Is Wall Street Reform Destined to Fail?

By now, most of you have probably heard: on Thursday night the Senate passed Wall Street Reform after a debate that had proceeded remarkably smoothly up until the last week or so.  In fact, throughout the whole process, not much out of the ordinary for what the people should expect of the Senate happened until it came down to the wire and some of the most-controversial amendments came up for debate, including a proposal to limit ATM fees and exempt auto dealers from new regulations.  Neither of those made it into the final Senate bill, but plenty remains.  The real question is, will it work?  It is true that the Senate’s bill still has a lot in it, including some very promising provisions, and that the House of Representatives has its own bill that must now be merged in conference, however any number of things could be done to weaken it.

Unlike health care reform, however, most of the main parts of the financial reform bill should survive the conference committee; both the House and Senate bills are quite similar, with only a few parts needing attention.  According to Senator Chris Dodd (D-CT), quoted in the New York Times, “This is one of those rare occasions when the two bills really are very close to each other”.  Despite this, there are major differences in the way the bills treat proprietary trading, or the practice of banks profiting off of trades using their own money and interests rather than acting in a service to their clients, the CFPA, and the “resolution authority”.

In fact, I would seriously question Senator Dodd’s statement above, except for the fact that we all saw the health care debate unfold; if you want a reminder of what the effort to merge bills passed by the House and the Senate considered to be normal or even very different from each other, look no further than the health care debate.  As far as the actual conference goes, there are things I like about both bills, and things I don’t.

Between a Rock and a Hard Place

Well folks, there is still about another week or so at a minimum before I can resume something resembling a normal post frequency, but I found snippets of time here and there to draft up a condensed version of this for my regular column in our college newspaper, Student Life, and so it was relatively easy to find just a bit more time to expand it and say everything I wanted to say this time around.  On a side note, that’s one of the things I love about doing the blog: I get to set my own word limits.  Anyway, enjoy this one until I get back to a normal amount of posts for a given week, which is more inevitable than Senate Majority Leader Harry Reid (D-Nevada) being able to round up 60 votes to break a filibuster on a bill that has widespread appeal outside of Congress.

Wall Street reform: Democrats want it, Republicans want it, the American people want it, heck even the tea party activists even want it.  Therefore, it shouldn’t be such a problem getting a strong bill through Congress, should it? Well, as they say, the devil is in the details.  More specifically, there are two pieces about the proposal at the center of this debate: a new regulatory agency devoted to consumer protection and the so-called “resolution authority”, and a $50 billion fund financed by fees on big banks that would, according to CNN, provide a mechanism to pay for the orderly closing of a future Lehman Brothers-style failure.  Of course, the Republicans, most notably Senate Minority Leader Mitch McConnell (R-Kentucky), are opposing these provisions as vehemently as they opposed the Democrats’ approach to health care reform.  However, while the health care opposition could be considered legitimate, the Republicans need to step carefully in their opposition to financial reform, as the provisions drawing the most fire right now are the ones that this country desperately needs.

The Consumer Finance Protection Agency, as it is being called, would ideally be able to prevent banks from luring people into those sub-prime loans that caused so much trouble for the economy when they started to go south, causing the recession. Further, this agency, or an existing regulator, must be given the power to regulate the complex securities such as credit-default swaps that few people can truly claim to understand. Institutions that are Too Big To Fail, or TBTF, also need to be dealt with in a way that reduces the ability of these few companies to have a drastic effect on the economy should they get in trouble and face the risk of collapse. I can understand the desire to prevent another round of bailouts, but the Republicans’ constant repetition of this talking point even after it has been proven false just makes me wonder.

Republicans are alleging that the fund proposed is nothing more than ensuring that there will be another round of bailouts whenever companies need them. The Democrats leading the reform effort, from President Obama and Senator Chris Dodd (D-New York) on down, are all saying that this is not true at all, and I tend to believe them, only because you have to admit that Senator McConnell’s outright opposition to the reform bill was only announced after he met with several Wall Street bankers seems pretty suspicious to me. Sure, the GOP has traditionally been the party that favors a free-market economy, but isn’t being seen as in favor of the status quo on Wall Street the last thing a member of Congress wants with so much anger directed at these bankers?

