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Insiders’ Views on Financial Regulatory Reform

Posted by Larry Doyle on July 16, 2010 1:02 PM |

What do industry insiders think of the Financial Regulatory Reform package coming out of Washington? The Wall Street Journal provides a fascinating review in Fed Gets More Power, Responsibility. Let’s navigate.

1. Henry Paulson
Former Treasury secretary
Grade: Incomplete
The systemic-risk council, tougher Fed regulation over top financial institutions and new authority to wind down failing institutions are essential steps forward. Improving derivatives rules is a real positive. But the bill doesn’t tackle Fannie and Freddie, and there are too many unknowns as to how the regulations will be applied.
Will it help prevent another crisis?  

The new tools in this legislation will help mitigate and manage the next financial crisis, which is inevitable, probably within the next six to 10 years.

2. William Isaac
Former chairman of the FDIC
Grade: D
It doesn’t address the material issues or any of the major issues that led to the crisis. It would not have prevented the last crisis and it won’t prevent the next one.
What’s the biggest likely change? Because the bill does so little, it is hard for me to see it having a major change.
Will it help prevent another crisis? This bill would not have prevented the last crisis and will not prevent the next one. And the next one could be more serious.

3. Harvey Pitt
Former SEC chairman
Grade: “F” for failure or, at best, “I” for incomplete
It’s likely to take a badly broken regulatory system and make it markedly worse. This legislation fixes nothing, accomplishes nothing yet promises everything.
What’s the biggest likely change? Legal and consulting fees will skyrocket. This bill is truly the “Lawyers’ and Consultants’ Full Employment Act of 2010.” Most of the attempted reforms are poorly drafted, or contain loopholes so large that a fleet of trucks could get past the supposed barriers.

4. Gary Stern
Former president of the Minneapolis Federal Reserve Bank
Grade: B
It recognizes a lot of the issues and potentially puts in place actions and policies that should improve incentives and aid in financial stability in the long-run, but it’s by no means certain that that’s the way it’s going to play out.

5. Mark Zandi
Chief economist of Moody’s Analytics
Grade: B+
It hit all the right areas of concern, it just didn’t get everything as right as I would have liked, citing the lack of attention to Fannie Mae and Freddie Mac, and a bank tax among the missing pieces.

6. Eugene Ludwig
CEO of Promontory Financial Group, a consulting firm and former U.S. Comptroller of the Currency
Grade: Wait-and-see
Now that Congress has completed its work, the real impact of this legislation is in the hands of the federal regulators.
What’s the biggest likely change? More regulation will make it increasingly hard for smaller institutions to show a profit. We can expect considerable consolidation of the banking industry.
Will it help prevent another crisis? There are bound to be other tail risks that mature into crises at some point in the future.

7. Peter Wallison
Co-director of American Enterprise Institute’s financial policy studies program and former Reagan administration official
Grade: F
Will it help prevent another crisis? The bill does not respond at all to the causes of the financial crisis.

8. Nouriel Roubini
Chairman of Roubini Global Economics and professor of economics, Stern School of Business, NYU
Grade: C+
What’s the biggest likely change? The bill does not address the causes of the failure and collapse of securitization that triggered the financial crisis and that is keeping credit growth weak.
Will it help prevent another crisis? A botched financial regulation reform is planting the seeds of the next financial crisis: the too-big-to-fail problem has not been properly addressed; the Volcker rule has been massively diluted; restrictions on derivatives trading are not meaningful; the distortions in bankers’ compensation have not been addressed; Fannie and Freddie have not been reformed.

9. Bill Gross
Founder and co-CIO for PIMCO and portfolio manager of The PIMCO Total Return Fund, of the world’s largest mutual fund
Grade: D+
What’s the biggest likely change? Wall Street still owns Washington. Better to have appointed [Former Federal Reserve Chairman Paul] Volcker ‘Dictator-In-Chief’ than to have let the lobbyists dilute what needed to be done.

10. Simon Johnson
Ronald A. Kurtz Professor of Entrepreneurship at MIT Sloan School of Management, senior fellow at the Peterson Institute for International Economics, member of the Congressional Budget Office’s Panel of Economic Advisers
Grade: B. At MIT, this is the lowest passing grade.
What’s the biggest likely change: The biggest change is the Kanjorski Amendment, giving federal regulators for the first time the right and responsibility to break up big banks when they pose a “grave risk” to the financial system. This has the potential to really constrain what big banks do—and how large they can get.
Will it help prevent another crisis? The answer to this depends on how the powers under #2 are used, including how the regulators understand systemic risk and the extent to which Congress is able to provide effective oversight on the use of the Kanjorski powers. Realistically, we may need to go through another major financial disturbance before officials “get this” to a sufficient degree.

11. Raghuram Rajan
Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago’s Booth School of Business, economic adviser to the prime minister of India, former chief economist at the International Monetary Fund
Grade: Incomplete
There is a lot of critical detail that has to be fleshed out by the regulators (who did not do such a great job the last time around).

