Princeton, August 6, 2010 – Strengthening his credentials as someone who doesn’t just talk about reform, but has actually demonstrated a lifetime commitment to reform, businessman Scott Sipprelle (R-Princeton) today detailed bold policy ideas to make Wall Street serve the needs of the broader economy, while protecting American taxpayers from the costs of future bailouts.
“When I was busy pointing out recklessness and poor leadership on Wall Street in 2005, career politicians like Rush Holt weren’t even dreaming about getting tough with the bad actors on Wall Street,” said Sipprelle. “Mr. Holt and his colleagues were looking the other way, while eagerly extending their hands to take fat campaign checks from folks in the financial sector. In fact, Mr. Holt has taken more than $500,000 from the finance, insurance and real estate sectors during his congressional career, including more than $33,000 from Goldman Sachs alone.”
“Rush Holt supported the Wall Street bail-out, a plan that rewarded reckless behavior on the backs of the U.S. taxpayer,” continued Sipprelle. “And then has the audacity to act incredulous when those very same institutions are paying out billions of dollars in bonuses a year later. The facts are clear: Mr. Holt’s recent anti-Wall Street rhetoric has nothing to do with serious reform, and everything to do with political opportunism.”
Sipprelle described the recent reforms passed in Washington as “poorly conceived” and “the product of lawyers and politicians who know little about how the economy or financial markets actually work.” He also criticized Congress for not having the courage to tackle reform of Fannie Mae and Freddie Mac, which were conspicuously absent from recent reform measures.
“We can never again force American taxpayers to choose between massive bailouts and economic catastrophe. My plan won’t just kick the can down the road, it will address the problems once and for all,” said Sipprelle.
“Many bad actors caused the economic collapse from which America has still not emerged. Lax enforcement by financial regulators, unscrupulous mortgage brokers, complicit politicians and excessive borrowing by American home buyers all played a role in creating market bubbles in a variety of asset classes,” said Sipprelle. “Special responsibility, however, must be assigned to certain Wall Street firms, whose excessive risk taking, lax underwriting standards and monumental leverage brought the U.S. and global financial system to the brink of total collapse.”
“The confidence of Americans in Wall Street has been badly shaken as the result of this recklessness, misconduct, and stupidity,” said Sipprelle. “It is critical that we restore faith in our financial markets, the essential furnace of economic expansion, in order to reassert and protect the vital function of our money markets. We must reform the aberrations of capitalism without killing off one of America’s greatest and most globally competitive industries.”
“Wall Street has been a magnet for entrepreneurs and job-creators globally, who have flocked to our financial markets to access capital in the world’s largest, fairest, and freest exchange,” said Sipprelle. “Similarly, the world’s capital providers have also come to America, searching out the most innovative and attractive investment opportunities. New Jersey and America have benefited enormously from the wealth-creation and jobs that flow from our thriving financial markets centered in New York. We need to bring that back.”
Reform & Renew the Essential Functions of Wall Street
· One Super-Regulator with the Power to Avert Systemic Crisis Proactively
Wall Street financial institutions form an inter-connected web where the failure of any one firm has a ripple effect on the entire system. In a severe financial panic the system is only as strong as its weakest link. Historically, this has presented regulators with a terrible choice if a large firm begins to fail. Either bail the firm out to save the system or let the firm fail and risk an unraveling of confidence in credit that could cause a severe depression, as occurred frequently in the early years of our nation’s history. It is for this reason that our financial markets require a single, vigilant, and powerful form of oversight to replace the dysfunctional form of current regulation.
· Smarter and More Effective Bank Regulation
The consistent flow of credit to America’s consumers, corporations and emerging businesses is a vital ingredient in sustained economic wealth creation. Yet our money markets have begun to exhibit troubling patterns of boom and bust, largely driven by excess credit creation followed by the absence of lending. It should be a central focus of the Fed to dampen the volatility of our economic cycles to enhance confidence and sound business planning. This can be accomplished by: 1) higher capital requirements for all financial institutions to reduce leverage, 2) explicit liquidity standards for all financial firms proportionate to size, funding maturities, and portfolio risk, and 3) restricting proprietary investing activities at deposit-taking subsidiaries.
· Bail “In” not Bail “Out”
Give the system regulator resolution authority to recapitalize failing institutions by writing off losses against the existing capital structure proactively so as to create a prudently capitalized institution. The aim of this resolution authority is to keep a troubled firm in business and avert a systemic impact, while allowing assets to be written down and losses recognized against private capital, thus not putting taxpayers on the hook. This policing authority would add a far greater discipline for financial institutions to avoid imprudent credit decisions that could threaten viability.
· Creation of a Mandatory Credit Derivatives Clearing House
Wall Street has experienced an explosion of financial engineering, including complex products such as credit default swaps and collateralized debt obligations that add little overall economic value. These instruments should be required to be cleared on an exchange to eliminate settlement risk and to allow regulatory transparency on open contracts for superior systemic risk monitoring. Higher margins should be required on all credit derivative contracts to reduce the incentives to speculate.
· Enhanced Incentives and Responsibility for Institutional Investors
Institutional investors now control almost 70% of the shares of America’s corporations, as compared to less than 10% in the mid-1950’s. With this dominant ownership comes an added responsibility to act as vigilant stewards of America’s savings pool. And yet, our institutional investor class has played a completely ineffective role in policing America’s CEO’s and Boards of Directors to demand effective governance and sound business practices, leading to many of the failures of conduct that we are witnessing today. Two policies could change that: 1) Requiring institutional investors to pledge to a standard of care as owners of America’s corporations, requiring a vigilant oversight through their voting power to supervise corporate strategy and executive compensation, and 2) eliminating the tax exemption for non-taxable investors who sell their stock within a one-year holding period. This additional holding period incentive would dramatically reallocate investment capital toward value-creating and longer-term investments and away from shorter-term speculative ones.