EC Consultation on supervision of financial services

1- The report-De Larosière proposes that hedgefunds and private equity should be subjected to regulation, transparency and control. I support this. This should include accountability and employer responsibilities.

But what about souvereign wealth funds from outside EU?

2- Vulture funds (fonds vautours) should be legally forbidden.

3- Banks, pension funds and insurance companies should be forbidden to use checking- and savings deposits of the public in stock market investments or other risky actions. In practice this is reached by legally separating again savings- and loanbanks from businessbanks (investmentbanks) and investment funds (as originally decided in 1933 by President Roosevelt, by the US Glass-Steagull act; this was repealed in 1999; see for example:

4- Short selling should be banned.

5- Prohibit all off-balance sheet transactions.

6- End tax havens and off-shore financial centers.

7- Credit transfer tax on international transactions

8- No bailing out of “bad” (toxic) assets at the expense of the taxpayer. In case the risk of a bankrupty is endangering the real economy, nationalize the bank.

9- IFRS should be revised. The evaluation at market value is in itself a cause of unstability and false information, because market prices are determined by offer and demand and speculation; which differs from the genuine economic value of the product/service.

10- A study group should work out a novel mechanism for the calculation of the stock prices that is based upon economic value(as defined for example by the composite of: last year's profit, order book, cash position, stable activa and work force).

At present stock market prices result from the latest bying and selling. This process is largely controlled by sentiment and information that is later found to be unfounded (see Prof. Robert Haugen:

So, share prices are nearly unrelated to the economic value of a company. However, they do, by themselves, determine the economic climate and as consequence can label a healthy enterprise or whole economy as sick, and vice versa.

11- Rating agencies: the existing commercial agencies have shown to be unable to correctly evaluate the risks of investments. This function should become the task of one EU public agency under control of parliament.

12- Remuneration of all persons working in the banking- and investment sector: abolishment of gold parachutes and stock options. Shares as variable reward should be cashed after 4 years only in order to avoid short-term policies. Renumeration should depend on long-term results which should include social and ecological criteria, building of reserve capacity and of job creation.

13- Executive officers and members of boards should be personally accountable before the law for their decisions.

14- Persons who have been unable (or unwilling) to predict/prevent the present banking crisis, are not likely to be efficient in the novel supervision process. They should not be charged to work out the details of the novel regulations, nor with the application of the latter. This holds for executive officers of banks and investment funds and insurance companies, investment specialists, traders; as well as members of the existing control organisms that failed to prevent the crisis. The experts of the Financial Stability Forum are among those.

15- Persons unfit as controllers or reorganisers of the financial market are those who have contributed directly to the financial crisis, by creating/promoting derivatives that transfer credit risk etc, and/or organizing deregulation, in their responsible function in public office or private groups (NB: the same persons are actually in charge of reforms; example: the present US secretary of the Treasury T. Geithner has been director of the IMF, and aide to Lawrence Summers from Goldman-Sachs who in 1999 was deputy at the Treasury of President Clinton who abrogated the Glass-Steagull act from 1933. Summers himself is now director of the National Economic Council of President Obama.).

16- The novel supervision of the financial services should be transparant to the public, and closely controlled by members of parliament.

Frank RoelsApril 10th 2009.

Emeritus professor Ghent University and Brussels University VUB, Belgium.