Obama’s Financial Regulation Proposal: The Devil Is in the Details

Having read through the draft of President Obama’s financial regulatory proposal, my initial reaction is largely positive. He sets the right tone and says all of the right things. However, the devil is in the details and we will need to see how these firm up as these ideas become law. In my view, there are a number of likely turf fights which will result from this proposal which will present a challenge. Moreover, the changes do give the executive branch via the Treasury and the Federal Reserve more power, and it is unclear both whether this is wise and whether it will be acceptable to members of Congress.

The President begins his proposal by acknowledging this severe crisis, the worst since the Great Depression, has been a severe blow to ordinary Americans and their access to credit for homes, cars, education, and businesses. He then states that the ultimate cause lies decades in the past due to complacency stemming from the apparent resilience of the U.S. economy. To be sure, crises did occur, but they never penetrated Fortress America’s defenses. I see this as a veiled rebuke of the Greenspan Era (see my post “The US Economy 2008” for a similar take on how the damage to the U.S. economy made this crisis different). He also decries a lack of transparency and the looting of American consumers before summing up that we must act now.

The President then makes five overarching points:

1. Reforms must promote robust oversight and regulation. I see these points as an explicit separation of the two tenets of the de-regulation movement – oversight and regulation – into separate issues. I anticipate Obama will move to greater oversight, but still allow de-regulation to ensue largely as it had done before the crisis.
2. Reforms must remove the balkanization of regulatory agencies. This is where problems lie because the concentration of power lies with the Treasury and the Federal Reserve. The executive branch already has too much power in the U.S. Government and the Federal Reserve has fallen prey to cognitive regulatory capture, making it an unlikely choice for systemic risk regulator (which I have dubbed SiRR).
3. Reforms must protect consumers better. While this is a very necessary inclusion, let’s see how robust the actual measures are.
4. Reforms must address operational issues that tie regulators hands. This point is clearly inserted to absolve Paulson, Bernanke and Geithner of any responsibility for the collapse of Lehman Brothers and the resulting panic this collapse caused. Do not be fooled by this point, it serves no other purpose.
5. Reforms must be international. Yes. This is a must. We cannot stop at domestic reforms because much of the problem has been the globalized nature of finance and financial institutions. Companies like Deutsche Bank (DB), HSBC (HBC), Citigroup (C), UBS, and Santander (SAN) – to name a few – all have more significant operations outside of their country of domicile than domestically. I view this point as a call to other countries to institute similar reforms and to ready themselves for international cooperation in regulating finance going forward.

On the whole, this is a good effort. However, this is just a blueprint to set the tone for eventual action – much as Geithner’s bailout plan for a plan was merely a blueprint. In my view, this is positive because it means we can still debate many of these issues and affect change before legislation is enacted in order to ensure a robust yet market-oriented approach which limits concentration of power in one entity or branch of government.

Below is a copy of the President’s prepared remarks.

Obama’s Financial Sector Reform Proposal

Update: you will notice that point 2 gives new powers to the Treasury and the Fed, while point 4 absolves the leaders of those institutions of blame for the worst unforced error during the crisis. Clearly, point 4 is necessary if you have point 2.

Comments

[Mad Hedge F...:]

Details, details. Another day of financial reform debate. Another day of closing the barn door after the horses have bolted. Please stop scratching your fingernails on the chalkboard, will you? What has the market come to? The volatility index (VIX) spikes 7% in one day, and we only get a 187 point drop in the Dow. It’s getting so you can’t even get a decent crash going. Thank goodness I’m not a Master of the Universe anymore. Life in that industry is about to become incredibly boring.

Jun 17 02:00 PM

[Big Bubbette:]

How about just re-enacting the Glass-Steagall Act. Will this add thousands of new Federal employees and at least six to ten new Czars to oversee this for the Comrade In Chief? How does this fit in with the committments Obama made at the last G20 to sign up for control of the Financial Stability Board (FSB) giving foreign countries oversight of our countries enterprise?

