There has been a lot of anger over the amount of money that Wall Streeters are getting paid one short year after the taxpayer-financed bailout. And the taxpayers have good reason to be angry, especially with the AIG payouts to banks which made bad bets. Shareholders have a good reason to be angry too.
Obama's proposals for a bank excise tax and reinstituting Glass Steagall are an obvious attempt to cash in on this populist anger. But these proposals not only would fail to prevent another financial catastrophe like the one we had in the fall of '08, they don't really render justice. The financial crisis was caused by a number of factors, too numerous to list here. But the main culprits were the overextended real estate market and the prevalence of unregulated financial products. Chief among the unregulated products were collateralized debt obligations (which sliced and diced mortgage payments into so many different permutations that even the people who created them eventually didn't know what they were worth) and credit default swaps (which effectively allowed hedge funds and investment banks to bet on the downfall of other financial entities). The fact that J.P. Morgan and Citibank could trade for their own accounts had virtually nothing to do with the crisis. And the bank excise tax smacks of a windfall profits tax, which merely penalizes corporations for being successful.
In order to prevent another financial crisis the government has to establish an over the counter, regulated market for credit default swaps, where the people who sell these products have to put up some sort of collateral in order to insure that they can pay off their obligations, similar to the way the futures market is run by the Commodities Futures Trading Commission on a centralized exchange.
And in order to see justice done the government also has to figure out some way to claw back the money it paid out on the backside of the AIG bailout, to Goldman Sachs, Credit Suisse, Deutsche Bank, and Societe Generale, among others. Each of these banks were paid over ten billion dollars apiece for their bad bets with AIG.
The other major reform which is long overdue is one concerning shareholders' rights. For far too long executives of public corporations have been paying themselves way too much, at the expense of the shareholders. The only people who are going to say no to an executive are the board of directors, and when the executive has staffed the board with his cronies, it is a license to steal from the shareholders. Congress should pass a bill making it mandatory for shareholders to get a vote to determine how much their CEO and other executives are paid. An executive who effectively pays himself is, to put it mildly, experiencing a conflict of interest. (In fact the conflict is so major as to not be a conflict at all.)
There was an article in the NY Times this morning which listed the percentage of revenue each of the major banks were paying out this year. Goldman Sachs was paying out 45 cents to its employees for every dollar of revenue it got (and the profits would have been a lot less without the AIG handout). JP Morgan paid out 63 cents, Bank of America 88 cents, and Morgan Stanley 94 cents. Citigroup actually paid out $1.45 for every dollar it took in, and thus had a loss for the year. But even when the banks turned a profit, the shareholders just got the leftovers.
This isn't just true of banks, by the way, it's true of any public corporation. I have a hard time believing that most Fortune 500 executives are worth what they get paid.