President Obama rode into Manhattan today threatening to slay the dragon of Wall Street greed. As usual, theatrics were uppermost. He spoke at the Cooper Union where Abraham Lincoln famously argued against slavery and exhorted his colleagues to work together to resolve their differences, doing “nothing through passion and ill temper.” Would that Mr. Obama’s quest was as laudable or clearheaded. Instead, the president comes to Wall Street demanding passage of a 1,300 page financial reform bill that will almost certainly not prevent another financial meltdown, but that further clogs the regulatory gutters and that might boost the president’s approval ratings.
Think about this: taxpayers are currently funding a Financial Crisis Inquiry Commission, a bipartisan committee formed last year to investigate the causes of the financial meltdown. It is holding hearings, investigating the actions of financial execs and generally rooting around trying to find out what went wrong. Presumably, the effort is aimed at preventing a reoccurrence. The report from this group is due December 15. Wouldn’t it make sense to see what the committee’s finding are before pushing through a massive overhaul of our financial regulations?
No-- it’s all about politics. Senator Dodd has seized on financial regulatory reform like a terrier with a rat so eager is he to return to private life with his reputation patched up. Having been branded a “friend of Angelo” for having received a “generous” mortgage from disgraced Countrywide CEO Angelo Mozilo, Dodd is seeking redemption by ramming through a bill purporting to rein in the “excesses” of our financial firms. Oddly, the bill only mildly restricts the use of credit – the one measure that might actually prevent future bank failures. It doesn’t matter; Dodd wants a bill passed before he leaves office -- even if it is terrible. (The Obama administration has of course vetted the notion that any legislation is better than none at all with its health care bill.)
All you really need to know about Senator Chris Dodd’s financial regulation bill is that Blanche Lincoln is a pivotal player. Ms. Lincoln heads the Senate Agricultural Committee, a group that normally concerns itself with cotton prices and childhood nutrition. That she and her committee will overhaul the regulation of commodities and futures trading is proof positive of how outmoded and dysfunctional our financial oversight actually is. In short, the derivatives industry is no longer dominated by pig farmers.
When former Treasury Secretary Henry Paulson undertook to redo Wall Street regulations, one of the main thrusts was to simplify the oversight structure-- described by former Undersecretary David Nason as “knit together over the last 75 years…We currently have five federal depositary institution regulators, one federal securities regulator, one federal futures regulator and a state-based insurance regulatory system.” The Dodd bill does nothing to fix this mess, but in fact makes it worse.
Instead of streamlining the current labyrinth, the Dodd bill will add an entirely new unit – the Consumer Financial Protection Bureau, to be awkwardly housed inside the Fed. This piece of the puzzle is prized by Dodd et al because it rings Main Street’s bell. Who doesn’t want to be protected, after all? Unfortunately, some argue that it is Main Street that will be especially damaged by the CFPB, which may well restrict credit to entrepreneurs and small businesses. The law will give the bureau’s director ultimate authority to regulate consumer financial products – along with the FTC and states’ attorney generals. The upshot is almost certainly to be confusion and higher compliance costs. Former regulators from both sides of the aisle have lined up to oppose this change. The bill includes authority for a government appointed entity to decide what kinds of loans can be made by banks or car dealers, for example. If auto loans brought about the financial crisis, it’s news to me.
Not all of the bill is meaningless. Ms. Lincoln has proposed a variety of measures aimed at increasing the oversight of financial derivatives, some of which make sense. She proposes that derivatives transactions be traded on exchanges and settled through clearing houses in an effort to increase transparency in this large and potentially dangerous sector. This is a reasonable response to the growing risks of unregulated derivatives trading. She is also pushing to ban banks from trading in the sector; I doubt this will pass, because too much money is at stake and the provision is opposed by the Obama team.
Many problems – not only leverage limits but also the manner in which ratings firms are compensated and the conflicted roles of Fannie Mae and Freddie Mac – are not addressed in this bill. Consequently, Americans will not be surprised when a few years from now investors get hosed by yet another trading bubble. They suspect and will come to find out for certain that the bill so eagerly hawked by President Obama is more fluff over substance. Mr. Obama is walking a very, very fine line between assuaging the anti-Wall Street crowd and really annoying the financial institutions that gave him millions towards his last campaign. In navigating this treacherous path, he and his colleagues are putting forward a bill that does not get at the heart of the financial crisis, will cost billions, and that promotes uncertainty – just what we need as we emerge from the mess of the past three years. No wonder enthusiasm for government is at an all-time low.
Liz Peek is a financial, political and social columnist and frequent contributor to the Fox Forum. For more, visit LizPeek.com.
Fox Forum is on Twitter. Follow us @fxnopinion.