RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 24/08/10

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[JR]

U.S. FINANCIAL SYSTEM STILL ‘FUNDAMENTALLY CORRUPT,’ KOTLIKOFF SAYS: HERE’S HOW TO FIX IT |  Tech Ticker | Aug. 24, 2010  10:37 am. EDT 

We have a "fundamentally corrupt financial system" and the Dodd-Frank reform bill did nothing to change it, says Boston University economics professor Laurence Kotlikoff. "Relatively little has changed except there are going to be more federal regulators who are probably going to miss major problems."

At the core of the 2008 crisis was "the production and sale of trillions of fundamentally fraudulent securities," Kotlikoff says, suggesting all levels of society participated in the fraud -- including homeowners. At the center of it all were financial intermediaries (a.k.a. Wall Street) who packaged and sold "snake oil under the guise of proprietary information" to limit or eliminate disclosure, and enabled by corrupt rating agencies, regulators and elected officials, he says.

In the accompanying video, Kotlikoff explains how we can "make Wall Street safe for Main Street."

In short, we should transform all financial companies with limited liability (banks, hedge funds, private equity firms and insurance companies alike) into mutual funds, which the professor describes as "little banks that have 100% capital requirements. "

Notably, the big mutual fund companies survived the "financial earthquake" of 2008-09 when the rest of the financial system collapsed, Kotlikoff recalls.

In late 2009, Kotlikoff and Harvard's Niall Ferguson penned an op-ed for The FT describing a blueprint for how to take moral hazard out of banking. Citing a speech by Bank of England governor Mervyn King, Kotlikoff and Ferguson called for "limited purpose banking" (LPB), that would "limit banks to their legitimate purpose - financial intermediation and payment facilitation."

Nine months later, Kotlikoff remains convinced this "very simple reform" remains a much better alternative than the financial reform bill hammered out in Washington - with plenty of influence from Wall Street lobbyists.

"We are rebuilding [the system] out of straw rather than out of brick," Kotlikoff says, suggesting his "LPB" proposal will ultimately be good for the economy and provide a model for the rest of the world. "If we have a safe, sound [financial] structure other countries will follow suit," he says

http://finance.yahoo.com/tech-ticker/u.s.-financial-system-still-%22fundamentally-corrupt%22-kotlikoff-says-here's-how-to-fix-it-535361.html?tickers=XLF,FAZ,JPM,GS,BAC,C,WFC&sec=topStories&pos=9&asset=&ccode=

[Herry12]

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