More Regulatory Reform—This Time in Banking

by Dave Schuler on October 19, 2009

There’s another column today in which regulatory reform figures prominently. It’s Paul Krugman’s column on the still-floundering banking system:

The main thing for the time being is probably to do as much as possible to support job growth. With luck, this will produce a virtuous circle in which an improving economy strengthens the banks, which then become more willing to lend.

Beyond that, we desperately need to pass effective financial reform. For if we don’t, bankers will soon be taking even bigger risks than they did in the run-up to this crisis. After all, the lesson from the last few months has been very clear: When bankers gamble with other people’s money, it’s heads they win, tails the rest of us lose.

Interestingly, different commentators are looking at the White House’s reaction to the situation in banking and drawing opposite conclusions.

Yves Smith thinks all the talk of reform has been kabuki:

Dear readers, do you think the Adminstration’s supposed fury is sincere, or merely playing to the crowd? Actions speak louder than words. The Administration, ONLY because the public was rip-snorting mad, announced plans to have tougher reforms in June, with details of various measures coming over July and August. Many have been largely empty (grand promises like clawbacks, with no follow up of any substance, juxtaposed with the spectacle of the poor pay czar Kenneth Feinberg floundering with a hollow mandate). Worse, the supposedly substantive ones have been an utter joke. The “derivatives” (read credit default swaps) reform was misguided from the get-go. I was an early fan of the idea of putting them on exchanges, but I am now persuaded that that will never work (unlike real derivatives, you cannot have adequate initial margining. It would kill the product, hence you will have an inadequately capitalized exchange. And in the 1987 crash, the Merc was on the verge of failure, and if it had gone down, it would have taken down the NYSE, so exchange failures can propagate into related markets).

But not to worry, we won’t get that far, the Administration’s proposal had an industry-favoring loophole you could drive a truck through: only “standardized” contracts would trade on an exchange (or via a clearinghouse). So this reform was mere window dressing.

So why is the Administration so angry? It isn’t that there is no reform. There was never any intent to have real reform.

while Barry Ritholtz is openly optimistic:

Well, good news kids: It appears that the White House has had enough; They are finally beginning to push back against the banking lobby. Obama adviser Valerie Jarrett was quoted as saying “We are disappointed by the lobbying of anyone in the financial industry against regulatory reform.”

That is a very broad statement — in my read, it suggests a major change in policy is about to occur.

Even Larry Summers, the former hedge fund employee who has been way too friendly with Wall Street’s banks, may be finding religion.

Frankly, I’m concerned about the prospects. It may be understandable for the Secretary of the Treasury to be BFF’s with the CEO’s of the big New York banks but it certainly makes me wonder whether whatever reform emerges will be directed at helping the banking system or helping the bankers. And when you consider the different treatment that Bank of America and Wells Fargo appear to be getting from the New York banks it gives one pause.

I’m still waiting to hear what sort of regulations will be proposed that might actually have a chance of revivifying the banking system rather than pounding another nail into its coffin. Maybe someone can point me to an update. My intuition is that present situation wasn’t so much caused by a lack of regulation as by misregulation or dysregulation and a failure of enforcement. Bright, shiny, new regulations probably won’t do much to help that. I’m reminded of Ambrose Bierce’s definition of a conservative:

CONSERVATIVE, n. A statesman enamored of existing evils, as opposed to a Liberal, who wants to replace them with others.

Is the Obama Administration liberal or conservative?

{ 7 comments… read them below or add one }

Steve Verdon October 19, 2009 at 1:19 pm

Beyond that, we desperately need to pass effective financial reform. For if we don’t, bankers will soon be taking even bigger risks than they did in the run-up to this crisis.

Gee, could that be from the bail outs that so many progressives favored?

Even Larry Summers, the former hedge fund employee who has been way too friendly with Wall Street’s banks, may be finding religion.

Proof that optimism springs eternal.

Frankly, I’m concerned about the prospects. It may be understandable for the Secretary of the Treasury to be BFF’s with the CEO’s of the big New York banks but it certainly makes me wonder whether whatever reform emerges will be directed at helping the banking system or helping the bankers.

The bankers obviously. C’mon where are Summers and Geithner going to be looking for a new gig in 4 to 8 years?

And when you consider the different treatment that Bank of America and Wells Fargo appear to be getting from the New York banks it gives one pause.

Pause for what? To think that reform is indeed kabuki or will benefit the banks? Or pause the Summers, Obama, Geithner et. al. really want to push through meaningful reform….like the Baucus bill the Obama will gleefully sign and say, “See I reformed health care”? Or how about Sarbanes-Oxley? That sure did lots of good.

You know, I bet we have existing laws, rules and regulations that could be applied to the current situation. The problem with that is that it doesn’t allow for grandstanding by our glorious dear leaders. Instead we’ll get another layer of byzantine laws that in the end wont do squat. But hey, maybe I’m wrong and there really is a pony in there somewhere.

CONSERVATIVE, n. A statesman enamored of existing evils, as opposed to a Liberal, who wants to replace them with others.

Is the Obama Administration liberal or conservative?

I like Robert Higgs’ characterization best,

I don’t dispute that it [fiscal stimulus] has failed and that it will continue to do so, but my reasons for this judgment have nothing to do with partisanship, inasmuch as I loathe both parties equally — indeed, I don’t regard them as two parties at all, but only as two wings of a predatory one-party state.

steve October 19, 2009 at 5:28 pm

” You know, I bet we have existing laws, rules and regulations that could be applied to the current situation.”

And yet the banks, insurance guys and shadow bankers crashed the economy with the existing laws you bet we already have. What stops them from doing the same thing again? TBH, if I had no morals and a desire to be rich AND I was a banker, I would do the exact same stuff again knowing that I would be bailed out anyway. Even if I was not bailed out, I could make a ton of money before things crashed. Leverage ratios of 50 to 60 make things easier.

Steve

Steve Verdon October 19, 2009 at 7:39 pm

And yet the banks, insurance guys and shadow bankers crashed the economy with the existing laws you bet we already have. What stops them from doing the same thing again?

Nailing their asses to the wall using the existing laws. But we wont do that. We wont do that because Timmy G. and Larry S. wont be able to go back and get nice cush gigs working for Wall Street firms 1 day a week making millions.

steve October 19, 2009 at 8:32 pm

What laws do you think they broke? CDOs are legal. CDSs are legal. The 40:1 leverage ratios were made legal. The dont ask dont tell loans were legal. I have my doubts about Moody’s et. al., but so far there is nothing illegal there yet either. This is as close as i have seen so far.

http://www.mcclatchydc.com/227/story/77244.html

Steve

Steve Verdon October 20, 2009 at 10:06 am

steve,

IDK which laws were broken, but that doesn’t mean the position of TOBAL (There Oughta Be A Law) is right. I’m not a lawyer, nor am I legal expert i the field of finance. But we have so many laws and regulations against fraud, and prosecutors have become so adept at fitting laws to suit their needs when prosecuting a case, I’m sure they could find something. But they aren’t looking. That should be your first outrage. But it isn’t. Which is why I sit here bemused.

steve October 20, 2009 at 4:28 pm

I dont spend a lot of time being outraged. I am a little uncomfortable with prosecutors being able to use broadly written laws to selectively prosecute. While there is always some discretion on the part of the prosecutor, I would prefer things be a bit clearer.

Steve

Steve Verdon October 20, 2009 at 4:40 pm

You and Martha Stewart….

:p

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