Wall Street Banks and Similar Special Interest Groups Frustrate Meaningful Financial Reform

 

The proposed financial reform bill would not make significant changes in the way Wall Street banks are regulated or consumers are protected, despite its lengthy 1,336 pages, according to a recent MSNBC article, “Financial reform diluted with bankers in the mix.” The reason why, as the article’s title suggests, is that the would-be target of reform are playing an influential role in shaping the legislation.

The bill proposed by Senate Banking Committee Chairman Christopher Dodd, D-Conn., the Restoring American Financial Stability Act of 2010, was supposed to regulate a “shadow” banking system (think of the “run” on the auction rate securities market “bank”), protect taxpayers from picking up the tab for another bank bailout and create a new agency to protect consumers from predatory lending.

But those reform goals face significant opposition. After a year of debate, the bill that emerged from the Banking Committee Monday was compromised with loopholes and watered-down provisions that undermined its principal goals, critics say.

“It doesn’t do any significant reform of the system that got us into this problem,” said William Isaac, chairman of the Federal Deposit Insurance Corp. during the Reagan administration. “All it does is shuffle the same powers around among the same agencies in a little different way. It really hasn’t changed anything.”

Critics complain that the current proposal fails to prevent banks from taking on too much risk, fails to protect consumers from predatory lenders, and fails to ensure that taxpayers will not be on the hook to bail them out again if they get in trouble.
Surprisingly, the proposal to establish an independent agency to protect consumers is being attacked. In a letter to Senator Dodd, consumer activist Ralph Nader said: “The Consumer Financial Protection Agency should be independent with strong leadership, not part of some other existing bank-indentured financial regulatory agency. Consumers need an independent agency that will serve their interests without being captured by the financial wheelers and dealers who put gouging for short-term profit before the legitimate interests of consumers. These wheelers and dealers have been expert in capturing the so-called bank regulators in Washington, DC.”

“It’s the consumer abuse and the lack of accountability and the lack of oversight of the lenders that got us into this mess,” said John Taylor, president of the National Community Reinvestment Coalition, which advocates for broader access to basic banking services. “Unfortunately, it looks like this agency is independent in name only.”

Bankers and Wall Street firms have so far succeeded in conforming the bill to their purposes. For example, the bill would require credit default swaps and other risky derivatives to be traded on regulated exchanges but creates a loophole for “customized” contracts. Hedge funds would have to register with the SEC, but other private pools of capital like private equity firms would be exempt.

Moreover, only the very largest banks ? roughly 100 of the 8,000 in the U.S. ? would be subject to regulation. Those with assets under $10 billion would be exempt. ??”The size of assets shouldn’t be the reason they’re not covered by a meaningful, strong consumer protection agency,” said Taylor.

One of the major goals of regulatory reform was to homogenize the patchwork of state and federal agency laws. “The history has been that many of these agencies haven’t been very effective and have had close relationships with the industry,” said Dean Baker, co-director of the Center for Economic and Policy Research, an economic policy research group. “And that’s a really big problem.”

Infighting among those agencies, chiefly the Fed, FDIC and the Office of the Comptroller of the Currency, along with intense lobbying by companies they regulate, has largely preserved the status quo. That leaves the existing patchwork of regulators ? and the potential for loopholes ? largely intact. Banks will still be regulated by, among others, the National Credit Union Administration and 50 separate state banking regulators. (The Office of Thrift Supervision will be eliminated and its functions folded into other bank regulators.)

While the banking system and its problems are complex, the reason we are not seeing the stringent reforms that are needed is pretty simple. Our political leaders are allowing those who created the problems to influence the legislative solution. Don’t they know that most Americans despise Wall Street and don’t want the fox to have any role in designing the henhouse?