Personally, I’m not too fussed over whether someone has a PhD in astrophysics. If I like the article, it’s well-written and researched, has good arguments and spelling looks alrite, then that’s enough for me. I have to laugh every time I read Mike’s bio given above as simply “Mike Whitney lives in Washington state”. I’m economically illiterate, so his articles are good for me so I can (partially) try to understand what’s going on.

Keep up the good articles, Mike.

The Good Citizen Fund: Proposal For Private Regulation Of The Financial Sector
These four ‘instant reforms’ could be implemented tomorrow morning by regulators of banks, GSE’s, exchanges, and broker/dealers. At first, compliance with the reforms would be voluntary, but they will be made legal and binding as quickly as possible.

1) No credit extensions to entities which do not agree to reforms
2) Stricter minimum margin rules for credit extensions (sliding scale from 2%)
3) No new off-balance sheet items unless exchange-traded or very collateralized
4) No more netting of trades unless settlement date is within 30 calendar days.

How To Enforce The Reforms
Banks, GSE’s, exchanges and broker/dealers that agree to comply voluntarily with the four reforms will be listed immediately on the Fed’s public website as ‘Voluntary Members of the Financial Sector Reform Movement’ (Reformers). After April 30, Reformers agree not to enter into any transactions with ‘Non-Reformers’ that choose not to comply.

If a firm does not agree to comply with the voluntary reforms by April 30, the Fed will consider it a ‘bad faith’ market participant and may deny it access to repo, the discount window and other financial support. Even if a firm decides after the April 30 deadline to become a Reformer, it will not be added to list before June 1 (and on monthly dates thereafter).

The Federal Reserve will post this warning statement on its website:

The following is a list are ‘Voluntary Members of the Financial Sector Reform Movement’ (Reformers).

IF NOT LISTED, AN ENTITY MAY NOT BE ELIGIBLE FOR ACCESS TO FEDERAL RESERVE FUNDING.
List

MEMBERS OF THE REFORM MOVEMENT CANNOT DO BUSINESS WITH THE FOLLOWING ENTITIES:
These entities have assets in excess of $10 billion and have elected not to be a member of the financial sector reform movement.

The Federal Reserve will also post the following statement on its website:

Good Citizen Awards: Employees are asked to help enforce the Reform Movement. If your employer is a Reformer and you know of any violation which occurred after April 30, you should inform your immediate supervisor about your concerns. If the violation continues after another week after notifying your supervisor, please report the violation to the Federal Reserve Bank at 800-000-000. Your privacy will be protected.

If inspectors find the reported violation exists — or even that you had good reason to suspect one — you will receive a $10,000 (or more) Good Citizen reward. If the inspectors find the suspected violation did not occur, no action will be taken against you or your firm. But always act in good faith.

If a firm incurs a second violation, it may pay a $1 million penalty in order to remain on the ‘Reformers list’ or it may choose to delist and not pay the penalty. Subsequent violations will carry a penalty of $5 million each.

All violations, penalties paid, and voluntary delistings will be noted at the site.

End of Federal Reserve Message.

The Federal Reserve can implement the plan immediately as follows
(1) a telephone number and recorder to take reports of suspected violations
(2) appoint approriate staff to handle the phones and coodinate inspectors
(3) open a ’special purpose’ account for Good Citizen income, awards and expenses

Note that the Federal Reserve will not be in charge of the voluntary reform movement. Its role is to coordinating activities until the private system outlined next is set up and to otherwise carry out its mandated duties.

Private Regulation Of The Financial Sector
The proposed new regulatory company will be a private company (’Good Citizen’) authorized by Congress to oversee compliance of existing regulatory framework of the financial sector, propose new regulations and changes, and to provide ‘bailout’ insurance.

Good Citizen will be organized along the lines of a insurance company and funded by tax-deductible premiums based on total employee compensation. The company will have a small staff to gather reports of possible infractions and coordinate remedies with existing regulators.

Participants in the financial sector must purchase an insurance policy and agree to comply with its conditions. Transactions with uninsured parties in the financial sector are not permitted. The financial sector includes entities which conduct business in securities (securities will be very broadly defined) including banks, broker/dealers, exchanges, inter-dealer brokers, leveraged hedge funds and private entities, insurance companies offering credit enhancements for securities and counterparties. Affiliated companies or closely-tied entities which are at least 20% owned (actual, constructive or contingent) must also be insured. This includes all ‘off-shore’ and international subsidiaries and affliates.

Total compensation, the basis for annual premium payments, means any money or perks that are paid to employees. This amount must certified by an outside auditor. The insurance premiums may be as much as 25% of annual total employee expense — a huge number that should be sufficent to enlist the financial sector itself as watch dog. It is obvious that market participants can identify rogue firms and shady practices far more quickly than government agencies.

Claims, awards and operating expenses are expected to small; therefore, the insurance company will begin paying taxable dividends after two years. If the financial sector acts prudently in its self-interest, it should receive back most of the premiums paid in the form of taxable dividends. In effect, premium payment should operate like a deferred compensation plan. Note that there is no tax subsidy involved.

There will a very generous award system for Good Citizens, including payments for ‘good-faith’ false alarms. Good Citizens will be anonyomous and their privacy protected. There may also be incentives and dividends for faithful compliance and cooperation. There will also monetary penalties for infractions including the ‘death penalty’ cancellation of the policy.

Non-US Companies and Entities
Central banks and regulatory authorities outside the US will be asked to cooperate with the spirit of the Good Citizen program and not permit ‘loophole’ competition that disadvantages members of the reform movement. Indeed, off-shore companies may join the Reform movement.

Reformers will be encouraged to report any foreign abuse to the Good Citizen company so the company will follow through with Congress and other US regulators.

The US elite is recycling its investments out of the dollar by buying, for example, shares in Swiss banks at knockdown prices. Similar deals are probably being made elsewhere. Once they have saved their own wealth, they’ll let the “little guy” take the fall. Let them eat cheese!