Excerpt from the Hussman Funds' Weekly Market Comment (1/25/10):
1) Immediately vest the FDIC (or other regulator that has a strict consumer-protection mandate) with the authority to take receivership / conservatorship of distressed bank and non-bank financial institutions, including bank holding companies, in the event of insolvency.
It is essential for the public and policymakers to understand that the "failure" of a financial institution does not generally imply losses to customers or counterparties, but only to its stock and bondholders. The FDIC efficiently handles scores of bank "failures" annually by taking receivership or conservatorship of the whole bank, typically selling its assets and non-bondholder liabilities as a single going concern (which can then be recapitalized), wiping out stockholder equity, and providing partial recovery to bondholders with any residual. This receivership process works.
5) Prohibit the use of credit default swaps except for bona-fide hedging purposes.
Credit default swaps act essentially as insurance contracts, which pay out in the event that the bonds of a financial institution go into default. Large speculative books of credit default swaps have been created, often in excess of the value of the actual debt of the underlying institutions. These swaps create a risk of contagious losses for the counterparties of these swaps if the debt of some institution goes into default, even if the party receiving payment has no position in the impaired bonds. Such large-scale speculation inappropriately amplifies the disruption caused by the failure of a financial institution. Credit default swaps are appropriate hedging devices provided that the holders have equivalent positions in the same or like financial debt. Their use as naked speculative vehicles should be prohibited.
8) Discharge and replace Ben Bernanke and Timothy Geithner.
Since the beginning of the credit crisis, both of these bureaucrats have proven themselves to be ardent defenders of bank bondholders but a danger to the interests of the public and to the clearly defined prerogatives of Congress under the U.S. Constitution. Defending the public emphatically does not require the public to defend the bondholders of mismanaged financial institutions against loss. Both Bernanke and Geithner have made repeated end-runs around Congressional spending authority in defense of these institutions.