Financial reform is on the way.And Wall Street is breathing a sigh of relief.Puzzled?You’re not alone.Many of us who watched in horror as the casino spirit that pervades our mega-banks and hedge funds nearly destroyed the world’s financial system and crippled the U.S. economy have been waiting for the Hanging Judge to come out of his chambers to dispense rough justice.But instead, the bills that have emerged from the House and the Senate and that will now be reconciled into a single piece of legislation mete out a few ankle bracelets, some fines, and a stern warning that the sheriff will be watching carefully once the felons go back to work.
It’s not that the Obama administration has not pressed for some necessary changes at the banks, trading houses, and hedge funds.It’s that the administration, as in many other areas, has balked once again at pushing for necessary structural changes and instead has settled for some pretty good tweaking of the machinery.The Tim Geithner and Larry Summers team have, as the business consultants say, sub-optimized the administration’s windfall acquisition.What did it acquire?Pure Political Gold: They were handed the most powerful populist backlash against the greedy, corrupt, and reckless ways of the financial sector that this country has seen in nearly a century.And instead of reining in the masters of the universe who have profited mightily as the country has fallen into a hole, the Obama administration has decided to tighten some basic rules and give them a stern warning that this time the regulators will be watching like hawks.No, really, we mean it this time.Meanwhile, the lords of finance are breathing easier.Now they can go back to lording over our politics and economy.
The areas in which we are almost certain to see some tinkering are clear. There will likely be some sort of audit of the Federal Reserve Bank and the hundreds of billions it handed out to banks to save them from themselves.The robust attempts to substantially narrow the Federal Reserve’s supervision powers or to regularly audit the secretive agency have been neutered or completely excised.And keep in mind, a lot of the watering down of real reform is being done by Democrats working with Republicans. That way everyone can keep pontificating in front of television cameras about how shocked they are that gambling has been going on on Wall Street while never endangering those campaign donations they’ll need come November.
When the final bill is cobbled together we are also likely to see some sort of resolution agency with the authority to force the liquidation of any bank or institution that threatens the broader financial system. The Senate bill calls for a special insurance fund that the biggest banks would have to pay into so that there would be money on hand for bail-outs and unwinding the multi-billion dollar messes banks have been creating for themselves.That provision has met with so much Republican resistance that it may not make it to the final piece of legislation. Democrats are already announcing that they are not “wedded” to the concept.As if we thought they were ‘wedded’ to anything other than reelection.Of course, the current arrangement is to use taxpayer money to fix bank messes.
Banks may also be forced to reduce their proprietary trading business (in which they risk their own money on big market bets) but don’t count on it.The administration helped to torpedo an amendment that would have pushed them out of that business.
There will be new capital ratio standards, which means the banks will probably have to increase the amount of money they set aside to cushion the blow of future losses.The Senate bill also wants no single banking company to use acquisitions to grow to more than 10 percent of U.S. financial liabilities.We’ll wait and see if this piece makes it through.The Dems and the Obama people have essentially refused to take on the real challenge of forcing too-big-to-fail institutions to break into separate giant businesses that would not threaten to cripple our economy.
As for the sometimes dangerous but much-traded financial concoctions that are called derivatives, Missouri Democrat Blanche Lincoln has pushed hard on a provision to force banks to spin off their swaps business into separately capitalized entities. Lincoln is caught in a brutal primary election scheduled for June 8 in which she needs to seem tough on Wall Street.Chris Dodd has already made attempts to introduce amendments that would give Geithner the power to undermine Lincoln’s spin-off rule.The big banks are now focusing nearly all their lobbying firepower on killing Lincoln’s provision so most likely it will be cut completely from the compromise bill that Obama signs or the banks will get one of the many who do their bidding to put in another provision that neuters the only amendment with any bite.
We will probably see over-the-counter derivatives like foreign exchange swaps, forced through central clearing houses and on to electronic exchanges to supposedly increase the “transparency” of the trading business in these custom-tailored bets.
The final legislation will likely create a so-called Consumer Protection agency to patrol abusive credit products but no one should expect much from this rather squishy and vague provision.The administration has made a big deal of saying it doesn’t want car dealers exempt from the rules of this new agency as the House bill provides.OK, no problem with that, but did car dealers plunge us into a near Depression?
Does all this improve the regulatory oversight and controls of our financial sector?Yes.Is it enough to ensure that the stomach-wrenching, job-destroying meltdown that we are still emerging from can’t happen again?Not by a long country mile!The White House actually lobbied against amendments that would have introduced real changes in the structure and the incentives that drive the financial sector of our economy. The Brown Kaufman amendment, for example, would have ensured that the six biggest banks were broken up into smaller pieces that the government might actually be able to regulate effectively.Some of these amendments were designed to force banks, which benefit from federal guarantees, to stick to the traditional business of banking and push all the super-leveraged betting businesses into non-bank companies that would also be regulated.The administration and the leaders in both the House and Senate wouldn’t even let some of the more courageous amendments reach the floor for a vote or, as with Brown Kaufman, they let it through only after lobbying against it and be assured that it stood no chance of getting into their bills.
Take the Collins Amendment, which would have forced bank holding companies and non-bank financial companies to have the same minimum risked-based capital requirement guidelines as the FDIC-insured deposit banks.In other words, Collins wanted the new risk-based capital requirements to serve as a “floor” for all financial businesses.Without that kind of cross-harnessing, the bonus-driven Vegas-style wagering will simply move to another part of the holding company or another section of the financial world and could still end up threatening government-insured banking institutions. And we know what happens when those institutions are in peril. Anyone in the mood for another taxpayer bailout?Tim Geithner, the man who has been most liberal with taxpayer money, begs to differ.He argues that setting that kind of baseline is too restrictive and that foreign banks would get a jump on the U.S. banks.Leave it to the discretion of our regulators, the administration has been telling the senators.Never mind that that same regulatory discretion has cost U.S. taxpayers the better part of a trillion dollars in bailouts, credit guarantees, and cheap money to Wall Street and the big banks.What it has cost us in lost jobs and economic productivity may never be tallied.
With Geithner and Summers designing its strategy, the Obama administration has refused to challenge the power of the big money men and the mega-banks.That would require breaking up the biggest of these leviathans to reduce their influence over the economy and the policies of the nation.It would require forcing all financial institutions to significantly boost their risk-based capital reserves.It would require the separation of the traditional banking businesses that benefit much of the economy from the proprietary betting businesses that do little but create profits for bankers, traders, fund managers and their wealthy investors.
When Mr. Obama sits at his desk to sign the final bill into law, our biggest bankers will be relieved that after all this hue and cry, things will finally return to business as usual.