"On FNC's Greta Van Susteren's program, author and columnist Dick Morris noted "literally from April 2nd of this year, that is, today, it's a whole new world of financial regulation in which, essentially, ALL of the U.S. regulatory bodies and ALL U.S. companies are put under international regulation, international supervision. It really amounts to a global economic government.

Called the Financial Stability Board (FSB), the pending international body's legislation -- which will of course override the US Constitution -- states: "We agree to a framework of internationally agreed upon high standards. We will set up a financial stability board with a strengthened mandate to extend regulation and oversight to all systemically important financial institutions, instruments and markets" -- including hedge funds, all -- anything that they decide is important to the system -- to endorse and implement tough new principles on paying (ph) compensation and to support sustainable compensation schemes and the corporate social responsibility of ALL firms." The international community will now be able to determine the salaries and compensation of us all."

www.hyscience.com/arch...

Jun 17 02:54 PM

[PastTense:]

Some of us have alternative ideas--like going back to the separation of commercial banking from investment banking.

Jun 17 02:56 PM

[David Ristau:]

Look. This is a dull situation because it just is something that won't even go into effect for a year at least. Between Iran, Iraq, Afghanistan, stimulating the economy, HEALTHCARE, and the climate...it just won't happen.

I like this segment from the article, "Financial Reregulation Long Way Off:"

With health care and climate control on their plates, it’s unlikely that any
regulatory bill will emerge this year. Indeed, as the negotiations over those two
issues heats up it’s not unreasonable to think that regulation might not get a
hearing at all.

Complicating the picture is the fact that whatever public pressure may have
existed for reform, has now pretty much dissipated as the crisis is perceived to
have ebbed. Yeah, this blog and all the others bloviate about it but in reality, the
general public got glassy-eyed when things were in crisis, and frankly it isn’t at the
top of their agendas. They feel like they have a lot of other things to worry about.
So, no votes to be gained, no rush on the part of Congress. It’s a simple equation.

Read more at theoxengroup.com/lindm...

Jun 17 04:08 PM

[dcb:]

dude, I usually enjoy your posts, bu you are getting to be cetin putting the same ones up over and over. not cool


On Jun 17 02:00 PM Mad Hedge Fund Trader wrote:

> Details, details. Another day of financial reform debate. Another
> day of closing the barn door after the horses have bolted. Please
> stop scratching your fingernails on the chalkboard, will you? What
> has the market come to? The volatility index (seekingalpha.com/symbo...)
> spikes 7% in one day, and we only get a 187 point drop in the Dow.
> It’s getting so you can’t even get a decent crash going. Thank goodness
> I’m not a Master of the Universe anymore. Life in that industry is
> about to become incredibly boring.

Jun 17 04:29 PM

[dcb:]

I would like to see it kept up in the public debate. I also think conditions will be getting worse despite the rise of consumer confidence. now that prices are starting to rise and jobs aren't appearing the public may have the stomach again for the debate soon.


On Jun 17 04:08 PM David Ristau wrote:

> Look. This is a dull situation because it just is something that
> won't even go into effect for a year at least. Between Iran, Iraq,
> Afghanistan, stimulating the economy, HEALTHCARE, and the climate...it
> just won't happen.
>
> I like this segment from the article, "Financial Reregulation Long
> Way Off:"
>
> With health care and climate control on their plates, it’s unlikely
> that any
> regulatory bill will emerge this year. Indeed, as the negotiations
> over those two
> issues heats up it’s not unreasonable to think that regulation might
> not get a
> hearing at all.
>
> Complicating the picture is the fact that whatever public pressure
> may have
> existed for reform, has now pretty much dissipated as the crisis
> is perceived to
> have ebbed. Yeah, this blog and all the others bloviate about it
> but in reality, the
> general public got glassy-eyed when things were in crisis, and frankly
> it isn’t at the
> top of their agendas. They feel like they have a lot of other things
> to worry about.
> So, no votes to be gained, no rush on the part of Congress. It’s
> a simple equation.
>
> Read more at theoxengroup.com/lindm...

