You may like or dislike Barack Obama’s hazy proposals for reforming the U.S. banking sector. Few people, though, would disagree that reform of some sort is needed. What should be included in that reform? John Hussman, the very smart guy who heads up Hussman Funds in Maryland, offers an eight-point plan and it makes for interesting reading.
For starters, there’s the obvious: the Federal Deposit Insurance Corporation needs expanded powers, so it can take over troubled insurance companies or bank holding companies or non-deposit-taking investment banks. The lack of these powers was a glaring omission during the recent crisis.
There are many less obvious ideas as well. Hussman is a fan of requiring banks to hold a substantial chunk of their capital in the form of convertible debt. Under Hussman’s proposal, this layer of convertible debt would automatically become equity if a bank runs into trouble. The additional level of equity would provide an extra buffer to protect depositors and counterparties from crisis.
Also worth considering is a rule that would prohibit the use of credit default swaps except for purposes of genuine hedging—in other words, banning the use of credit default swaps for purely speculative purposes.
Hussman’s final point, though, may be his most heart-felt: he wants both Federal Reserve chief Ben Bernanke and U.S. Treasury Secretary Tim Geithner to be fired. Both, he says, have done end runs of questionable legality around Congress to protect the bondholders of banks and both deserve to be kicked to the curb as quickly as possible. That sounds like an increasingly common sentiment in Washington.
Freelance business journalist Ian McGugan blogs for the Financial Post.