Regulators differ on financial industry regulatory reform approach
The Wall Street Journal is reporting, based on unnamed sources, that the Obama administration’s top regulators are resisting the ‘New Financial Foundations’ regulatory reform plan written and proposed by U.S. Treasury Timothy A. Geithner, and the President’s White House Economic Advisor, Lawrence Summers. In attendance were Federal Reserve chairman Ben Bernanke, Federal Deposit Insurance Corp. (FDIC) Chair Sheila Bair and Securities Exchange Commission (SEC) Chair Mary Schapiro. According to people familiar with the meeting that took place last Friday, Geithner went on a profanity-laden tirade expressing frustration that fellow regulators were resisting certain aspects of the reform plan, and were not fully on-board as “team players” with the administration. Financial regulatory reform is one of President Obama’s top priorities, and like healthcare reform has been fast-tracked on the administration’s policy agenda.
Neal Wolin, Treasury’s deputy secretary, said Geithner told regulators ‘they have the prerogative to express their views, but he wanted to make sure that, since everyone had agreed on the importance of achieving reform this year, everyone stayed focused on that goal.’
Chief regulator
Yet, today’s New York Times is framing the issue as a “turf battle” for regulatory jurisdiction. While jurisdictional turf battles are an underlying issue, the push-back by dissident regulators is not about “turf” per se. The real issue is that Geithner and Summers are acting as a bulwark for the financial industry against agency regulators willing to get tough and hold accountable the Wall Street and banking industry status-quo, and their powerful lobby. The dissident regulators told the Senate banking committee on Tuesday that the new “super regulator” – a proposed consumer protection agency based in the Federal Reserve – being proposed under the Geithner-Summers plan would transfer some of their authority to the publicly unaccountable Federal Reserve Bank system, and would never be as effective as they could be under in their respective agencies. But instead of working to modify or withdraw the plan, the Treasury secretary has chosen to take the regulators to task, warning them that their failure to regulate was partly responsible for the economic crisis. A recent global survey by World Public Opinion reveals that the public favors more aggressive regulatory action to hold the financial industry accountable for the global financial crisis.
Government officials said Geithner had expected regulators to object to parts of the plan that threatened their power or authority, but Treasury officials appeared caught off guard at how much the criticism resonated with lawmakers. Geithner, Summers and Bernanke support a “super regulator” model centered in the Federal Reserve Bank and composed of the heads of the major existing regulators. Whereas the FDIC’s Sheila Bair, SEC’s Mary Shapiro and Elizabeth Warren, Chair of the Congressional Oversight Panel (COP) on Financial Reform (appointed by Barney Franks) among others, support a tougher, more aggressive and autonomous model under the auspices of the respective Federal agencies. As I have noted before, I am a fan of Sheila Bair and Elizabeth Warren and support their tougher approach to financial industry regulations. I also believe that Geithner and Summers rather cozy “insider” relationship with the Titans of Wall Street and the Lords of Finance gives an unsavory appearance of a conflict of interests, as well as making Geithner and Summers susceptible to the financial industry’s powerful lobby and influence. Read more about that here, and here.
However, as I have also noted in previous blogs, since the plan was unveiled in June, it has met fierce resistance equally from the financial industry lobby whose interest in to maintain the status-quo; as well as from lawmakers on Capitol Hill and financial regulators who believe the reform package is unnecessarily industry-friendly and does not go far enough in its effort to prevent future financial meltdowns, nor does it sufficiently hold accountable practices by Wall Street and the banking industry that precipitated the global financial crisis. Even Republicans – the party of “No!” – have expressed reservations about the reform plan.
The problem, in my considered opinion as an industry professional for nearly two decades, the Obama administration’s effort, though brilliant in places, does not rise to the challenge before it. They have, instead, taken the path of least resistance — an incremental approach that concedes and pays deference to Wall Street and the financial industry lobby at the expense of American consumers and taxpayers. If the goal is to prevent a recurrent implosion of the global economy and to prevent future financial system crises with devastating consequences still reverberating around the world, then they have missed the mark. It is a missed opportunity of the highest magnitude that I believe may prove to be President Obama’s Achilles heel.
Unlike the government’s temporary ownership stake in automakers and major financial companies, the regulatory changes set to be announced yesterday are designed to be permanent. They could result in a major realignment of power and authority among government agencies that set the rules for banking, lending and investing and touch American lives through daily transactions, from credit cards to mortgages and mutual funds. Consider, for example, if today’s financial trading system was an athletic contest where the referees have lost their vantage point. Complex plays unfamiliar to the referee occur out of their sight and fouls go undetected (think Bernie Madoff), they lose track of fair scoring, while some referees halt play and others let it go on. That’s basically what we have today, and even the players have had enough. Tim Ryan, president and chief executive of the Securities Industry and Financial Markets Association balked recently, “On a macro-basis, we’re very supportive of reform,” , but “the Obama administration because they’re working in a more realistic environment are into the art of the possible,” Ryan said, instead of measuring up to the opportunity of the moment.
Chair Bair
Top COP
Secondly, the true reformers in the administration who have very credible positions, ideas and proposals are being blocked-out by the industry-friendly Geithner-Summers axis. People like Sheila Bair, the present FDIC Chair; SEC Chair Mary Shapiro and Elizabeth Warren, Harvard corporate law professor and Chair of the Congressional Oversight Panel (COP) on financial reform
, as well as Dem black sheeps like former New York Governor, Eliot Spitzer – who as the state’s AG, led a brilliant, but at-the-time unpopular, effort to reform many of the industry practices that are now at the very center of the financial system meltdown. In addition, Eliot Spitzer – with a stellar track-record as a truly bold, independent reformer – would, in my considered opinion, be a brilliant replacement for Tim Geithner as U.S. Treasury Secretary.
As the Senate began deliberations on the financial reform plan, President Barack Obama’s plan to increase oversight of banks and other financial institutions ran into skepticism last week on Capitol Hill where senators sharply questioned whether it was enough to prevent another economic meltdown. Kudos to the Senate for lambasting the plan for precisely what many have criticized the administration about. Namely, this plan is a needlessly industry-friendly piece of legislation that doesn’t go sufficiently far enough to prevent similar financial industry practices in the future; and that Geithner and Summers relied too heavily on its cozy industry relationship and influences in drafting a plan that decidedly does not hold accountable the very people who jeopardized American capitalism. The lack of a ringing endorsement in many quarters suggests the proposal was headed for rejection or a major revision by a Congress sensitive to voter anger frustration over Wall Street’s wreckage of the economy, and the wholesale failure by regulators of properly regulating Wall Street in the public interest. In addition, so tepid is the Obama plan that last week Senator Chuck Schumer of New York, a key player in financial issues, called on Treasury Secretary Tim Geithner to include a single banking regulator in the administration’s overhaul plan. Even House Republicans — the party of “No” — are calling for regulatory streamlining, too, but their plan would cynically take power away from the Federal Reserve and the FDIC. Not a good idea in my opinion, when Sheila Bair, FDIC Chair, is truly the only financial industry regulator who seems consistently willing to hold the culprits of the financial debacle accountable.
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Internet Resources:
Federal Reserve: http://www.federalreserve.gov
Federal Deposit Insurance Corp.: http://www.fdic.gov
Congressional Oversight Panel: http://cop.senate.gov/
Securities and Exchange Commission: http://www.sec.gov
Treasury Department: http://www.ustreas.gov
Around the Web:
One Math Geek’s Plan to Reform Wall Street | Newsweek Business …
Obama urges quick action on Wall Street reform | Reuters
Jill Schlesinger: Wall Street Reform: Regulators and Lawmakers …
