Say what you want about the Wall Street Journal; it's still the paper of record for the tarnished titans of industry, and a must read outside of its editorial page. A few days ago, the WSJ sponsored a summit on a new financial system, the Future of Finance Initiative. Anyone who expected the experts in attendance to proclaim continued obeisance to the past is in for a shock. The twenty principals adopted by the participants include: five different calls for increased regulation; three calls for increased transparency; requirements to measure and control risk; a reduction in the use of leverage; and a return of loan underwriting to its roots.
Follow me for an explanation in English of the proposals.
The twenty principles are the consensus of the participants. They start off with the bloody obvious: A loan should be granted based on the borrower's ability to pay. Banks should enforce their standards. Non-bankers selling mortgages should be supervised by the same regulators. Appraisers should meet national standards.
Then the principles move in some surprising directions. Give more flexibility to the FDIC. Don't allow businesses to go from regulator to regulator until one gives them permission to do something. Pay regulators better. Pay rating agencies (Moody's, Standard and Poor's, et al.) based on the accuracy of their ratings. Create a federal agency that is tasked with limiting foreclosures, including the use of interest and principal reductions.
The participants determined that more transparency is needed -- something the financial industry has fought for decades. They think that price and volume data on derivatives should be published, just like stocks and bonds. They propose standardizing information about CMOs and CDOs and making that information available. They want a clearinghouse for credit default swaps, with full information on the instruments.
They suggest that any business wanting to engage in risky financial dealings be required to put up capital to cover the risk, or even be surcharged for the risk posed to the financial system. They propose a "skin in the game" requirement for buyers and sellers of derivatives.
They have also embraced the idea of a systemic risk regulator; that is, someone (the Federal Reserve) who can say, essentially, "You can't do that because the system can't handle the risk." In other words, no more AIGs.
The list includes some clunkers, of course. Executive compensation gets a weak tweak. There's a call for accounting rule changes with little detail behind it. There's much talk about systemic risk, but not much indication that the participants know how to measure it.
I understand perfectly that this document is, first of all, self-serving. The financial industry is producing this only because stronger regulations are coming, and they need to be ahead of the curve. But unlike, say, the NRA, the financial industry hasn't produced a reflexive list, and this doesn't appear to represent a joining of a battle with Congress and the President. Treasury Secretary Geithner was a participant (as were some other people about whom I have mixed feelings) and this list looks to me like a good-faith effort to fix what's broken. If nothing else, it's not a bad place from which to start. If we get a systemic risk regulator, substantially better underwriting of loans and more transparency in the world of finance, that ain't bad at all.