12. Douglas Elliott
Fellow, Economic Studies, Initiative on Business and Public Policy, The Brookings Institution
Grade: A- grading on a curve
It gets us two-thirds the way to where we ought to be, which is a good result for something this complex.

There is an extraordinary amount of sense on cents in these reviews. Where does this writer come out on this reform package? I mostly agree with Bill Gross. I would give it a D. Why? At the core, nothing has truly changed in the political and regulatory framework overseeing Wall Street. If anything with the Fed gaining powers, things may have gotten worse. I concur with Gross and wrote as much in March 2009 in my piece, How Wall Street Bought Washington.

With the titans of Wall Street still owning Washington, how can America ever truly feel confident that we will have the transparency necessary for real reform to occur? I highlighted in May 2009 and repeat today, Future Financial Regulation: Not a Question of Sufficiency, But of Transparency and Integrity.

While America at large and Wall Street specifically will feel some of the changes embedded in this reform package, I do not expect we will see the wholesale, fundamental changes we so desperately needed to avoid another economic crisis.

Wall Street will continue to take the money to the bank, and Washington will smile for the cameras; but for Americans at large, this experience and ongoing nightmare is one huge “opportunity lost.”


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  • Duke

    I find Harvey Pitt’s grade to be the most interesting. He is typically in the tank and for him ot give this reform package an F speaks volumes.

  • coe

    For my two cents, there are substantive errors of commission as well as omission in the bill that do not at all address the issues that triggered the crisis. First and foremost, the absence of any clarity on the future roles and risk management of the GSEs is the biggest glaring void. The central impact on housing, and hence the economy at large, is staggering – and clearly, the commercial banks and S&Ls are “all in”. Take that a step further and include the roles and risk management of the FHLB system in the same category. Second, the Congress whiffed on understanding and addressing the implications of derivatives – both interest rate risk, but also the insidious destructive power of over-leveraged and poorly structured credit synthetics. Third, they needed to direct a revamp of the accounting system in a way that promotes transparency, engenders balance sheet symmetry, and closes the loopholes on off-balance sheet leverage. And as far as what IS included, don’t get me started …2000 pages of a bill that spawns dozens of task force studies and depends on the wisdom of the Federal banking regulators to drill down and turn this mass of legislation into rules – hmmmm – I don’t think so…It’s no wonder the consultants and lawyers are feeling like they should pinch themselves…at the end of the day, the big banks will fill conference rooms with their substantive resources to first implement, and then arbitrage the new bill (can anyone remember the recent debacle with Sarbox?!)…while the regional and community banks will be less able to pay in a real sense for the cost of this legislation. Consolidation is inevitable as the small guys throw in the towel – somewhat ironically promoted by the FDIC as they try to snuggle up the damaged banks into the larger franchises – in essence promoting the creation of more “too big to fail” scenarios at the expense of community service – even as private equity firms and management groups plead for a shot at a public policy solution with little government cost. And, by the way, all the costs attendant with FinReg will be transfer priced to the customer – take a bow, Barney Frank…hit the bricks, Christopher Dodd, and as for the Administration and President, add this to the growing list of how this band of charlatans and academics are arrogantly trying to re-engineer America without a clue!

  • fred


    This was our chance to get it right. As I understand it, (I haven’t read the bill), we didn’t make the best of the moment.

    Three major issues were/are at the core of the problem, Glass-Stegall, FDIC, and security valuation accounting. We could have written the entire Fin Reg bill more effectively on one page:

    1. Declare yourself; hedge fund, prop trading desk, commercial banking, combination. You will be regulated by your most risky declaration.

    2. Only stand alone “plain vanilla” banks should recieve the FDIC backstop. Oversite FDIC.

    3. Required capital ratios should be consistent with the most aggressive risk being taken. Oversite Fed.

    4. As with depreciation, let banks choose either to use mark to market accounting or a mark to an industry standard model. If trading is to occur, even in the securitization process, mark to market should be required. Oversite Fed.

    5. If markets are illiquid, securities do not trade regularly, or trade on a centralized exchange, securities should be valued at .75, .50 or .25 cents on the dollar. Oversite Fed.

    6. All deposits (no cap) at FDIC insured banks should be covered. All AAA money market accts at non bank institutions covered under SPIC. Oversite FDIC, SPIC.

    7. Only securities issued by the Treasury, (sorry fannie, freddie, etc) will be backed by the full faith and credit of the US Gov’t. Oversite Treasury.

    Scott Brown where are you when we need you? let me introduce you to Paul Volcker.

    • fred

      8. All persons assuming fiduciary responsiblity, should be required to achieve a minimum level of competency, CFP, CFA. AAA is not an excuse for poor due diligence!

  • LD

    You make all too much sense here. If we could only simplify it as such for our Washington cronies.

    But, despite your sense on cents approach…NO SOUP FOR YOU!!

  • fred



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