“It is common to reinvest after-tax compensation for capital gains.  But when the amounts subject to investment risk were awarded in exchange for services but have not yet been recognized as taxable income, those amounts should be taxed as compensation when paid.”

Contact Daniel Berman, 617-353-3105, bermand@bu.edu

School of Law Professor Cornelius Hurley, director of the Morin Center for Banking and Financial Law and former counsel to the Fed Board of Governors, says Treasury’s “stress tests” for top U.S. banks is a mess because it only disclosed the test methodology just before the test results will be made public.

“For credibility purposes, this methodology would have been better had it been released at the beginning of the process rather than at the end.  On the eve of the stress-test results release it reads more like a rationalization than a game plan.

“Indeed, the Treasury maneuvered itself into an almost impossible situation with the way it handled this issue.  Absolve the banks and who would believe the results.  Name the capital-deficient banks and the only thing that keeps them alive is the generosity of the U.S. taxpayer.  Quite a mess.”

Contact Cornelius Hurley, 617-353-5427, ckhurley@bu.edu

Professor Cornelius Hurley, director of the Morin Center for Banking and Financial Law and former counsel to the Fed Board of Governors:

“Secretary Geithner has kicked off the debate over regulatory reform starting with systemic risk.  Regrettably, the proposals continue the Fed’s failed policy of ‘constructive ambiguity’ regarding too-big-to-fail firms.  I applaud Geithner’s suggestion that TBTF firms have to be identified ahead of time.  However, we now know that such firms and their uninsured creditors have an advantage that takes the form of the taxpayers’ safety net.  The funding benefits of that safety net have to flow to the general treasury of the U.S., not to the bottom line of TBTF firms.  Otherwise, we are doomed to re-live this cycle.”

Professor Tamar Frankel, an authority on securities law and author of “Trust and Honesty: America’s Business Culture at a Crossroad“:

“The market we have today does not signify freedom for investors, but freedom for a few very tightly controlled, very large concentrations of investors’ money.  This is private power and like any power it requires counterveiling power.  I just hope that the government exercises a counterveiling balance to the private power holders, rather than taking them over.  And rather than rely on self reporting, which unfortunately may note be reliable any more, let government begin to rely on government examinations by experts.”

Robert R. Bench, senor fellow at the Morin Center for Banking and Financial Law and former deputy Comtroller of the Currency:

“Under this proposal, the game changes from “too big to fail’ to ‘big enough to qualify for FDIC liquidation,’ which should foster more market discipline on these institutions, in addition to the major increases in government supervision proposed by the Treasury.  The administration is smart not to propose at this time any restructuring of the existing financial agencies.  All agency personnel need to stay focused on managing the crisis and not on the game of bureaucratic musical chairs.”

Contact Cornelius Hurley, 617-353-5427, ckhurley@bu.edu

Contact Tamar Frankel, 617-353-3773, tfrankel@bu.edu

Contact Robert Bench, 617-353-5428, bobbench@bu.edu

“It appears that the plan is going to be very heavy on the use of public funds and very light in inducing private parties to participate.  For the plan to be successful, two elements are essential.  First, there must be robust financial inducements for private pools of funds to participate on a significant scale.  Second, banks must be required to part with assets that they are carrying at unreasonable values.

“Early indications are that the funds for the program are going to come largely from the taxpayers and that the banks will be free to offer up their dregs for sale and, even then, to resist sales that will negatively impact their capital.  The Treasury and the FDIC already have the tools needed to deal with thinly capitalized banks.  It’s called receivership.”

Contact Cornelius Hurley, 617-353-5427, ckhurley@bu.edu