Thus, McConnell and the rest of the GOP are in a bind; if they hold out on their position as steadfastly as they did on health care, it will be so easy to label them as being too friendly toward the very people who are being popularly blamed for the financial crisis. On the other hand, capitulate too quickly and too completely, or at all, depending on which activists you talk to, to the Democrats’ offering and they will be labeled as being soft and forsaking conservative principles. This label would be particularly effective with respect to the CFPA; Republicans under President George W. Bush created the Department of Homeland Security, one of the greatest big-government accomplishments of the past 50 years, and fears of that will certainly be brought up about the CFPA if they haven’t already.

Oops, They Did it Again

Okay, I apologize for the facepalm-inducing title, but it grabbed your attention, didn’t it?  Happy bonus week to all, especially to those Wall Street bankers receiving performance-related bonuses for 2009.  As much as I think the bonuses themselves are a little too large given the recession, this post is not so much about them as it is about the hearings on the origins of the financial crisis taking place on Capitol Hill today.  Of course, the two are naturally linked, as the public outrage over seven- or eight-figure bonuses coming out of one of the worst years Wall Street has had in the last century will certainly add to the interest in enacting new proposals to limit these pay practices, and influence the tone and perhaps even the course of the hearings themselves.  In addition, these bonuses have caught the eye of federal financial regulators, who now want to do something about them.

Conducted by a bipartisan commission created for this purpose, the hearings on the causes of the financial crisis contain all the political theater you would expect from such a high-profile event.  In fact, the bank representatives at the hearings and administration officials, including Treasury Secretary Geithner, Federal Reserve Chairman Ben Bernanke, and FDIC Chief Sheila C. Bair, have been going after each other in the media over the last few days.  It is, in fact, the same tired old arguments we have been hearing from the bankers for the last couple of years.  In effect, they say that such high bonuses are necessary in order to keep the talent they have and be able to remain in business.

Federal officials, on the other hand are about as tired of hearing these arguments as we, the common citizens, are.  Now, they are discussing various ways to train the financial services industry that this is a practice that is frowned upon.  When training a dog, or teaching a child, for instance, positive reinforcement for good behavior is one of the best ways to achieve a desired end result.  That appears to be the core of the various strategies that the Obama administration is mulling over in response to concerns over bonuses.  However, outrage over bonuses is only part of the picture.  Recently, it came out that the government is probably going to take a large loss on the Troubled Assets Relief Program, or TARP legislation that bailed out several of the “too big to fail” financial firms, not to mention the automakers.  At a time when we are increasingly concerned about the national deficit, the government clearly wants some of that money back.

Of course, some companies have already paid back much of their bailout money, and it is unclear whether the new measures would affect only the firms that have not done so, or the industry as a whole.  However, the Huffington Post is reporting today that one of the proposals under consideration is essentially a tax on these “too big to fail” institutions.  In theory, this tax would only apply to the parts of the institutions whose actions directly led to the crisis and encourage these large institutions to break up.  Great idea, but I am highly doubtful it will actually work.  In practice, the only effect this tax will have is being passed on to consumers.  Nothing else will change except we will have given banks a new excuse to nickle-and-dime the consumer for everything.  Did you notice those new fees banks are imposing ahead of the credit card legislation slated to take effect in the next couple of months?  That legislation was a great idea, and it will help consumers overall, but banks have already adjusted.  The same will happen with this new tax.

Certainly, this idea will recover a fair amount of the TARP money that as invested in these institutions, but it will be coming out of the consumer’s pocket, rather than the bank’s.  It is a nice try, but it will not work as planned.  If the government really wants to avoid the “too big to fail” problem, the only surefire way would be to forcibly break up these institutions with the force of the law.  That in itself goes against the capitalist ideal, but hey, it would work.  Of course, another idea is to wait for consumers to shift to a smaller bank and leave the major institutions to handle the investment banking cash cows they love.  In fact, there is evidence that this may already be happening.

