) should be required by law to occur only through public markets, with OTCtransactions and any side agreement deemed unlawful and unenforceable;Establish a fusion center within the U.S. Treasury, the Financial Health Intelli-gence Center, whose mission is to: (a) analyze technology innovation and laborand capital reallocation needs for the U.S. economy; and (b) recommend proac-tive changes to regulatory policy, oversight, and enforcement for financial mar-kets based on this analysis. These recommendations would then be forwarded tothe regulatory agencies and to Congress, as necessary, for action;Implement a Market Assurance System within the U.S. Treasury that addressesthe entire financial industry being regulated.
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This system would automaticallysort through firms’ financial data and enable the appropriate regulators to iden-tify financial firms who are misleading investors before such companies become
MANAGING SYSTEMIC RISK in the FINANCIAL SECTOR
LYLE A. BRECHT DRAFT 2.1 410.963.8680 - CAPITAL MARKETS RESEARCH - Saturday, October 10, 2009 Page 3 of 7
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A description of the system is athttp://www.scribd.com/doc/9790231/.

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