Occupy the bookshelf: #OWS turns two ...we are somewhat concerned that you, like us, might be suffering from "well-informed futility syndrome." Why, yes! Yes we are! And frankly we're worried about some of our readers too... The above is the brutally honest message that greets the reader who reaches the end of the Alternative Banking Group's Occupy Finance book. Tuesday is the two-year anniversary of the Occupy Wall Street movement, which the book's launch is timed to coincide with. It's the birthday cake that took several months and a committee to put together. Occupy Finance is partly a primer, with explanations of everything from fractional reserve banking, to the role of securitisation in the crisis, to Magnetar and to legislative changes that have aided bank profitability over the years. It comes with the leanings you'd expect, but the Occupy blazoned on the front is a pretty fair warning that it isn't going to read like bank research. That said, many of the members of the Alternative Banking Group who worked on the book are employed within the financial services industry, or were in the past. And in short, they think the financial system as it currently stands isn't working, particularly with respect to the current regulatory framework. While you struggle to contain surprise about the conclusion they've reached, we'll mention that what we quite liked about the book is that it contains proposed strategies to improve matters (Chapter Eight) and also information about some of the good things that are already going on (Chapter Nine) according to the group. Below is an overview of some of the proposals. We've kept most of the glaringly obvious ones out. Frankly if you're reading FT Alphaville right now, you're probably fairly close to dying of over-exposure to themes like banks holding more capital, simplified and transparent markets, and so on. Sorry about that.* Lock the revolving door The movement of financial professionals between regulatory agencies and banks can create a detrimentally common mindset, as well as lead to conflicts of interest. The Alternative Banking Group would propose that a more discerning door be constructed, with the following goal: People going to work for the government would see it as a career. A permanent ban would attract people who would find government employment a rewarding mix of good compensation and public service-just the sort of attitude we would want in regulators‒rather than what we have today, where working for regulatory agencies is viewed as a stepping stone to a more lucrative job on Wall Street. Junior regulators need only be subject to a temporary ban of perhaps one year. As people gain tenure and rise in rank, the bans should be lengthened to a few years, and those at the highest levels should be permanently banned from entering private industry. In conjunction with this, the regulatory agencies should be encouraged to hire from within government so that career prospects for regulators would be improved. Obligatory Venn diagram involving Goldman Sachs and the government to demonstrate current state of door: Punish wrong-doing Even when there was clear evidence of wrongdoing, the SEC, the Department of Justice, and/or state Attorneys General made agreements with Wall Street firms that permitted these firms to "neither admit nor deny" wrongdoing. The fines that were imposed were typically woefully inadequate to discourage future misbehavior, and in fact did little more than establish the fee for criminality. In addition, fining companies is generally ineffective because it doesn't sufficiently punish the executives who committed or condoned the wrong-doing and personally benefitted from it. The SEC has begun, in some cases, to demand that financial firms actually admit to the crimes they have committed. But this is still the exception when it should be the rule. Even in extreme cases, such as HSBC's admission to years of money laundering for drug cartels, no criminal charges are pursued. This must change. It won't be enough though, because, well... Damn you, Michael Lewis!** Cultural change ...statutory restrictions and prosecutions are necessary but not sufficient. Social and industry norms also play an important role. When Michael Lewis described outrageous behavior on Wall Street in the 1980s in the book Liar's Poker, he thought it would embarrass people on Wall Street into acting better. Instead, the book was taken as a "how-to" manual! Wall Street became even more brazen in taking advantage of clients, the government, the public, and anyone else they can make a buck from. Society is partly responsible for this since, in addition to money, Wall Street executives get public accolades even when they are caught committing wrongful acts. Obligatory illustrative examples are given, including Libor, JPMorgan's Whale, and a sense within the industry that market forces are the root to all good things. Make it simple: Retail products edition As the Center for Plain Language has shown, it is possible to write a credit card agreement that a fourth-grader can understand - if you want to. This level of clarity should go a long way toward helping individuals avoid the traps that currently exist in all-too-many financial products. We also applaud efforts to restrict the use of complex financial instruments. Here too, the CFPB [Consumer Finance Protection Bureau] is leading the way. The Qualified Residential Mortgage designation that is applied to simple mortgage structures will encourage their use. While it is still legal to offer the more complex mortgages that created such havoc during the latest crisis, the hurdles to using them are higher compared to simpler instruments. This should discourage their use. Pass inspection ...there should be review of financial products before they are used. Two professors have proposed an agency that would review products for financial safety and effectiveness, similar to what the Food and Drug Administration does for pharmaceuticals. The existing regulators should be doing this. Nonetheless, interesting idea about having a wholly separate, dedicated review process. But speaking of the regulators... Thou shall not shop for one's regulator, nor be utterly convoluted Another serious problem is the fact that multiple regulators cover similar activities or the same entities. As a result, banks and other financial institutions can often choose their own regulator. It should come as no surprise that they choose the one that is most lax. Even worse, the agencies" budgets are often, in part, determined by how many companies choose them. This leads to competition among agencies for who can be the most "attractive" regulator‒meaning the most lax! One of the worst cases was the Office of Thrift Supervision (OTS), which was supposed to be regulating savings and loan companies, actively promoting itself as being "industry-friendly." The bailout of AIG proved the downfall of the OTS. As for some stuff that's still around and just annoying: Both the SEC and the Commodity Futures Trading Commission (CFTC) regulate derivatives. The financial industry is playing these agencies off against each other in order to delay and weaken the rules being implemented as part of Dodd Frank. These two agencies should be combined in order to avoid such practices. Profound statement alert: In general, rules need to be written that apply across the board. It is unfair if similar activities are treated differently from a legal, regulatory or tax standpoint. What's worse, it is an opportunity for what Wall Street calls "regulatory arbitrage" and we call "gaming the system." Blush. Financial athletes Overall, when one considers that this book was written by committee, it's a commendable effort. We would have liked better citations for some of the claims made along the way, but two thumbs up for discussable policy proposals. Anyhow, read it if you feel so inclined and make up your own mind. We leave you with this, from the introduction of the book: Some kinds of cheating are publicly condemned. Athletes accused of using performance-enhancing drugs are exposed and forfeit their titles; teachers and administrators who alter test scores lose their jobs and are arrested. But where is the outrage when whole laws are written for and by big banks and financial firms to give them unfair advantages in relation to competition, tax policy, and influence within government? Why do the tax laws provide that the compensation of hedge fund managers does not count as "salary" and thus is taxed at a much lower rate? How much money is legally kept in off-shore accounts by businesses that use our infrastructure to secure their profits? Haha, no we're not sorry about it. But we do ♥ you. Please note, we also ♥ Michael Lewis. Related links: Haldane, Occupy, and the path to reform - FT Alphaville Play the global financial crisis card game! - FT Alphaville FT Alphaville meets mathbabe to talk Occupy Finance - FTAV tumblr Happy Birthday Occupy Wall Street... #OWS Day 732 - Huffington Post