Jun 17 04:33 PM

[dcb:]

I am not sure our government has shown the maturity to handle its own financial affairs and the financial affairs of this country. If it means less influence for the financial services industry as a lobby group it may not be a bad thing. Europe appears to be moving towards some real reform in my view, while we putter around and talk a lot accomplishing nothing.

when the Nazi's attempted to destroy the world they lost their government. when our financial system destroys the world they keep their bonus.


On Jun 17 02:54 PM Big Bubbette wrote:

> How about just re-enacting the Glass-Steagall Act. Will this add
> thousands of new Federal employees and at least six to ten new Czars
> to oversee this for the Comrade In Chief? How does this fit in with
> the committments Obama made at the last G20 to sign up for control
> of the Financial Stability Board (seekingalpha.com/symbo...)
> giving foreign countries oversight of our countries enterprise?<br/>
>
> "On FNC's Greta Van Susteren's program, author and columnist Dick
> Morris noted "literally from April 2nd of this year, that is, today,
> it's a whole new world of financial regulation in which, essentially,
> ALL of the U.S. regulatory bodies and ALL U.S. companies are put
> under international regulation, international supervision. It really
> amounts to a global economic government.
>
> Called the Financial Stability Board (seekingalpha.com/symbo...),
> the pending international body's legislation -- which will of course
> override the US Constitution -- states: "We agree to a framework
> of internationally agreed upon high standards. We will set up a financial
> stability board with a strengthened mandate to extend regulation
> and oversight to all systemically important financial institutions,
> instruments and markets" -- including hedge funds, all -- anything
> that they decide is important to the system -- to endorse and implement
> tough new principles on paying (ph) compensation and to support sustainable
> compensation schemes and the corporate social responsibility of ALL
> firms." The international community will now be able to determine
> the salaries and compensation of us all."
>
> www.hyscience.com/arch...
>
>

Jun 17 04:37 PM

[THofler:]

The author is clueless when it comes to point #5. The Euro's have been developing the Euro-wide Basel II regs for the last 12 years at least. THEY are not going to be taking any calls to arms from US. THEY will expect US to capitulate and adopt their supposedly meticulous work.

And Sec. Geithner has already signed-off on the raising of the Financial Stability Forum (advisory group) to the new level of Financial Stability Board (global systemic risk regulator).

While I understand the virtues of most developed nations using the same accounting and regulatory standards and systems, the problem is that Basel II is a complete mess and the FSB doesn't know diddly about risk.

Oh, by the way, the Obama proposed Consumer Protection Agency is incredibly stupid in that it gives immense regulatory powers to the new agency, many of which are in direct conflict with the Fed, and the agency is guaranteed to be hyper political from day one. If you like the idea of credit card rates that can't increased (in spite of defaults quadrupling) or zero down option ARM mortgages, then your going to LOVE the new CPA regulator.

Jun 18 02:05 AM

[sunnsea:]

This is simply our global creditors imposing discipline on us, the borrowers, for messing up and deceiving them for the past 30 years and for ignoring or repealing our own sound laws like Glass-Steagall. They are trying to keep us from going completely bankrupt. Bottomline: No more SUVs and 4X4 s for suburban cowboys!

Jun 18 11:36 AM

[Bruce Wayne:]

Obama's reform is not the most urgent issue at the moment, as eluded in earlier comments, however a sudden drop in the economy will rattle people enough to push this through without understanding the details.

Recent bankruptcies of Six Flags, Extended Stay Hotels and Eddie Bauer underscore that people are not out spending and the market continues to slide. However, a larger event is needed then these relatively small bankruptcies.

It will take a systemic problem to "rally the people" into this reform. Rising defaults for BoA, American Express and other consumer credit lenders combined with a drop in the commercial property market is a good start. Throw in the magnitude of the derivatives market and the current meeting in Russia between other large economic powers, a meeting which the US was shut out of, paint a bleak picture for the Q3.

Jun 18 12:52 PM