| Pundits and talking heads alike are spending a great deal of time dissecting the proposed Regulatory Reform ("Reg Reform") legislation. After Democrats broke the will of Republicans to hold a filibuster against a motion to begin debate, it would appear the Senate is set to pass, in bi-partisan fashion, Reg Reform. But what does the Senate version of this bill contain? That's an important question because the House already passed their version of Reg Reform, so what is the compromise likely to be? How long will it take for both chambers to craft a compromise? Those are all good questions, so let's talk about it.
In short, much like Health Care, Reg Reform will likely take on the personality of the Senates version. And, I believe the Senate version of this bill is good--not great, but good. It's a start compared to where we were upon the initial collapse of the American economy, a new Administration taking power, new Regulators in place, and legislation to prevent further collapse of our economy today.
Too Big to Fail
Now I said that the Senate version of Reg Reform is good, but let me first talk about the area where I think it is weak. The Senate version of Reg Reform attempts to address the concept of financial institutions being "too big to fail," in a couple of ways. Originally a $50 billion dollar fund, paid for by the institutions themselves, would allow for a systematic dismantling of "too big to fail" institutions versus simply allowing them to collapse with no grip on the institutions assets, its tentacles and ripple effect to domestic and global markets, as well as deal with the employees that allowed the institution to function day to day. That provision, a bi-partisan craft by Senator Mark Warner (D-VA) and Bob Corker (R-TN), appears to be stripped due to a compromise between Senator Chris Dodd (D-CT), Chairman of the Financial Services Committee, and Senator Richard Shelby (R-AL), the Ranking member on the committee. The idea that the $50 billon dollar fund was some continued "taxpayer bailout" of the industry, as said by Senate Minority Leader Mitch McConnell, is a lie. But, from what we know now in the compromise is federal regulators would be allowed to collect costs of helping to dismantle any failed institution from their assets and/or creditors. This begs the question, "if the institution failed because their assets had no underlying value, and/or creditors were unwilling to infuse capital, how do regulators intend to collect?" Also, the government would provide loan guarantees, as authorized by Congress, to the dismantled institutions. This was a provision that didn't exist prior to the compromise. I believe this compromise endorses yet another "bailout" by taxpayers. The original fund, paid for by institutions, was higher incentive for institutions not to engage in extensive risk-taking. How can regulators collect from failed institutions, and/or their creditors, if they have nothing for which they can collect? I rank this compromise as the result of heavy lobbying by the financial industry and is weaker than the Warner/Corker bi-partisan $50 billion dollar fund.
The second provision addressing "too big to fail" is the so-called "Volker Rule." This rule is named after former Federal Reserve Chairman, and current Chair to President Obama's Economic Advisory Board, Paul Volker. This rule would prevent financial institutions that own banks from engaging in risky and speculative proprietary trading, or buying and selling securities like sub-prime mortgages for self institutional gain, when it works against the institutions clients and customers. The argument is that prop trading is what aided in the collapse of our economy, which is true; prop trading did have a hand in our economic collapse. However, the "Volker Rule" would have little impact on the larger financial institutions as they have already dumped, or dramatically altered their proprietary trading activities. Moreover, as admitted under testimony by former and current CEO's of America's top financial institutions, the "Volker Rule" would have an impact of between 5-10% of total assets of any institutions affected by the rule---minimal impact at best. I believe the "Volker Rule" is more about strategy on the part of President Obama and the Democratic-controlled Congress than it is substantive addressing of root causes of the financial collapse. I reference strategy because I believe Volker, with his heavy and well respected resume on both sides of the political aisle, along with the trust of President Obama---more so than Treasury Secretary Geithner has at this time, is meant to be a white rabbit for the industry to chase down a dark hole. Some in the financial industry consider the "Volker Rule" a reversion to the Depression-era Glass-Stegall Act, which was reversed by Congress in 1999. That couldn't be farther from the truth. The fact is that the proposed "rule" doesn't go far enough. From a strategic political perspective I believe the "Volker Rule" is good, but I'm very skeptical at its real ability to prevent a similar economic collapse, or minimize risk on the part of financial institutions as witnessed since the reversion of Glass-Stegall in 1999.
Tomorrow, part two of this series will focus on the proposed Consumer Finance Protection Agency and Reg Reforms effect on the derivatives market.
|