Economic Reform Gets Closer to Reality

It may not be at the forefront of everyone’s mind lately, especially since the economy may finally be recovering from last year’s financial crisis.  However, we must still reform the economy and the regulations that allowed this crisis to take place.  The House of Representatives got sidetracked for several months by the healthcare debate, but now that they passed their form of healthcare reform, they were able to get down to business on everything else.  Today, the House managed to pass their form of economic reform.  So far, it looks like a decent attempt at it.

According to CNN, this bill would create another agency designed to protect consumers and investors against the sort of risky practices in credit cards, mortgages, and other types of lending that largely brought about the crisis in the first place.  Now hold on just a minute.  Before you go “oh not another government agency!”, consider this: isn’t more regulation of the relatively free-wheeling financial services industry a good thing?  For instance, as Rep. Barney Frank (D-Massachusetts), chairman of the House Financial Services Committee, and by extension, one of the main architects of the bill, put it in the Politico article, “The bailouts of AIG and Bear Stearns would be not possible — made illegal — under this bill.  If a company fails, it’ll be put to death.  Yes, we have death panels, but they got the death panels in the wrong bill. The death panels are in this bill.”  This is exactly the spirit we need, with more than a trillion dollars in bailouts in the last year, we should not be propping up companies that may or may not be able to survive on their own without such risky practices.  Also, I love the clear swipe at Sarah Palin’s assertion that health care reform included the so-called ‘death panels’.  Well-played, Rep. Frank, well-played.

Now, you may also remember the “too big to fail” mentality.  In case you’ve forgotten, this was the notion that a major corporation such as Bank of America, Citigroup, and GM, among others are so large that the collapse of one of them would cause economic catastrophe.  This notion has not been discredited yet, and I am not sure it ever will, however the House bill takes a firm step toward fixing the problem.  According to both the CNN article linked above and the Politico report, the bill will give regulators the power to dissolve these large corporations that are effectively conglomerates of many businesses.  The idea behind this, of course, is that only the part of the business that is in trouble will fail, rather than an entire company.

Although these are the largest components of the bill, there are other notable provisions.  For one, the bill gives Congress to have the Government Accountability Office provide oversight to the Federal Reserve.  Up until now, the Fed has operated independently.  Undoubtedly, the Fed’s independence will decrease with the oversight that the GAO would provide, yet that may not be such a bad thing.  At the very least, it would provide more transparency and assurance that the Fed’s actions will have a positive effect on the economy.  In addition, the bill would regulate many of the kinds of complex derivatives that got us into this mess.  The other major part of it is that the bill empowers shareholders to have a say in executive compensation.  All of these are great ideas, but unfortunately it will take the Senate many months to even start work on it; healthcare reform and the other “must-pass” legislation, spending bills, etc., are filling the Senate’s agenda until at least the early spring.

Lehman Brothers 1 Year Later: Where’s the Reform?

As a society, we seem to follow a “never-again” philosophy.  After Pearl Harbor, after 9/11, after the Great Depression and nearly every other tragedy in American history, we have collectively said “never again”.  The same is true about the kind of behavior that led to the greatest financial collapse since the Depression.  One year ago, we vowed that this kind of behavior would not happen again.  We talked endlessly about the need to place new regulations on the financial sector.  One year later, where are the new regulations?

The answer is simple: tied up in Congress.  According to the BBC, there are “five lobbyists for every Congressman in the financial industry” in the U.S.  Wait a minute.  Aren’t we talking about President Obama, the same one who promised us an end to politics as usual?  While I can see the creation of yet another agency as being contentious, after what happened a year ago, strengthening the SEC and existing regulatory bodies should be a no-brainer.

Sure, we may have gotten sidetracked by the healthcare debate, but it is surprising that there has been no action on the proposed financial services industry reforms.  We can talk about reforming financial regulation all we want, but we need to match that talk with Congressional action.  After all, passing legislation that is good for the country despite lobbyist attempts to the contrary is part of the “change” candidate Obama vowed to bring as President.