Confessions of a raving, unconfined lawyer

Now that the Masters of the Universe have been proven not merely venal but completely wrong, we need an agenda for the First Hundred Days that truly “puts people first.”  Will John McCain endorse even one of these?

1.    End mortgage derivatives.  There is no reason to have this toxic form of securitization (which has only been in existence for 25 years) – except that the mortgage and investment banking industries wanted yet another way to generate huge profits.  The bankers proved incapable of valuing these mortgages but forged on in the hope of saddling unsuspecting foreign investors with the risk.  We need to decide as a nation that the freebooter ideology that supports these funny-money tricks, which produce no useful goods or services, is not worth the damage it has caused.

2.    End naked short selling.  Short selling – which was a major factor in the 1929 crash – was supposed to be regulated by the SEC, but the SEC has deliberately (and arguably corruptly) looked the other way.  There is no constitutional right to sell what you do not own, and no useful purpose to be served by allowing people to sell what they do not have in their portfolios.  Brokers should be subjected to heavy penalties for processing naked short sales.

3.    Reestablish the firewalls.  The New Deal’s separation of banking from brokerage and from insurance had a simple goal:  to focus banks on protecting their depositors and insurance firms on maintaining reserves with which to pay claims.  Removing those firewalls made those companies “globally competitive” without providing an ounce of added value to their U.S. depositors; in fact, the only way for them to earn the profits they hoped for was precisely to put their depositors and policyholders at risk, to the maximum extent the SEC will allow; now that they’re all in the same business, it is impossible to wall off temporary risk.  Paradoxically, the attempt of self-interested businesses to avoid inherent risk has multiplied that risk across the entire economy.

4.    End stock option compensation.  Here’s a radical thought on executive compensation: pay them in cash like everyone else.  As with wedding and holiday gifts, cash is always appropriate.  Not to deny that it’s a useful policy for executives to own stock in their companies.  The proper way to implement such a policy is for the company’s board to require top executives to buy a stated number of shares every year – with their own money, like everyone else.

5.    End taxpayer subsidies to hedge funds and CEOs.  There is no economic justification for taxing hedge fund compensation as though it were capital gains.  And in the tax policy context, where nearly every individual deduction is limited in some way, there is no reason to allow an unlimited deduction for executive compensation.  Someone has to step in and say that the duty management owes to shareholders – always invoked to justify unlimited profit – also requires that company funds be spent making whatever product the company makes, not providing free buffet tables for the execs.

6.    End tax favoritism for homeownership mania.  The mortgage interest deduction is an irresistible carrot for most Americans, and led many to overinvest in housing they could not afford.  If this deduction must be enshrined in tax policy, at the very least renters should get a similar deduction for rent payments.

7.    End taxation of debt forgiveness on primary homes.  Homeowners who cannot afford their current mortgages may win renegotiation of their loan terms, only to find that the debt forgiveness is taxable income.  That may prove to be the unkindest cut of all.  Congress enacted a limited, temporary suspension of this awful rule in 2007, but it has been extended to 2013 – will it be made permanent?

8.    End affirmative action for the rich.  Criticism of the estate tax has focused on its effect on owners of small businesses and family farms which have significant value but low liquidity, but the Bush administration’s wholesale cuts in the tax rate chiefly benefit those who inherit publicly traded securities.  Buying shares of existing companies does not inject capital into the economy, and the heirs of deceased owners have not put an ounce of work into the wealth they now own.  The current Bush estate tax regime must be allowed to “sunset” in 2010; in fact, considering our desperate straits, estate and income tax rates could use a return to the progressive levels in effect during the Eisenhower years.

9.    Bail out state and local governments.  In the next few years, the mortgage and real estate meltdown will nearly bankrupt local governments that rely on property taxes in poor areas where the reduced tax base no longer supports the level of taxation needed to run basic programs.  This is on  top of revenues that will be lost through failed investments.  We will soon need to consider bailing out those governments to avoid creating ghost towns across America.

10.   End “too big to fail” blackmail. The management of every public company should be required to answer this question annually:  “Is your company too big to fail?”  If the answer is yes, the company should be broken up immediately.  If the answer is no, they should be held to their answer.