Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

Without Transparency, Financial Regulatory Reform Gets a “D”

Posted by Larry Doyle on March 15, 2010 9:50 AM |

Bloomberg just provided a sneak peek at the Financial Regulatory Reform package to be proposed by Senator Chris Dodd (D-CT) this afternoon. What are some of the highlights and my thoughts? Let’s navigate.

From the top down, and without being overly cynical, I am extremely concerned that this proposed financial regulatory reform is a reshuffling of deck chairs with increased powers for both the Federal Reserve and U.S. Treasury. The very fears I voiced almost a year ago remain entrenched. What is the basis of my fear? The so-called reform is much more focused on the “sufficiency” of regulation of our financial industry and not nearly focused on the “transparency” of the regulation, the regulators, and the regulated.

Call me suspect.

What are the key highlights as reported by Bloomberg?

1. The Federal Reserve will be charged with oversight of the large money-center banks which dominate our financial landscape.  The oversight of the smaller, regional and community banks will move from the Federal Reserve’s regional offices to the Federal Deposit Insurance Commission (FDIC). Put this in the reshuffling of deck chairs.

2. The OTS (Office of Thrift Supervision) and OCC (Office of the Comptroller of the Currency) will merge. This merger is an attempt to eliminate the ability of certain institutions to accomplish what is known as “regulatory arbitrage,” that is, shop around and effectively negotiate for the most optimal regulatory rulings. In my opinion, the overall effectiveness of this move will only be determined by how aggressive the management of the merged regulator is in promoting transparency. Do not think for a second that the merged entity might not be one layer of regulation simply placed upon another. My overall take is to put this component of the proposed reform in the “incomplete” category.

3. The newly proposed Consumer Financial Protection Agency, which will be the new entity to protect the American consumer from the predatory nature of the financial industry, will be housed within . . . the Federal Reserve. NOT GOOD. The Federal Reserve did have oversight of those entities which originated and underwrote predatory mortgages and other predatory consumer loans, so why is this agency and authority remaining under its domain? The Wall Street-Washington incestuous relationship certainly will not be exposed with this development.

2:40pm Senator Dodd just finished presenting his proposed reform. In his comments, he highlighted that this CFPA would be largely independent and that its director would be appointed by the President while it merely ‘rents space’ from the Fed. If this is not a load of crap I do not know what is. To think that the CFPA will be housed within the Fed but will maintain its independence takes naivete to an entirely new level.

4. The U.S. Treasury will head a Systemic Risk Committee charged with overseeing and ultimately unwinding firms as need be and if desired. With this development, Washington will try to sell America on the premise that there are no longer any firms which are “too big to fail.” Don’t believe it. The large banks have only gotten larger and more entrenched as a result of this economic crisis.

I have very mixed feelings about this systemic risk authority. On one hand, if existing regulators charged with monitoring the leverage within the financial system only did their job, this committee would likely not even be necessary. I would only wish that those voting on this aspect of the reform would HAMMER the point home that the SEC and FINRA FAILED in their charge to monitor Wall Street institutions. The failure within those institutions and necessary changes to those institutions are not even broached in the reform.

2:40 pm Perhaps they are in the fine print but they deserve widespread exposure.

I repeat my assertion, how can America accept Financial Regulatory Reform with no mention of changes within the Financial Industry Regulatory Authority? Wall Street owns FINRA. That should change.

5. American investors are thrown a bone in terms of being allowed to vote on “say on pay” within financial institutions and proposing new board members. Long overdue to break the stranglehold current management has held in stacking boards and ultimate control of these firms. Will it be effective? Time will tell, but this is a good development as long as it can be effectively implemented.

6. Where is the transparency across the entire derivatives markets? Where is the Volcker Rule? I would expect Wall Street to throw Washington a few morsels on these key fronts while truly beating the core of these initiatives like a drum.

What is my overall grade of this proposed reform? D

I do not view this proposed reform as truly exposing and changing the deeply entrenched incestuous relationship between Wall Street and Washington, despite what pundits and analysts may say.

What needs to happen? In a word, TRANSPARENCY. Very simple and concise delivery as to the rules of the road so consumers and investors can protect themselves. I honestly do not think that will happen under this proposal.

Many people might say with my critique I am not being cognizant of how Washington operates in passing legislation. I would respond that the Washington process is part of the problem. Where is the media to expose the Wall Street-Washington incest?

How should consumers and investors respond and react? Remain on guard . . . CAVEAT EMPTOR.

