Guest post from OWS: Too Big to Fail is Too Big to Ignore | FT Alphaville

Guest post from OWS: Too Big to Fail is Too Big to Ignore

The note below has been prepared by the Alternative Banking Working Group of the Occupy Wall Street (OWS) movement. As with the prior note published on FT Alphaville, we present it — without comment — as a document for understanding the aims of OWS.

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As a presidential candidate, Jon Huntsman proposed a six-point plan to address the critical and important problem of banks that are too big to fail. Now that he has left the race, there is no presidential candidate with a plan or even with an obvious interest in addressing this vital question. The Alternative Banking Working Group of Occupy Wall Street believes it is extremely problematic that this issue is being ignored, and urges every presidential candidate, including Barack Obama, to propose their too big-to-fail plans for review and for debate. In the weeks and months to come, presidential candidates on both sides of the aisle should make explicit plans to set up appropriate firebreaks in the financial system to protect taxpayers.

We’d like to take a moment to comment on Huntsman’s original plan, which is a good start. It sets a cap on bank size based on assets as a percentage of GDP. While such a cap could constitute a step in the right direction, it remains an inadequate solution unless other significant issues are addressed. Since Huntsman’s plan does not consider the impact of derivatives, implementation of his plan could lead to banks with limited hard assets and bloated derivatives books.

We propose that the plan also include caps on risk, as measured by various metrics involving risk models. To guard against manipulation of these models, we believe that the risk models should themselves be measured against a periodically changing series of benchmark portfolios – an idea also proposed by Vikram Pandit.

Next, we have three topics to add to Huntsman’s plan, namely the opacity of banks’ portfolios, the interconnectedness of banks, and the fact that markets themselves, like money markets, can be too big to fail and can lead to government bailouts at the taxpayer’s expense.

Opacity should be discouraged by recognizing that complex accounting imposes costs upon regulators, and ultimately upon the public. These costs should be borne by banks, by requiring them to pay the price of whatever forensic accounting is necessary in order to understand their books. Limits should furthermore be imposed on the exposure of a given bank to a particular institution or set of institutions. In cases where an entire market is currently deemed implicitly too-big-to-fail, the fact of a government guarantee should be made explicit, but that guarantee should be continuously phased out over the course of the next decade.

The Alternative Banking Group is composed of former members of the financial services industry, former policy makers, and interested citizens. Alternative Banking is a working group of Occupy Wall Street, and is non-partisan (containing Democrats, Republicans and Independents). Alternative Banking does not endorse political candidates, but rather attempts to highlight issues that we consider crucial to the future of our country’s financial and economic health.

Related link:
The Occupy Wall Street Bank – FT Alphaville