Return to Hybrid Glass Steagle and Claw Back Provisions.

In my 32 years on Wall Street, I have never seen an American President sound more angry at Banks and Brokerage Firms or whatever we call these companies these days than at today’s news conference. I mean the president actually did his version of George Bush’s “Bring it on” taunt to Al Qaeda.  This time it was President Obama saying to Wall Street “if you want a fight, you’ll get a fight”.  Either way, both Presidents bravado was meant to convey one message – it ain’t business as usual any more.

What’s very frustrating to me is that I told several friends on the "Hill" in 2004, that the collapse of the firm Long-Term Capital Management in 1998 was a serious wake up call. I noted that this was only a hedge fund with bets only in the billions of dollars, small by comparison to that the investment banks who were making bets in the trillions of dollars. I remember saying at the time, that what was needed was some sort of Glass Steagle Hybrid legislation. Laws that would put back some of the barriers between banks and brokers brought into existence after the great depression of 1929-1933. That legislation was named Glass Steagle and it was meant to prohibit the banks from making bets that were too large, putting depositors savings at risk.  In 1999, supposedly in order to compete with foreign banks, John Reed and Sandy Weil of Citicorp lobbied heavily to repeal Glass Steagle so that the company could better compete with the foreign banks. We have a Republican Congress and a Democratic President – Clinton -  to thank for repealing the protections that might have prevented the collapse in 2008 of some of the most prestigious names in American Finance. Lehman Brothers toping the list.  

The talk of the talking heads on TV today before Pres Obama’s press conference was of bringing back Glass Steagle. Brilliant boys and girls, you’re only 5 years too late…and oh yea….Gee wiz, why didn’t I think of that? The elected officias that I was talking to about this problem said that these big bets were hedged. I refuted their  claim that there was no such thing as a perfect hedge. Thus Long-Term Capital Management.

So who’s got it right in today’s financial free for all to regulate and prevent another financial meltdown.  Both have good ideas. President Obama wants to limit what banks can do with depositors money and taxpayer insurance funds. He doesn’t want banks to own hedge funds or private equity firms. I think hs’s got it right, but where I disagree is to tell the banks they can’t have any investment in these vehicles. Zero!? I believe that Banks should be allowed to have some stake - say a minority ownership stake in hedge funds and private equity funds. I would say that a maximum stake of 30-35 % is reasonable.

Now amidst all the calls for the over-bonused Wall Street Bankers to get real and less greedy, my suggestion – which Wall Street senior bankers agree with, is quite simple (and probably would have alleviated the need for this giant Financial Reform Package).  [By the way, leave it to Congress to over-react in a crisis. The Sarbanes Oxley Legislation which demands that the CEO and CFO of a public corporation take personal responsibility for any misdeeds of the company is a total abject failure and has accomplished nothing but weaken American Corporations in competition with foreign companies].  Anyway, on the giant bonus front there are two / hand in hand / solutions: 1) the employment contract of any employee designated to take risk on behalf of the company, can not be compensated / bonused in cash or stock until the trade that was put on, is taken off, and the profit or loss established. So in other words, that trader would get a base salary, and no bonus until the real profit or loss of his trading has been established. 2) The second protective device against rogue traders from putting on crazy trades would be to covenant that a majority of their bonus be taken in restricted stock – the restrictions to be lifted 5 years from the established bonus date. This has an ancillary effect of actually making that trader or the group of traders en-masse self policing. Believe me, they will watch the antics of their associates very closely if only to guard their stock.

So there we have it. Pres Obama is right, and so too is Wall Street. There’s one last thing that I would strong suggest. That the regulatory bodies – the SEC, FINRA, Federal Reserve, FDIC insist that only seasoned regulators with 5 + years experience conduct or lead audits of Banks and Investment Firms. They have a nose for smoke, a developed 6^th sense for problems. Were that type of person of experience to have audited Bernie Madoff….he would have been caught many many years ago.-- like 20 years ago. I knew him then, and he had the smell of a crook through and through.