We at The Small Business Authority believe in free markets. We also believe in less government regulation to more government regulation and we believe that financial institutions should be able to transact on an arm???s length basis and do so in many different markets. The primary caveat to this is when the financial institution uses a government guarantee or a government subsidy, it must therefore be very limited to the amount of risk and financial leverage that it can utilize to earn money.

After listening to three straight days of talking heads and pundits pondering over JP Morgan, it is important to get down to a very simple diagram and whiteboard explanation of why banks should not be allowed to participate in markets that have a connection with any kind of excessive risk taking. Technically, there is no difference between a bank taking FDIC insurance to guarantee its deposits with Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac also issued quasi-government guaranteed debt and engaged in excessive risk taking on the asset side of its balance sheet.

Banking institutions today should be well capitalized with plenty of equity cushion, should make vanilla commercial loans, consumer loans, and loans to small businesses with good underwriting standards that will enable them to survive basic projected loss frequency and severity. If interest rate risk is managed through floating rate loans versus floating rate liabilities, there is no need for any derivative hedging nor should derivate market making or proprietary trading be allowed in a bank or in a bank holding company. Banks should also have the ability to not take FDIC insured deposits and allow more sophisticated investors to deposit their funds and analyze the banks standalone credit.

Dodd Frank does not address the structural or philosophical problems that are inherent in our current banking system.?? The system needs to be repositioned in today???s current market where securitization, structured finance techniques, and other derivative securities have enabled our economy to be able to progress with the most sophisticated capital markets and allow risky ventures to be financed with higher cost of capital through mutual funds, private equity and hedge funds. These, in turn, are managed by the best and the brightest capable of understanding those risks. Risky investments and levered risk taking have no place in the current government guaranteed banking industry that we have today.

The Small Business Authority is interested, for its constituents and for America, in a small banking system that provides liquidity to businesses and individuals with basic bread and butter needs, less but more effective regulation and better rules and regulations to reduce tax payer risk and grow the economy. In today???s environment, high quality small businesses, consumer credits and commercial borrowers cannot obtain financing from FDIC insured institutions because those very same institutions that are backstopped by United States taxpayers are engaging in riskier, higher return, more profitable transactions at the expense of the United States taxpayer and United States treasury backstop.

Glass Steagall kept banking and investment banking functions separate for many, many years. The theory behind Glass Steagall was that investment banking activities created far more risk than the simple, unlevered lending and depository functions of a bank. Bank holding companies should be well capitalized and should potentially engage in activities that help businesses and consumers but do not engage in any excessive risk taking or financial leverage. We, as a country, need to get back to a capital asset pricing model where high risk ventures are financed with a higher cost of capital and not government guaranteed deposits at rates of between 25 and 100 basis points. We think that the Dodd-Frank bill, with its excess of 2,000 pages of regulation, does not help our current structural issues and that we should strongly consider bringing back Glass Steagall. Our capital markets have grown significantly over the past 25 years, which reduces the need for banks to finance risky ventures as other financing vehicles and structures are well suited and available to fill that void. We think these changes would be great for small business and the health of the United States economy and welcome your comments.


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