If Barack Obama could achieve only one financial reform, what it should it be?

• Position: A SYMPOSIUM OF VIEWS

It is often said that new American presidents who attempt to achieve too many goals overnight usually fail--that they need instead to spend their political capital on confronting initially a relatively small number of issues. Eventually, they can broaden their agenda. If President Obama asked you to name the most urgent financial reform, global or domestic, needed to rebuild the credibility of our financial system, what would you tell him?

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Outlaw credit default swaps.

BARTON BIGGS

Managing Partner, Traxis Partners, and author of Wealth, War and Wisdom (Wiley, 2008)

I'm no student of regulation, but the new administration would do our financial system a favor by outlawing credit default swaps. Originally designed as a form of insurance against companies defaulting on debt, they have developed into an easy way to short bonds and drive down stock prices.

Unlike shorting stocks where the potential gain is defined but the potential loss is infinite, CDSs are the opposite. In buying a CDS contract, the risk is limited but the profit potential is unlimited. If an adverse development is expected, possible, or even hoped for, the most efficient strategy is short the stock and then buy the CDS.

Thus, the existence of CDSs encourages bear raids. Driving up the CDS exerts downward pressure on the price of the underlying bond because as the imputed financing cost of the issuing company rises, its prospects, particularly if it is highly leveraged, deteriorate rapidly.

Last fall, bear raids by hedge funds, prop traders, and speculators intentionally drove up the prices of the CDSs of Lehman, AIG, and Merrill Lynch and drove down their common stocks to bankruptcy levels. Morgan Stanley, Goldman Sachs, Citicorp, and Bank America have so far narrowly escaped a similar fate. The same CDS buyers were short the underlying stocks and sometimes had sold short-dated, deep-out-of-the-money puts. These are bear gang raids, harmful to the financial system, and CDSs should be outlawed. The great financial panic of 2008 probably would have occurred anyway, but it would not have been as desperate.

Follow the Group of Thirty report.

JACQUES DE LAROSIERE

Advisor to the Chairman, BNP Paribas, and former Governor, Bank of France

Follow the recommendation of the Group of Thirty report that was recently published under the leadership of former Federal Reserve Chairman Paul Volcker. The report, "Financial Reform: A Framework for Stability," offers recommendations for the needed restructuring of financial institutions and markets.

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Accept the supremacy of the International Monetary Fund above that of the Federal Reserve!

JACQUES ATTALI

President, PlaNet Finance, and former President, European Bank for Reconstruction and Development

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Reestablish sensible incentives.

DINO KOS

Managing Director, Portales Partners, and former Executive Vice President, Markets Group, Federal Reserve Bank of New York

The single most important overarching reform is to reestablish sensible incentives for those firms and individuals participating in financial markets. The past cycle exposed deep flaws with how incentives had evolved and led financial institutions to take on large and ultimately imprudent risks.

In the old system, banks made loans and lived with the consequences. In the new system, those originating loans sold them to firms who packaged, securitized, and sold them to investors. The originators and packagers were paid based on volume, not on how the loans performed. Wall Street firms had a vested interest in "feeding the collateralized debt obligation machine" and so lowered underwriting criteria for loans they were willing to buy from originating lenders. Overly generous compensation packages reinforced those trends and magnified the risks at the height of the cycle.

Meanwhile, investors did not have the capacity to evaluate and analyze the risks embedded in complex products sold by Wall Street. Investors relied on rating agencies, not recognizing that they too were compromised.

This cycle has exposed a market failure caused by those misaligned incentives. Restoring those incentives should be at the top of the agenda. That implies preventing mortgage bankers from selling loans without recourse. They need to have "skin in the game" long after the loan has been securitized. Similarly, Wall Street firms that package loans into asset-backed securities must share in any losses. Volume alone cannot determine how firms in the intermediation process get compensated. There must be positive incentives for prudent underwriting.

Rating agencies play an influential role in the investing process, but they must be reformed and subject to greater scrutiny. That may involve formal regulation, but

it need not. It may be sufficient to change the compensation model. If the assumption is changed so that investors pay for their services, the most apparent conflict of the current model is eliminated. At minimum, the formal Nationally Recognized Statistical Rating Organizations (NRSRO) designation should be eliminated.

Restore the flow of credit.

SAMUEL BRITTAN

Columnist, Financial Times

President Obama does not need me or any of TIE's distinguished contributors to tell him that the most urgent financial requirement is to restore the flow of credit from the banking system to the corporate and personal sector.

But there is room for a debate on more basic reforms to reduce the likelihood of the present credit crunch recurring.

This is not the time to push one's pet ideas. In my case, it would be to establish a 100 percent reserve banking system on the fines long advocated by a distinguished economist of the 1930s and 1940s, Henry Simons. But I have no illusions that this would prevent other financial institutions from granting excessive credits along now familiar lines.

The most fundamental required reform is to broaden the mandate of the Federal Reserve so that it covers asset bubbles as well as consumer price stability, output, and jobs. The fact that this is now the fashionable cry should not deter one from joining it. What is fashionable may on occasion be correct. Now is not the time for brilliant originality.

Ideally, central banks should operate under "constrained discretion." That is, they should be given a definite mandate by governmental authorities and left to their discretion on how to carry it out. But we know too little both about what an asset objective should cover and how to set numerical target for it for such a course to be feasible yet.

Inevitably, the Fed will have to feel its way and learn by experience before it can be given any precise presidential or congressional objective. This will be easier in the case of the Fed than of other central banks that are now constrained by specific consumer inflation targets. The United States is still important enough for a new policy stance by it to give a lead to the world's main monetary authorities.

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Combine all the financial regulatory agencies into one unified body.

MAURICE R. GREENBERG

Chairman and CEO, C. V. Starr and Company

The most important change President Obama could make for the financial system at this early point in his administration would be to combine all the financial regulatory agencies into one unified regulatory body. At present, commercial and savings banks are regulated by one or more of the following: the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and various state banking departments. Securities are regulated by the Securities and Exchange Commission but options and futures on publicly traded securities are regulated by the Commodities Futures Trading Commission, which also regulates trading in commodities. Hedge funds and new financial instruments such as credit default swaps are effectively unregulated.

This new body would be charged with providing an effective system for safeguarding the public interest in all these areas while at the same time not stifling the innovation that has been characteristic of our financial system. We would propose that this new single regulatory body be guided by an advisory board that would include leading executives from financial services companies along with lawyers, accountants, and academics with financial markets experience.

This group would be charged with the responsibility of advising the new regulatory body on the impact of any new proposed regulation on the financial system, and thus avoiding any unintended adverse consequences. For example, the advisory group might suggest a phase-in period of three years for any new regulations to allow the financial system time to adjust without any dramatic adverse impact on the public interest. This new regulatory body would simplify the cost and effect of regulation and prevent gaps in regulation from harming our financial system. The Financial Services Administration in the United Kingdom has achieved this result.

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Revive the securitization market.

L. WILLIAM SEIDMAN

Chief Commentator, CNBC, and former Chair, Federal Deposit Insurance Corporation

The securitization market must be revived since a large portion of consumer loans are financed using bundled loans, or securitizations. This type of financing supplies most of the funds for student loans, auto loans, credit card balances, and housing (through Fannie and Freddie).

Today, the securitization market has collapsed. Losses on bad old securitized loans have frightened potential investors from investing in new ones. Confidence in securitization was undermined because the process was essentially unregulated and subject to much abuse. For example, in the subprime mortgage market, a broker could originate loans, get paid his commissions, and sell them as part of a securitized pool of loans, all the while not retaining any...