So, Treasury Secretary Timothy F. Geithner and the Obama Administration have now made a proposal for financial regulatory reform. Clearly, such a proposal was very much needed. But the proposal that the U.S. Treasury has now presented is sorely off target. It is neither comprehensive enough, nor does it address the core problems that everyone on Wall Street knows exist. It merely tinkers on the margins.
Until the fundamental problems are addressed, all we have been given is a fig leaf. This is dangerous as it has the potential of lulling us into a false sense of complacency. We have been here before with smaller crisis (such as with the Long Term Capital fiasco) and nothing was learned. Let’s not repeat our mistakes.
One of the principal reasons for the current financial crisis was the gross failure of the existing regulatory institutions. President Obama himself openly acknowledged this when he announced his reform package. Regulatory reform has been very much needed for a long time and very little has been done to fix the problems that plague our financial institutions.
The Geithner plan calls for a massive expansion of the powers of the Federal Reserve. Without a doubt, of the financial regulators that are examining the banks, the Federal Reserve is the most sophisticated. But, this is off a very low base. The Fed’s regulators are too young, inexperienced, under compensated and hardly the best we can get in the financial markets.
Nor is it clear…
…that such powers should reside with this institution. There are very good arguments that the Fed should concentrate its attention on monetary policy. Consumer protection is not a subject that falls naturally into the Fed’s expertise. It is hard to see the Fed overseeing insurance companies, the enormous number of non-bank financial companies such as the hedge funds, private equity, corporations such as GE, American Express, the savings and loans, the mortgage companies, etc.
It has also been very clear that a fundamental reform of the rating agencies is sorely needed. What has been proposed is tepid at best. Their entire business model needs to be revamped. For one thing, they can’t continue to be paid by the companies they are rating- an obvious conflict of interest.
There is a proposal to create a new agency to, “protect the consumer.” But isn’t this what the entire system of financial regulation is supposed to do? Moreover, the new agency is merely a new agency to oversee the operations of two smaller agencies, hardly something that will inspire great confidence. It is just another layer of bureaucracy.
A much greater oversight of derivatives trading is very much needed. The new proposal offers up several measures. But what has been offered up is far short of the mark. The new proposal is that simple derivatives be traded on an open exchange. But, they already are. Simple derivatives were not the problem that caused the financial crisis. It was the customized derivatives, that are highly complex and mathematical, that helped get us into the current mess. Those derivative instruments cannot be traded on an exchange and everyone in the financial markets knows this.
Arguably, the various financial regulators (such as the CFTC, the OTS, the OCC, the FDIC, etc.) all need to be melded into one over arching regulatory agency. This would eliminate the differing regulatory philosophies, rivalries and the fierce competition that currently exists. It would also put an end to the proactive shopping around for the most favorable regulatory ruling.
And how about reexamining the responsibilities of the Securities and Exchange Commission, which regulates the securities market, and oversees futures trading? The SEC is the same agency that received written notices over a ten year span that Bernie Madoff was running a Ponzi scheme and did nothing about it.
The new Treasury proposal oddly suggests that the SEC and the CFTC should have joint responsibility for regulating derivatives. The proposal argues for “clear, unimpeded authority to police and prevent fraud, market manipulation and other market abuses.” It would authorize both the SEC and the CFTC in keeping with their respective missions, to impose record-keeping and reporting requirements on all such derivatives. Really? Two sets of reports will now be required as well as two regulatory rulings?
Merging regulatory agencies means dealing with the committee chairmen in the Congress who guard their turf with the greatest of zeal. But this means challenging the status quo, clearly something the White House is very reluctant to do.
If we are to have world class financial markets and if we are determined to ensure that we do not have another crisis like the one we are living through, serious change must occur. This package reflects two things. First, is reflects a fundamental lack of understanding for how the markets really works, which is why at least some private sector experience in the U.S. Treasury is much needed. But secondly, it reflects a rush to do too many things at once at the risk of not doing anything in a thorough manner.