What do you think?

LD

Related Sense on Cents Commentary

Future Financial Regulation: Not a Question of Sufficiency, But of Transparency and Integrity; (May 18, 2009)

Please subscribe to all my work via e-mail, an RSS feed, on Twitter, or Facebook. Do a friend a favor and get them to subscribe as well. Thanks!!

  • Patriot

    Sounds like “the more things change the more they stay the same.”

  • exfedexaminer

    March 17, 2010

    To: MEMBERS OF THE SENATE AND HOUSE BANKING COMMITTEES AND TO ALL SENATORS AND REPRESENTATIVES.

    URGENT: TAKE THE FEDERAL RESERVE SYSTEM OUT OF FEDERAL BANK SUPERVISION AND DO NOT MERGE THE OTS INTO THE OCC OR CEASE EXISTENCE OF THE THRIFT CHARTER OR THE TRIFT BANK HOLDING COMPANY FORM OF OWNERSHIP

    I first emailed this plea to various members of the House and Senate Banking Committees in April 2008. I emailed the same plea on or about March 14, 2010, and followed up with a phone call to each committee member’s office expressing the same plea on March 15, 2010. AND WHAT DID I SEE RELEASED BY SENATOR DODD? A BILL THAT GIVES THE FEDERAL RESERVE SYSTEM MORE POWER. ARE YOU SENATORS NUTS OR DO YOU JUST NOT GET IT?

    I worked as a bank examiner. After serving in numerous capacities, I can credibly tell you that the Federal Reserve System (Fed), its 12 Reserve Banks and the Board of Governors, should NOT be involved in bank regulation and, at the same time, engaged in setting monetary policy. This inherent conflict of interest is the reason we are in the banking crises that we are in today. MONETARY POLICY AND BANK SUPERVISION CANNOT BE DONE TOGETHER BY THE SAME AGENCY. LET ME REPEAT. IT’S A BLATANT CONFLICT OF INTEREST!

    The previous Fed chairman continually lowered interest rates, promoted the housing boom by encouraging the use of exotic mortgage products, and refused to write regulations to address issues related to the inherent risks associated with exotic mortgage products. As a result, no bank examiner, Federal or State, in his or her right mind could or would dare do anything substantive to hinder the subprime mortgage explosion that ensued. THIS IS THE WAY IT REALLY WORKS IN REAL LIFE, REALLY! YOU GUYS DON’T GET IT. YOU SET UP THERE AND LISTEN TO THE FED CHAIRMAN AND FED GOVERNORS BLOW SMOKE UP YOUR COLLECTIVE DRESSES AND BUY IT. EITHER YOU DON’T GET IT, YOU DON’T WANT TO GET IT, OR YOU’RE TOO LAZY TO TRY TO GET IT.

    NOW DODD AND THE REST OF YOU LAZY WASHINGTON INSIDERS WANT TO GIVE THE FED SUPERVISION OVER BANKS WITH $100 BILLION AND MORE IN ASSETS AND ALL BANK HOLDING COMPANIES WITH CONSOLIDTATED ASSETS OF $50 BILLION AND OVER? I worked as an examiner and I can tell you for a fact that the Fed has had supervision responsibility over bank holding companies of every size as a result of legislation passed by both the house and senate. They’ve had examination staff in bank holding companies with consolidated assets of $50 billion and over for years. THEY WERE ASLEEP AT THE SWITCH! Now you want to give them supervision over something they’ve always had supervision over? Are you nuts? You just don’t care about the facts? Don’t care about how things really are? Or are you Washington insiders who want to keep the good ole boys at the Fed in power because you’re too scared or lazy to do other wise?

    And you and Dodd want to reward the Fed by giving them supervision of banks with assets of $100 billion and over? They have never examined that size institution in their history. The OCC examiners our nation’s largest banks and has since the beginning of time. DO YOU NOT KNOW THAT? OR DO YOU SIMPLY NOT CARE? The Fed does not have enough examiners with the necessary skill sets to examine banks that large. The Fed examines small community state banks. DO YOU NOT REALIZE THAT? WHY WOULD GIVE THE FED THE BIGGEST BANKS TO SUPERVISE WHEN THEY HAVEN’T THE RESOURCES TO DO SO EFFECTIVELY? THAT’S THE OCC’S SPECIALTY. DO YOU NOT KNOW THAT?

