Thursday, June 18, 2009

Sweeping Regulatory Overhall? Or Just Sweeping It Under the Rug?

Obama announced what many are calling landmark regulatory reform for the financial services industry.  Others are just shrugging their shoulders, wondering why shuffling some responsibilities around to the same group of regulatory bodies that completely missed the financial crisis is going to somehow avert the next crisis.  After all, Sarbanes Oxley, enacted after the off-balance sheet partnership shenanigans at Enron caused the implosion of the firm, did absolutely nothing to stop all of the off-balance sheet partnership shenanigans by Wall Street investment banks this time around.  Notice how the investment banks are somehow always in the mix?  They found the way around the last regulatory overhaul and they will find their way around the next.  There's just too much money at stake and they have no problem paying the fines AFTER the money has been made.

Here's a quick summary of some of the new powers granted to the various regulatory agencies recommended in the proposal:
  •  The Treasury Secretary (the position that provided such consistent leadership decisions in the past year as bailing out Bear, letting Lehman fail, giving AIG multiple billions so it could give the money to Goldman Sachs, bailing out Citigroup 2x? 3x?, then trying to get Sheila Bair canned for the audacity of attempting to stem foreclosures) will gain authority to seize systemically important non-bank institutions.  Mr. Geithner will also chair the "financial services oversight council."  A new "national bank supervisor" will regulate federally chartered depository institutions and sit within the Treasury.
  • The Fed (the esteemed institution that created not one but two financial bubbles not even ten years apart, that invented a host of new financing facilities which gave investment banks a huge subsidy allowing them to finance any kind of collateral, regardless of whether anyone can price it at interest rates far below market rates, reduced interest rates to zero, then started buying Treasuries from the Treasury department which is likely to cause yet another bubble at some point in the next few years) will gain new powers to identify risks in the financial system.  You know, risks like bubbles, and since the Fed usually causes them, they should definitely see the next one coming.
  • The SEC (allowed investment banks to increase leverage to 30-1, failed to notice the risks on the balance sheets of most major banks and investment banks which they were in charge of regulating, has yet to discipline any bank or investment bank for accounting fraud, blamed the financial crisis on short-sellers, missed a boatload of ponzi schemes, in particular a $65 billion one which whistle blowers repeatedly tried to warn about) is still tasked with protecting investors.  
  • The Comptroller of the Currency is out, but the former head, John Dugan, is now going to become the head of the new bank regulator that reports to the Treasury.  I have no idea what the Comptroller of the Currency was supposed to do during the financial crisis but I'm assuming Mr. Dugan will continue to do it at his new post within the Treasury.
  • The FDIC (which even I must admit has so far done a fairly decent job of winding down all of the failed banks and protecting depositors without causing a panic, although Ms. Bair likes to give a few more guarantees than I am comfortable with) will help unwind systemically important institutions when they fail but will only execute on orders from the Treasury.
  • The Office of Thrift Supervision is also kaput.  


mrbogue said...

Nice post - this is akin to hiring a reputed drunk/drug addict to fly an airplane or a convicted sex-offender to teach preschool.

I'm a little confused though, I thought we had green shoots all over the place, why do we need this overhaul again?

Mr Wrightwood said...

"Green shoots" to "aw, shoot"s in a few months.