| Consumer Finance Protection Agency (CFPA)
As the legislation is outlined right now the new and potentially independent agency overseeing consumer protection will be housed within the Federal Reserve. I say "potentially independent" simply because only time will tell exactly how independent the agency will actually be. Having said that, I believe housing the agency within the Federal Reserve versus it being its own stand alone entity is a good thing. Why? Because I don't believe creating another entity of bureaucracy with regulatory authority that both the Federal Reserve and the Securities and Exchange Commission already had, they just didn't utilize, will do anything to help consumers. Housing CFPA within the Federal Reserve ensures streamlined communication versus bureaucratic barriers, budgetary needs expanded within an already existing agency versus funding yet another stand alone entity, and Presidential appointment power with Senate confirmation. These are all good things for consumer protection. The sticking point it would appear is that rules and regulations centered on consumer protection would apply to both bank and non-bank entities, which it should. No institution should be exempt from these new rules and regulations. Moreover, this bill empowers State Attorney Generals to enforce these new rules and regulations, which again I think is good. It's almost like deputizing additional officers to help police the system and enforce law. What's wrong with that? Well, most likely you will have some states that are more aggressive than others. The position of Attorney General is a politically elected one, so politics could drive whether a State Attorney General acts in accordance, or even oversteps ones authority and law more than the motivation and overall goal to protect consumers. Having said that, the CFPA in Washington DC can only do so much and oversee so much. They'll have their hands full with the top 5% of financial institutions as it is so additional eyes, ears, and law enforcers at the state level I believe is ultimately a good thing for consumer protection. An additional concern is exactly how any new rules or regulations would affect small businesses. That is a justified concern. The whole concept of Reg Reform is centered on the actions of a handful of large institutions, and the inactions of the regulatory framework to do anything about it. In the middle are the people who generally play by the rules, so now they have more rules to govern them? It remains to be seen exactly what rules that the CFPA will craft that will actually impact small businesses, but ultimately the alternative to doing something is to do nothing. The United States can no longer afford to simply do nothing. The CFPA provision is a good one.
Derivatives
The whole situation around derivatives is a complicated one, but I'll do my best to explain it in a way that everyone can understand. A derivative is a basic agreement between two willing partners that is based on a future value. In the past, this market had been less transparent than any other and resulted in risky trading of bonds and commodities that were expected to bring future value---generally through a technique known as hedging. This technique reduces risk by transforming derivatives into insurance by creating a fixed price expected to yield future value. As we all know by now, that didn't occur. First, the authority to oversee the derivative market rests with the Senate Agriculture Committee, which is chaired by Blanche Lincoln (D-AR), and not the Senate Finance Committee, which is chaired by Chris Dodd (D-CT). Senator Lincoln is a conservative Democrat who is being challenged in a primary by Arkansas Lt. Governor Bill Halter. It came as a surprise when Lincoln released her derivative proposal in April and it was much farther to the Left, or tougher, than what most expected it to be--some argue a direct result of her primary challenge. I don't disagree with that. The current Reg Reform legislation merged Lincoln's proposal for trading these over-the-counter (OTC) derivatives on more open and transparent exchanges, perhaps even electronic exchanges. Record keeping and reporting would also be required. In short, OTC derivative transactions would be conducted more transparently through regulated central exchanges. The Federal Reserve would also be empowered with expanded authority to manage the OTC derivative market. Blanche Lincoln's proposal went farther than any expected it to, and it was surprising too that she won Senator Chris Dodd's support on her version. However, it is quite likely that the Lincoln derivative proposal will be accosted during the amendment process once the larger Reg Reform bill goes to the floor. Senator Mark Warner (D-VA), among others, have expressed concern that if the derivatives proposal stays in tact as is that it would drive the market overseas and make banks and financial institutions outside of the United States vastly more competitive in a global market. That's not entirely out of the realm of possibility, which is why I believe ultimately the derivatives portion of Reg Reform will be watered down to be less effective as what is currently proposed. I like the way the derivatives piece is now, but I don't think it will be what we see in the final version of the bill.
Tomorrow I'll discuss the strategies of both the Republicans and Democrats on Reg Reform. |
