Saturday, June 26, 2010

Financial "reform" bill a dud

Yves is merciless about the Obama administration's financial "reform" bill:
I want the word “reform” back. Between health care “reform” and financial services “reform,” Obama, his operatives, and media cheerleaders are trying to depict both initiatives as being far more salutary and far-reaching than they are.

So what does the bill accomplish? It inconveniences banks around the margin while failing to reduce the odds of a recurrence of a major financial crisis.

The only two measures I see as genuine accomplishments, the Audit the Fed provisions, and the creation of a consumer financial product bureau, do not address systemic risks. And the consumer protection authority was substantially watered down. Recall a crucial provision, that banks be required to offer plain vanilla variants of products, was axed early on. In addition, the agency, initially envisioned as independent, will now be housed in the Fed, which has never taken any interest in consumers (witness its failure to enforce the Home Owners Equity Protection Act, a rule which would have limited subprime lending) and has a long standing hands-off posture towards its charges.

Most of the rest is mere window dressing.
I have a lower opinion of the bill than Yves, since I don't like the consumer protection agency. I see that as to households what the bond rating agencies are to corporations -- third parties with no skin in the game whose job it is to keep you "safe" by making credit decisions for you. Not only did the ratings agencies fail, they actually made things worse by enabling bad credit to pass as triple-A. A loan is not a product, it is a combination of a financial instrument and a borrower, and treating it as if it were a product, "good" or "bad" by itself, misses the fundamental nature of a credit transaction, which is a promise between a lender and borrower.

I also don't like the "audit the Fed" provision. What are they going to do? Send Bernanke to jail? Which leaves nothing in the "good" column.

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Blogger Ohm (Ώ) said...

I'm least excited about Consumer Protection Agency and Audit the Fed concepts as well.

But what's your opinion of the provisions around Financial Resolution Authority? All of consumer protection, oversight etc can go out the door if effective system is in place where shadow banks that screw up can be liquidated/resold wiping its investors off rather than public money put on the line to save the financial system.

5:24 PM  
Blogger winterspeak said...


FRA is fundamentally a matter of political will. The Fed and Treasury clearly assumed power they did not have circumvented the law when they decided it was the right thing to do. To Big to Fail exists in the informal rules which actually describe how things run, not the formal rules (whatever their guise).

When Citi goes down, will the Fed and Treasury make foreign depositors whole? How, exactly, will they resolve overseas branches and divisions?

11:33 PM  
Blogger Ohm (Ώ) said...

Depositors, and deposit insurance, are the concern of FDIC, and equivalent authorities in their respective countries. So resolving branches from a depositor-protection perspective is well covered even before the latest Fin Reforms in America, the US FDIC does not pay depositors at Foreign branches.

The concern of the FRA is such liabilities of a falling Bank/Shadow Bank as are not under any kind of insurance say, eg it has issued CDS' to other Financial Insitutions that have made further business/investment decisions based on that 'guarantee'. What liabilities/guarantees the Public Receivership will keep alive and which ones it dissolves (and MOST will fall in this category) is dictated by the ripple-effect of dissolving/defaulting on that liability -- ie if the financial system as a whole can absorb it and stay standing. It does not matter if some of the beneficiaries of the limited, COMPULSIONED, conservation are abroad, the key thing it that clear compulsion wrt save-the-system should exist, all other parties get wiped out (shareholder, bondholder, guarantee holder,....they made a bad business choice in putting their money on a bad bank, so they lose).

If it's possible to capitalize and resell the cleaned up entity, equity in it is resold to public like the current Administration is doing with GM.

I think the FRA is the Real deal in the Fin Reg Reform, the CPA,the Audit the Fed et al are distractions.

12:27 PM  

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