Eclipsed by last week’s Iranian elections and the first historic BRIC nations summit was President Obama’s rollout of his administration’s proposed overhaul of the U.S. financial system and its regulatory framework — the most ambitious financial system reform since the post-Great Depression laws establishing the modern framework. Referred to as a ‘New Financial Foundation‘ by its archtects in a recent Washington Post editorial, it was introduced in bold strokes. However, 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. He is, as one commentator pointed out in response to their effort, whistling past the graveyard of “zombie banks.”
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
Here’s The Baseline Scenario, and my biggest issue with the President’s financial reform plan is that the drivers of the administration’s policy lack credibility as true reformers because of their cozy relationships, background and interests as members of the Wall Street Oligarchy. The President and other role players like Geithner and Summers have been out saying all the right things in public about financial reform, scolding Wall Street’s oligarchs and the Lords of Finance about their risky behavior, etc. But I’m worried more about the inside game: about all those enamored former Wall Street and Banking industry staffers inside the administration responsible for crafting policy. People like Geithner — a scion of former Treasury Secretary Robert Rubin who was steered into his previous position as New York Federal Reserve Bank President — a position historically appointed to Wall Street insiders because of the power, structure and centrality of banking & finance in New York, the perceived financial capitol of the world. Some would argue, myself included, that having twice failrd the test of “self-regulatory” risk management and financial accountability the industry has little credible standing to dictate the terms by which they will be regulated going forward. Wall Street ruined capitalism. It should be up to a new robust regulatory framework to restore faith and trust in financial markets; not the foxes guarding the hen house.
See Matt Taibbi of Rolling Stone magazine discuss this issue.
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; 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.
Rearranging the deck chairs does not fundamentally alter the fact that the regulators had the power over the past few years — Spitzer on financial reform
Third, internally, the administration has vacillated over whether to streamline the vast array of regulatory agencies. At one point, Treasury and White House officials floated the idea of a single financial services regulator to oversee banks and certain insurers. But it didn’t get a warm reception from the chairman of the Senate Banking, Housing and Urban Affairs Committee or the chairman of the House Financial Services Committee, so the administration timidly backed away from the idea.
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.
The administration also considered, then backpedaled, merging the Securities and Exchange Commission (SEC), the primary stock market regulator, and the Commodities Futures Trading Commission (CFTC), which oversees the more complex financial products, commodity futures and some options markets. On its face a terrific, reasonable idea, but lacking boldness in their plan caved because the move would have meant Congressional and regulatory turf battles. This is why some believe the President is squandering a lot of political capital — contrary to his bold statements about “the urgency of now.” The chinks in the armor are beginning to break, and I hope the people managing the President pay heed to Frank Rich’s op-ed piece in last Sunday’s New York Times.
Finally, the President’s financial reform plan lacks boldness, and squanders the political capital of a historic moment. And for whatever bite the President’s plan lacks, the GOP plan is, well, non-existant or plainly lacks any credibility. Republicans prefer that companies be restructured or liquidated in via bankruptcy — yet another cynical prescription whose real intent is to protect the interests of institutional stakeholders, rather than employee retirement plans, consumers or common stock investors like you and I.
Alabama Rep. Spencer Bachus, the top Republican on the House Financial Services Committee, urged lawmakers to reject a regulatory system “that depends on the infallibility of the government regulators, who have so far shown themselves unable to anticipate crisis, let alone prevent them.” But in last week to the Council on Foreign Relations, Summers offered the administration’s counterpoint: “Any financial institution that is big enough, interconnected enough or risky enough that its distress necessitates government writing substantial checks, is big enough, risky enough or interconnected enough that it should be some part of the government’s responsibility to supervise it on a comprehensive basis.”
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Internet Resources:
Federal Reserve: http://www.federalreserve.gov
Securities and Exchange Commission: http://www.sec.gov
Federal Deposit Insurance Corp.: http://www.fdic.gov
Congressional Oversight Panel: http://cop.senate.gov/
Treasury Department: http://www.ustreas.gov
Around the Web:
The ‘New Financial Foundations’ Plan, Geithner & Summers on WaPo
Geithner previews Obama’s Wall Street reform plan – MarketWatch
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 …