    The Fed chairman stated, as every past chairman has, in testimony before a house subcommittee on March 17 that the Fed needs supervisory oversight over small state member banks too in order to establish smart monetary policy. BULL CRAP! The Fed chairman, the governors or their staff do not use data from bank exams or examiners for anything. They use date provided by economists on a macro level. Economists think bank examiners are below their level of esteem and would never as examiners for data in order to establish economic policy. IT DOESN’T HAPPEN IN REAL LIFE? BUT YOU GUYS KEEP BUYING THAT TIRED LIE YEAR AFTER YEAR. If that were true, the Fed Chairman and Paulson wouldn’t have run over to a closed session of congress in the middle of the night in early 2008 with the sudden realization that the our country and the rest of the industrialized countries were on the brink of a great depression. In fact, both of those clowns kept telling the public that everything was fine, the fundamentals of the economy were strong and that we had reached a bottom.

    AS A BANK EXAMINER, I AND MY COLLEAGUES KNEW FOR OVER A YEASR PRIOR TO THAT EMBARRASSING MEETING WITH YOU THAT THE ECONOMY WAS NOT FINE. NO ONE AT THE FED KNEW BECAUSE THEY DO NOT USE BANK EXAMINATION OR BANK EXAMINER DATA OR IMPUT! THAT’S HOW IT REALLY IS. THAT’S REALITY. DO YOU NOT GET IT?

    DO YOU NOT ALSO SEE THE CONFLICT OF INTEREST THAT THE FED FACES DUE TO TRYING TO SUPERVISE BANKS AND SET MONETARY POLICY? I DON’T CARE WHAT OTHER COUNTRY OR COUNTRIES ALLOW THEIR CENTRAL BANK TO DO BOTH, IT’S A CONFLICE TO INTEREST! DO YOU NOT GET IT?

    CORRECT THIS CONFLIT NOW. DON’T GIVE THE FED POWER OVER BANKS THEY HAVE NO EXPERIENCE WITH. TAKE THEM OUT OF SUPERVISION. THEY COULDN ‘T EFFECTIVELY SUPERVISE BANK HOLDING COMPANIES. THEY HAD EXAMINERS IN LEHMAN BROTHERS AND EITHER COULDN’T UNDERSTAND THE ACCOUNTING FRAUD LEHMAN HAD GOING ON OR THEY CHOSE TO TRY TO SWEEP IT UNDER THE CARPET. THE LATTER IS MORE LIKELY BECAUSE THAT’S HOW FED EXAMINERS OPERATE IN MANY CASES INVOLVING HIGH PROFILE, OR LARGE COMPLEX FINANICAL ISNTITUTIONS WITH “POLICAL” CLOUT. THAT’S HOW THE FED WORKS IN REAL LIFE.

    There needs to be one single Federal Bank Regulator. However, if this cannot be agreed upon due to gridlock in both chambers then at least remove the Fed from all supervisory responsibilities and leave everything else as is. Leave the OTS, the OCC, the FDIC, and the States in their current supervisory roles. The consumer protection idea is sound, but any agency would be better at overseeing this vitally important responsibility than the Fed.

    DO NOT DO AWAY WITH THE THRIFT CHARTER, THRIFT HOLDING COMPANIES OR THE OTS. Because if you do, it will leave no option for large organizations to convert to a form of ownership that will allow for both regulatory oversight and for the organization to continue to operate in its present form and structure. And the OCC does not have the manpower or experience to supervise thrifts. You will disrupt the OCC, thrift operations, and stymie the mortgage industry, bringing it to a complete halt.

    Also, if the thrift charter and the thrift holding company were no longer available as options, what would or could have been down with Wall Street firms to bring them under the Federal Supervision umbrella? Nothing unless such organizations were forced to divest or breakup operating units simply to enable them to become bank holding companies under the BHC Act. If were to happen then those actions would have a serious detrimental impact on a firm’s customer base and it would result in a negative compounding affect on the nation’s economy.

    In addition, thrifts are charted to promote home ownership and mortgage lending. The thrift charter and importance will be of even greater benefit going forward. The banking industry will pull back from mortgage lending, and has done so already, by making lending standards more difficult to achieve. This will mean that thrifts will become the major player in rebuilding our economy which is heavily dependent upon mortgage lending and real estate construction. Do away with the thrift charter, the thrift holding company and the OTS and you have essentially guaranteed that the U.S. economy will never recover and that Federal regulatory oversight will become bogged down in confusion, become over taxed from a resource standpoint, and contribute to our economic demise.






Recent Posts


ECONOMIC ALL-STARS


Archives