More than one year after the financial collapse, Senate Banking Chair Christopher Dodd formally released a proposed financial reform bill, entitled “Restoring American Financial Stability.”
The bill intends to create three new independent agencies: the Consumer Financial Protection Agency, the Agency for Financial Stability and the Financial Institutions Regulatory Administration.
It intends to create a new Office of National Insurance at the Department of the Treasury and a new Office of Credit Rating and an Office of Investor Advocate at the Securities and Exchange Commission.
Many of the duties and authorities of the agencies are combined from other existing offices and agencies, especially the Federal Reserve Bank. Under the new bill, the Federal Reserve Bank would continue to manage monetary policy and be the lender of last resort, but it would lose many of its consumer and bank regulatory duties.
The New Authority
The new agencies will have authority over the Securities and Exchange Commission (SEC) in order to regulate derivatives and hedge funds. New SEC duties give the authority to examine credit rating agencies, disclose their methodologies and track record and deregister an agency.
There are also new proposals to regulate municipal securities advisors and dealers with enforcement through the SEC.
The bill provides for an annual assessment of the SEC, an apparent attempt to regulate the regulators, where an Investment Advisory Committee will watch over SEC practices and priorities along with a new Office of Investor Advocate.
There are more changes in corporate governance and shareholder rights and a page with the caption “Ending Too Big to Fail” describing new requirements for “limiting large, complex companies and preventing future bailouts.”
Is Now the Right Time to Regulate?
In 1998, the director of the Commodities Futures Trading Commission, a woman named Brooksley Born, argued derivatives should be regulated because banks were taking risks lending money to hedge funds to buy derivatives.
To shut her off, Congress passed legislation prohibiting the Commodity Futures Trading Commission from writing new rules to regulate derivatives.
According to former Federal Reserve Chair Alan Greenspan (as quoted in the Washington Post), “Regulation of derivative transactions that are privately negotiated by professionals is unnecessary.”
Apparently, Congress agreed with Alan Greenspan that professionals are infallible, but that was in 1998. They now think they are greedy and irrational and need to be controlled with new agencies and regulations.
The truth is that nothing has changed from the 1990′s or the 1930′s. Financial crises occur because banks only hold a fraction of deposit liabilities in reserve to pay for checks.
If banks make enough risky loans for things like derivatives that default, they will not be able to clear checks for account holders who need to make payments. Unless there is a bailout, business transactions will halt and the economy will collapse.
Congress Has the Power, But Does it Have the Will?
In the 1930′s, there were many gamblers who took risks and bought stocks with borrowed money. After many banks failed, Congress passed the National Banking Act of 1933 and the Securities and Exchange Act of 1934, which included Federal Reserve authority to set Margin Requirements: requirements that limit the percentage of borrowed funds to buy financial assets.
Margin requirements are still available for use as they have been since the 1930′s. If Congress thinks derivatives are not covered by Margin Requirements, a sentence or two of revision in the regulations would take care of it.
Perhaps a 1,100 page bill reflects a Congressional mania for grandiose solutions, but I have to wonder about their motivation.
Do they really want to regulate their friends on Wall Street? We will see.
About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com