To reclaim the envy of the world

The Wall Street Journal published a column by David Weidner on the Tobin financial transaction tax.  Wrapped around the discussion of the tax was the notion of why Wall Street was once the envy of the world and what it would take to reclaim this position.

Regular readers are very familiar with why it was once the envy of the world and what it would take to reclaim this position.

Until the financial crisis, Western finance—led by Wall Street—was the envy of the world. 

The biggest reason for this, of course, was money. Big financial institutions generated more than one-third of U.S. corporate profits, and their work force was compensated commensurately. 

And there was another reason why the world looked to American finance: U.S. markets were considered the most open, fair and transparent in the world. 

More than three years later, Wall Street's reputation is deeply wounded. Astounding losses suffered by the financial industry and the ensuing recession pulled back the curtain on a system corrupted by greed, excess and a lack of regulation.

Where lack of regulation is best exemplified by each area of the financial system that can be characterized as opaque (think opaque, toxic structured finance securities and contagion via black box banks).

Here and abroad, central bankers have used bailouts and new rules to shore up banks. But it's really a fiscal solution to a problem of confidence. People have lost faith, not only in the banking system, but in politicians and governments that are supposed to keep them in check.

Please re-read this paragraph as it nicely summarizes the current state of affairs.

There is only one solution to this problem of confidence.  That solution is disclosure.  Banks must be required to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

By requiring this disclosure, people no longer have to rely on politicians and governments to keep the banks in check.  People can do it for themselves.

For all of the mistakes and foot dragging in Europe, leaders are considering something that actually might restore lost trust. It won't happen immediately, and it isn't a guaranteed fix, but it does leap a big hurdle that global regulators face: how to pay for it all. 

I'm speaking, of course, about a financial-transactions tax. Around the globe, it goes by different names. In Australia, where a tax went into effect Jan. 1, it is being called a "cost-recovery tax." In other places, it is known as a "Robin Hood Tax" and "Tobin tax," named for Nobel laureate James Tobin, who proposed in the early 1970s a tax on currency conversions. 

In the U.S. it is the "stock-transfer tax." And it is a political nonstarter....

The tax will do nothing for restoring lost trust.

The only way to restore trust is through disclosure.  Market participants trust is restored when they have access to all the useful, relevant information in an appropriate, timely manner so they can make a fully informed investment decision.

The tax does offer offer a couple of potential benefits.  First, it is a source of revenue to pay down the deficit that was incurred as a result of the solvency crisis that began on August 9, 2007.  Second, it would change the economics of high frequency trading and this could potentially limit the impact of trading algorithms on the market.

Rather than begrudge the banks their earnings, let them keep the money with one condition: They should pay for markets that are truly fair, open and transparent, the kind that used to be the envy of the world.

It does make sense that the banks should provide ultra transparency and pay for the mother of all financial databases that will host this information and make it accessible to all market participants.