Sense on Cents

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)

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This entry was posted on Monday, March 15th, 2010 at 9:50 AM and is filed under General, regulation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.