Self-Directed IRA Investing

On March 23^-24, I participated in the Wall Street Journal sponsored “Future of Finance Initiative” in Washington, D.C. Initially conceived to be a forum of financial experts to develop recommendations to the Obama Administration to help define the future of the financial system in this country (post the financial crisis), participants quickly modified the agenda to combine suggestions for dealing with the still occurring crises and the financial markets going forward. The results of the work of the 86 invited experts was published in the March 30^th Wall Street Journal. Prior to publication, the forum presented their recommendations in a White House briefing with Larry Summers, the President’s Assistant for Economic Policy and Director, National Economic Council.

While it was clear that time did not allow for the development of a comprehensive road map, the participants were able to reach consensus on 20 recommendations, many of which either echoed programs already underway or elaborated on them. This was no easy accomplishment considering the widely diverse points of view represented. In fact, one participant actually abstained from the voting on recommendations presumably out of protest. The wide-ranging group consisted of some of the titans of Wall Street, such as Arthur Levitt, former Head of the SEC; Paul Volcker, Chairman of the Economic Recovery Advisory Board; Gary Cohn, President of Goldman Sachs; and Damon Silvers, Associate General Counsel, AFL-CIO. Nevertheless, everyone checked their egos at the door and there were sincere efforts by all participants to take the challenge seriously and to try to help the nation’s financial system recover and progress in the future.

Personally, I found the experience to be the most intellectually and interesting in my 40 years in financial services and I was honored to be invited. More importantly, I hope that the result of the forum efforts will help the Administration with the vast array of issues needed to be resolved to stabilize the current economic crisis and to lay a foundation of controls and regulations that will prevent a reoccurrence in the future.

While it is not possible to recount all 20 recommendations in this newsletter, some interesting points can be shared. First, although many of the participants represented investment firms, banks, and broker/dealers as well as regulators of Wall Street, they were quick to suggest financial system improvements to reduce systemic risk that required more regulation of themselves. This objectivity was refreshing and appropriate and recommendations included:

• Improving disclosure, regulation and transparency from non-bank financial institutions, especially those involved in over-the-counter derivatives markets;

• The reform of rating agencies to eliminate the current environment of self-dealing and to compensate such agencies on their track record of success;

• Limiting the concentration of leverage across large systemically important financial institutions, through the use of capital and other controls;

• Developing a set of accounting rules that are pro-cyclical and to establish the Federal Reserve as the Systemic Risk Regulator of banking as well as non-bank financial institutions;

• Bolstering the FDIC with sufficient capital to ensure that all potential liabilities from bank failures are covered, and so that the public is reassured of the safety of their bank deposits;

• Allowing the Government to limit executive compensation in firms in which they and the public have a substantial economic interest;

• Strengthening the credit underwriting standards of financial institutions, and empowering and training regulators to enforce the standards;

• Streamlining the current regulatory architecture to make regulation more effective and consistent across all financial services industries and to eliminate regulatory arbitrage;

• Developing more effective and encompassing programs to limit and eventually forestall foreclosures such as more liberal and creative programs such as rent to own, principal reductions, loan modifications, for financially responsible Americans;

• Enhancing collateral requirements on over-the-counter derivatives and capital requirements for sponsors of credit default swaps; and

• Creating clearinghouses to enhance the transparency for standardized credit default swap contracts.

Since time did not allow for the development of the specifics guidelines, controls, and implementation plans for these and other suggestions, consideration is being given by the Wall Street Journal, forum participants and the Administration to continue the dialogue in the future. I hope to be invited to participate again and to lend my voice to the current concerns as well as my ideas to improve the ability of Americans to rebuild their retirement savings.

Surprisingly, there was no consensus on the inclusion of changing the mark-to-mark approach under FASB 157 for the evaluation of the securitized mortgage market, although there was heated debate over this issue. Following the event, however, I was glad to see the administration and FASB modify their position, and allowing banks t establish a value for these assets based on what they would be worth in an “orderly” market and not a “distressed” market. It is viewed by many, although diverging from the “free market” philosophy, that this nevertheless pragmatic change will allow banks to shore up their balance sheets, reduce their need for capital, and lead to the unlocking of credit markets. Unfortunately, however, as of this weekend, the government is still not acting on our recommendation to allow banks to return TARP money. Some 15 recipient banks desire to return all their TARP money, and they are willing to prepay all interest, but the government is refusing. The government’s position is not very clear, and we hope it will allow banks, that are capable, to return public funds in the very near future. Even more disturbing is the alleged coercion of one bank CEO who indicated to the media that even though his bank had no sub-prime mortgages nor derivatives, that he would see a public audit by the FDIC unless he agreed to take Government funds. That is scary, folks.

One remaining concern is the status of the derivatives markets. It is estimated that there are $186 trillion in bank derivatives. Continued decline in the strength of banks could force this market to freeze, a situation which could be disastrous. That’s why it is so important to strengthen the banks, so they are able to meet their obligations to each other.

Finally, I have to point out that there was no recommendation by the forum to put the G20 in the position of controlling the U.S. financial system. Our recommendation was to create a super regulator, like the Federal Reserve, to regulate all financial markets. I am pretty certain, that there would have been little support for what the Administration agreed to in the G20 meetings-that is, to allow member nations to have oversight of our markets. How or if this plays out will be an issue to reckon with.

Overall, I perceived a sincere sense of purpose and the recognition within the forum of the need for regulatory reform, refinement, and the application of ongoing sophisticated systemic science so that a similar crisis does not reoccur. I am personally proud of almost single-handedly championing the inclusion of foreclosure reform from the approximately 80 suggestions originally drafted, to the final twenty. I feel strongly that continued foreclosures will not only displace more Americans, but will continue to erode the value of the securitized mortgage market, exasperating the credit freeze, requiring more government intervention and deficit-financing and leading to more joblessness. While there is a consensus that not all Americans will be eligible for relief, I feel there is a need to stem the tide of foreclosures for responsible Americans, many of whom, were duped by fraudulent mortgage brokers. Besides, there is no upside when someone in foreclosed on. Both borrower and lender are adversely affected, as is the overall economy. Furthermore, the efforts of the committee that deal with the socio-economic aspects of the financial crisis, if acted upon, should help heal the current cleavage between Main Street and Wall Street, by providing a sense of order and control that will restore U.S. consumer and global confidence in the American financial system.