In true Washington fashion, Obama’s proposed regulatory reforms have been “leaked” to the market. Let’s review, analyze, and critique. The Wall Street Journal provides a very helpful overview of these reforms via Blueprint to Avoid Market Meltdowns:
President Barack Obama spent the first five months of his presidency trying to make sure the worst financial shock in 70 years didn’t push the U.S. economy into a depression. He will spend the next five months or so trying to redo the rules of finance so we don’t go through this again.
Enough of the Obama plan has leaked to see how Treasury Secretary Timothy Geithner and chief White House economist Lawrence Summers propose to protect the economy from the vulnerabilities now so painfully evident: Plug the gaps; don’t redo the organization chart. Rely heavily on the sagacity of the Federal Reserve; the alternatives are inferior. Craft a plan that has a chance of getting through Congress.
Will there be real “change” involved in Obama’s plans or a mere reshuffling of the deck chairs along with a healthy dose of Monday morning quarterbacking? Will the Wall Street-Washington cabal be exposed or solidified? Let’s navigate the landscape of Obama’s proposed reforms using the WSJ’s blueprint:
Problem: Several financial firms were so big and intertwined that their failure threatened the entire system, and they weren’t all banks.
Solution: Pump up the Fed’s role in overseeing all big “financial holding companies,” giving it explicit authority to match its responsibility. Tell it to protect the system, not only the sturdiness of the banking units of these firms. Brace for controversy: Some in Congress already think the Fed is too powerful.
So propose a “council” of regulators to share some duties, but make the Fed the heavy. (Retain the Fed’s ability to lend to anyone in a crisis, as it did to Bear Stearns and American International Group, but require it to get the formal OK of the Treasury secretary.)
The Fed is already charged with these responsibilities within the banking industry. I highlighted these points the other day in my post “The All Powerful Federal Reserve”:
What are the Federal Reserve’s responsibilities?
-supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
-maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
The Fed failed to perform. Why give it more power? Obama is specifically addressing the risks within the insurance industry in designating the Fed as the authority in overseeing the entire economic system.
I believe our risks are increasing dramatically via this move. Why? Not enough checks and balances. Not enough eyes and ears and “teeth” to monitor and promote accountability. Merely because the Fed is “all powerful” does not mean that it is “all knowing,” “all capable,” and “all encompassing.”
Additionally, this concentration of power within the Fed will inevitably make the Fed more political and not an independent institution. Foreign investors will not look kindly upon that development.
With this move, I think Obama is solidifying the model as currently crafted in which institutions currently deemed too big to fail lose that fear of failure. How does the moral authority embedded in that fear of failure get embedded in other firms currently extremely large, but not quite “too large to fail?” Where is the line drawn?
I believe Obama should shift oversight of the insurance industry from the state level to the federal level so insurance companies can not “arbitrage” state regulators. Have the federal insurance regulator aggressively monitor risks within the industry along with capital levels and leverage ratios.
There is speculation that insurance brokers will be subject to FINRA regulations. This move would be a HUGE mistake. What does Finra know about insurance?
I believe Obama should provide increased authority within the FDIC, the Federal Housing Finance Authority, the Office of the Comptroller of the Currency, and the Commodities Future Trading Corporation to manage capital risks and liquidity risks within their respective financial institutions. Employ more troops on the ground to infiltrate the institutions.
Much like Bill Singer promotes, I believe Obama should decertify FINRA as the self-regulator of Wall Street. Either a government agency with real teeth should oversee the broker-dealer activities on Wall Street or a private self-regulator with representation from all parts of the industry and held accountable by an overseer.
On all these fronts, NO lobbying dollars can be directed without a full and total public exposition.
Problem: Investors now know the government won’t let big firms fail in a crisis (even if the government says otherwise) so investors will lend too readily to such protected firms.
Solution: Force such firms to hold bigger capital cushions and leverage themselves less, making them less prone to recklessness — and less profitable.
But don’t move so quickly that new capital requirements intensify today’s credit crunch. Instead, ask the Treasury to come up with new capital rules over time, and give the Fed the
Reimpose the “mark-to-market” accounting standard along with a requirement to do away with “off balance sheet” SIVs (structured investment vehicles). Telling firms that they should hold more capital cushions but then allowing them to play accounting games skirts this issue. Without integrity in the process, results will fall far short of expectations.
Problem: Too many consumers were sold inappropriate mortgages and other financial products.
Solution: Concentrate consumer-protection authority in a single new agency that, unlike the Fed, doesn’t worry about the safety and soundness of banks. (A big question: Will it have teeth?)
Aggressively monitor institutions originating consumer products. Require them to be fully registered and licensed. Prosecute criminals aggressively.
On Wall Street, do away with the arbitration process in which individual brokers and firms are largely protected. Impose stiff fines, penalties, and jail time. Be much more aggressive in barring individuals and firms from the industry for egregious business practices.
Problem: Financial firms shopped for the softest regulator, and had a lot to choose from.
Solution: Kill the Office of Thrift Supervision, the weakest of the bunch, but leave the rest of the organization chart unchanged to avoid politically costly battles (a concession that some deem a missed opportunity but the administration describes as a politically necessary step.)
How and why are financial firms allowed to “arbitrage” the regulatory process? Financial firms should be assigned to one regulatory body. The regulator needs to be held accountable.
Let’s stop with the sufficiency of regulation debate and enter into the transparency and integrity of regulation debate. In so doing let’s embrace market based principles and capitalism.