See update below:
Today Yesterday was the big day to get the details of the Obama administration's financial regulatory reform proposal.
The actual Report is uploaded to EP and available here.
Some tidbits I noticed:
- We propose to enhance the Federal Reserve’s authority over market infrastructure to reduce the potential for contagion among financial firms and markets. (p. 7, 2nd para)
- New agency, modeled on, but not FDIC, for non-financial institutions and holding companies.(p. 8, para. 7)
- New Financial Oversight Council reports to the Federal Reserve (p. 9, I.a.1)
- Repeal of just reporting of Gramm-Leach-Bliley Act (?) (p. 11, para 1)
- YAA(yet another agency) National Bank Supervisor created
- Consolidated Institution Regulation moved to....Federal Reserve
- YAA National Insurance Regulator (opposite of what was reported yesterday)
- Determine fate of Freddie Mac/Fannie Mae by 2011
- YAA Consumer Financial Protection Agency
My first impressions are power consolidation to the Federal Reserve and U.S. Treasury.
With Larry Summers in the mix it's no surprise we cannot get Glass-Steagall reinstated.
It's an 85 page document, if others see a detail that pops out at them, write it in a comment and I will update this post.
The New York Times put the document into searchable web form, but it doesn't load consistently so the top copy is locally hosted.
The U.S. Treasury link for me gave an invalid site error.
Firstly our lovely screw the middle class U.S. Chamber of Commerce, of course opposes the proposed Consumer Financial Protection Agency:
Yesterday, the banking lobby voiced its displeasure with the idea of a new agency, and advocated simply relying on the same regulators that let the house burn down in the first place.
Here is a sampling of what the other economic bloggers are finding with the new Financial Reform Proposals:
The issue was definitely not that banks and nonbanks could fail in general. We’re good at handling some kinds of financial failure. The problem was: a relatively small number of troubled banks were so large that their failure could imperil both our financial system and the world economy. And – at least in the view of Treasury – these banks were so large that they couldn’t be taken over in a normal FDIC-type receivership. (The notion that the government lacked legal authority to act is smokescreen; please tell me which statute authorized the removal of Rick Waggoner from GM.)
But instead of defining this core problem, explaining its origins, emphasizing the dangers, and addressing it directly, what do we get in yesterday’s 101 pages of regulatory reform proposals?
My initial reaction, therefore, was largely positive. However, upon further reflection, it is clear this is a political document more than a regulatory one. The white paper is a govern by consensus product about which I have grave reservations. There is much to like about the white paper, but also much to question. As a result, I see no need to rush ahead and enact sweeping legislation and reform before the full measure of the financial crisis has been felt and the implications of regulatory lapses is known.
So, now we officially know. After the federal government lavished $13 trillion worth of federal subsidies on the banks to keep the financial system from self-destructing, the Obama administration released details of its new ‘rules of the road’ financial regulations today.
The much pre-publicized white paper was supposed to contain the most sweeping overhaul of the financial system since the 1930s. But, unfortunately, Obama is not FDR.
FDR took on Wall Street full-force in 1933. His New Deal included the Glass Steagall Act, which separated banks into consumer (or commercial bank) and speculator (or investment bank) entities. Only the commercial banks, relegated to conventional, ‘boring’ activities, got federal backing. His reforms also allowed for independent audits of the banking system to ensure financial soundness (as opposed to taking just their word for it, which is what Geithner’s stress tests did) and established the Home Owners’ Loan Corporation to provide mortgage money to people at risk of foreclosure.
Obama’s plans didn’t even come close. They accepted the banking landscape, with its giant, complex firms, as a given, and went from there. To be fair, certain items like enhanced issuer accountability for loans and securitized products, greater capital requirements for banks, and relegating certain derivatives to exchanges, are useful tune-ups of the system. But, giving the Fed more power, creating an additional layer of bureaucracy through the 'Financial Services Oversight Council,' and allowing the biggest Wall Street players to maintain their status and size, is not reform. It’s more of the risky same.
The Big Picture
The initial read on the Obama Regulatory plan was an enormous disappointment. Both supporters and critics who expected him to take a hard turn to the Left have been left either surprised or disappointed, depending upon their leanings.
To the pragmatic center, including your humble blogger, what stands out is the number of half measures and omitted actions that were viewed as necessary to prevent a replay.
The Ritholtz piece goes into what should be in the proposal, in other words policy recommendations.
The Market Ticker
Finally, there are the items that are just flat-out missing. Most-glaring among them is the lack of a ban on off-balance-sheet vehicles such as conduits and SIVs. If there is one thing that ENRON taught us it is that these vehicles are the hiding places for fraud, abuse, and mis-marked assets where investors, auditors and regulators cannot easily find them.
Bluntly put these loopholes must be closed and off-balance-sheet vehicles prohibited outright: if you have an economic interest in something, it must be consolidated on your balance sheet so that both auditors and investors know what you're holding, how much you're holding, and the potential impact on your firm's finances from that holding.
I suggest reading all of the above economics blogs links on this one. My 2¢ is this is a glorified power grab by the Federal Reserve, executive branch and U.S. Treasury.
Senate Banking Committee - On the Federal Reserve Being Top Regulator