The Problem:
Reckless Behavior on Wall Street & Its Impact on the Economy

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 consumers all played a role in creating market bubbles in a variety of asset classes. Special responsibility, however, must be assigned to 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. 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.

The importance of Wall Street to a thriving American economy should not be understated. Since the creation of the New York Stock Exchange in 1792, 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. 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.

The goal of Wall Street reform must be to ensure that U.S. taxpayers are never again presented with a choice between massive taxpayer-funded bailouts and economic depression.  Wall Street has a critical role to play channeling capital from investors to consumers, in turn fueling economic growth.  But Wall Street must serve Main Street and not the other way around.

The Solution:
Reform & Renew the Essential Functions of Wall Street

As someone who has worked in the financial markets for over two decades, I have a special understanding of America’s financial system based on my experience as:

• a stock market expert who structured stock offerings, enabling companies, large and small, to raise capital in order to expand their business
• an investor of educational endowment and retirement savings portfolios, targeting America’s savings toward the nation’s most innovative and promising companies
• a venture capitalist, identifying those early stage and most risky investments which offer the promise of the jobs and industries of tomorrow

Armed with this expertise, I am uniquely positioned to reform and renew the essential functions of Wall Street. Here are my ideas:

One Super-Regulator with the Power to Avert Systemic Crises 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 Federal Reserve 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.

Legislation to Prevent the Socializing of Bank Losses on the Backs of Taxpayers: Bail “In” not Bail “Out”
Enact legislation that would 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 to avert a systemic impact while allowing assets to be written down and losses recognized against private capital, thus not putting taxpayers on the hook. The effect of 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 over the recent past, 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.