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The President's Financial Regulatory Reform Proposals: Too Much, Too Little, or Too Soon to Tell?

by Professor Stefan Padfield on June 18, 2009

in Banking & Finance Law,Business,Consumer Law,Government,Political,Securities Regulation,Stefan Padfield

Yesterday, the Obama administration unveiled its most recent proposals for financial regulatory reform, calling for "A New Foundation."  The proposals break down into five key objectives: (1) "Promote robust supervision and regulation of financial firms," including creation of a new "Financial Services Oversight Council of financial regulators to identify emerging systemic risks and improve interagency cooperation" and increased regulation of hedge funds; (2) "Establish comprehensive supervision of financial markets," including "[c]omprehensive regulation of all over-the-counter derivatives"; (3) "Protect consumers and investors from financial abuse," including creation of a new Consumer Financial Protection Agency and requiring public companies to "implement 'say on pay' rules, which require [non-binding] shareholder votes on executive compensation packages"; (4) "Provide the government with the tools it needs to manage financial crises," including increased governmental power to take over failing firms posing significant systemic risk; and (5) "Raise international regulatory standards and improve international cooperation."  As should be expected, early reactions span a wide spectrum.

Simon Johnson complains that the proposals don't go far enough.  He identifies the key issue underlying the recent financial crisis as being the existence of entities that had gotten "too big to fail."  But as far as addressing this issue, the new proposals provide "little reason to be encouraged."

The reform process appears to be have been captured at an early stage – by design the lobbyists were let into the executive branch's working, so we don't even get to have a transparent debate or to hear specious arguments about why we really need big banks. . . . In order to get to the point where you can reform like FDR, you first have to break the political power of the big banks, and that requires substantially reducing their economic power – the moment calls more for Teddy Roosevelt-type trustbusting, and it appears that is exactly what we will not get.

Meanwhile, Lawrence Cunningham describes the proposals as "exquisitely moderate and modest"–a "prudently simple set of ideas."  Finally, Larry Ribstein seems to lean to the other end of the spectrum in suggesting the proposals go too far, though he adds a most important qualifier:

First, we have to keep in mind that this isn't really a legislative package, but a kind of starting gun to let the intense lobbying begin. It will be interesting to compare the proposal to the sausage that emerges at the other end of the grinder.

My own initial take is that the majority of the proposals seem sensible, at least in theory.  Of course, the devil is in the details.  Ultimately, I agree with Prof. Ribstein that it is still too soon to tell how these proposals will fare.  Stay tuned.


The Reverend June 18, 2009 at 3:04 pm

I hate to be overly cynical…..but after the gamblers and paper shufflers recklessly gambled the future of America away….isn't it true that all the new money schemes that created the crisis are still being run each and every day.

Health care reform has been totally hijacked by Big Insurance and Big Pharma….and I have no doubt that Big Banks with their Big Bribe Money will be just as successful.

The only way to reform the crooks in America, and they are legion, is to eliminate the lobbying money. Hell will freeze over before that will ever happen.

Per Kurowski June 19, 2009 at 2:42 pm

They’ve left the rotten apple in the reform barrel though!

Though the proposed financial regulatory reform often speaks about more stringent capital requirements it still conserves the principle of “risk-based regulatory capital requirements” and by doing so the New Foundation unfortunately builds upon the most fundamental flaw of the current regulatory system.

Regulators have no business in trying to discriminate risks since by doing so they alter the risks and make it more difficult for the normal risk allocation mechanism in the markets to function.

Financial risk cannot only be managed by looking at the recipients of funds since those lending or investing the funds are also an integral part of the risk. High risks could be negligible risks when managed by the appropriate agents while perceived low risks could be the most dangerous ones if the fall in the wrong hands.

The recent crisis detonated because some plain vanilla (very simple and straight forward) and awfully badly awarded mortgages to the subprime sector managed to get dressed up as AAAs should attest to the previous. This crisis does not grow out of risky and speculative railroads in Argentina this crisis has its origins in financing the safest assets, houses, in supposedly the safest country, the US.

With this proposed financial regulatory reform I can only conclude that the regulators are dead set on digging us deeper in the hole we´re in.

Do you know that if a bank lends to a borrower that has been able to hustle up an AAA the bank is authorized to leverage itself 62.5 to 1?

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