Obama Regulatory Reform Plan - Updated: Others Weigh In, Big Business Opposes Consumer Protection

See update below:

Today Yesterday was the big day to get the details of the Obama administration's financial regulatory reform proposal.

The actual Report is uploaded to EP and available here.

Some tidbits I noticed:

  • We propose to enhance the Federal Reserve’s authority over market infrastructure to reduce the potential for contagion among financial firms and markets. (p. 7, 2nd para)
  • New agency, modeled on, but not FDIC, for non-financial institutions and holding companies.(p. 8, para. 7)
  • New Financial Oversight Council reports to the Federal Reserve (p. 9, I.a.1)
  • Repeal of just reporting of Gramm-Leach-Bliley Act (?) (p. 11, para 1)
  • YAA(yet another agency) National Bank Supervisor created
  • Consolidated Institution Regulation moved to....Federal Reserve
  • YAA National Insurance Regulator (opposite of what was reported yesterday)
  • Determine fate of Freddie Mac/Fannie Mae by 2011
  • YAA Consumer Financial Protection Agency

My first impressions are power consolidation to the Federal Reserve and U.S. Treasury.

With Larry Summers in the mix it's no surprise we cannot get Glass-Steagall reinstated.

It's an 85 page document, if others see a detail that pops out at them, write it in a comment and I will update this post.

The New York Times put the document into searchable web form, but it doesn't load consistently so the top copy is locally hosted.

The U.S. Treasury link for me gave an invalid site error.


Firstly our lovely screw the middle class U.S. Chamber of Commerce, of course opposes the proposed Consumer Financial Protection Agency:

Yesterday, the banking lobby voiced its displeasure with the idea of a new agency, and advocated simply relying on the same regulators that let the house burn down in the first place.

Here is a sampling of what the other economic bloggers are finding with the new Financial Reform Proposals:

Baseline Scenario

Too Big to Fail Politicially:

The issue was definitely not that banks and nonbanks could fail in general. We’re good at handling some kinds of financial failure. The problem was: a relatively small number of troubled banks were so large that their failure could imperil both our financial system and the world economy. And – at least in the view of Treasury – these banks were so large that they couldn’t be taken over in a normal FDIC-type receivership. (The notion that the government lacked legal authority to act is smokescreen; please tell me which statute authorized the removal of Rick Waggoner from GM.)

But instead of defining this core problem, explaining its origins, emphasizing the dangers, and addressing it directly, what do we get in yesterday’s 101 pages of regulatory reform proposals?

Naked Capitalism

A More Comprehensive Look at Obama's Reforms:

My initial reaction, therefore, was largely positive. However, upon further reflection, it is clear this is a political document more than a regulatory one. The white paper is a govern by consensus product about which I have grave reservations. There is much to like about the white paper, but also much to question. As a result, I see no need to rush ahead and enact sweeping legislation and reform before the full measure of the financial crisis has been felt and the implications of regulatory lapses is known.

Firedog Lake

Obama's Financial Overhaul is More like a Tune Up:

So, now we officially know. After the federal government lavished $13 trillion worth of federal subsidies on the banks to keep the financial system from self-destructing, the Obama administration released details of its new ‘rules of the road’ financial regulations today.

The much pre-publicized white paper was supposed to contain the most sweeping overhaul of the financial system since the 1930s. But, unfortunately, Obama is not FDR.

FDR took on Wall Street full-force in 1933. His New Deal included the Glass Steagall Act, which separated banks into consumer (or commercial bank) and speculator (or investment bank) entities. Only the commercial banks, relegated to conventional, ‘boring’ activities, got federal backing. His reforms also allowed for independent audits of the banking system to ensure financial soundness (as opposed to taking just their word for it, which is what Geithner’s stress tests did) and established the Home Owners’ Loan Corporation to provide mortgage money to people at risk of foreclosure.

Obama’s plans didn’t even come close. They accepted the banking landscape, with its giant, complex firms, as a given, and went from there. To be fair, certain items like enhanced issuer accountability for loans and securitized products, greater capital requirements for banks, and relegating certain derivatives to exchanges, are useful tune-ups of the system. But, giving the Fed more power, creating an additional layer of bureaucracy through the 'Financial Services Oversight Council,' and allowing the biggest Wall Street players to maintain their status and size, is not reform. It’s more of the risky same.

The Big Picture

Obama Reform Plan Fails to Fix What is Broken:

The initial read on the Obama Regulatory plan was an enormous disappointment. Both supporters and critics who expected him to take a hard turn to the Left have been left either surprised or disappointed, depending upon their leanings.

To the pragmatic center, including your humble blogger, what stands out is the number of half measures and omitted actions that were viewed as necessary to prevent a replay.

The Ritholtz piece goes into what should be in the proposal, in other words policy recommendations.

The Market Ticker

Obama's Financial Regulatory Reform goes through the summary line by line (follow along here) and critiques. I quote a point I have not heard much about: The Federal Reserve Act, section 14:

Finally, there are the items that are just flat-out missing. Most-glaring among them is the lack of a ban on off-balance-sheet vehicles such as conduits and SIVs. If there is one thing that ENRON taught us it is that these vehicles are the hiding places for fraud, abuse, and mis-marked assets where investors, auditors and regulators cannot easily find them.

Bluntly put these loopholes must be closed and off-balance-sheet vehicles prohibited outright: if you have an economic interest in something, it must be consolidated on your balance sheet so that both auditors and investors know what you're holding, how much you're holding, and the potential impact on your firm's finances from that holding.

I suggest reading all of the above economics blogs links on this one. My 2¢ is this is a glorified power grab by the Federal Reserve, executive branch and U.S. Treasury.

Senate Banking Committee - On the Federal Reserve Being Top Regulator

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No hint of FDR in overhaul

The reviews are coming in, and they are generally bad.

Rather, the Obama plan is little more than an attempt to stick some new regulatory fingers into a very leaky financial dam rather than rebuild the dam itself. Without question, the latter would be more difficult, more contentious and probably more expensive. But it would also have more lasting value.

For instance, there is no mention of regulating the discredited rating agencies. There is also to mention of breaking up the banks that are "too big to fail", and the plans on derivatives are very weak.

Everywhere you look in the plan, you see the same thing: additional regulation on the margin, but nothing that amounts to a true overhaul. The new bank supervisor, for instance, is really nothing more than two smaller agencies combined into one. The plans calls for new regulations aimed at the ratings agencies, but offers nothing that would suggest radical revamping.

I also don't like the idea of giving more power to the Fed. They've already proven they aren't up to the job.

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Most of the comments from financial sector lobbyists

were positive which is a very bad sign.

This proposal is already a compromise. The financial oligarchy won. They know that if this is what is initially proposed in congress that it will be watered down more during the process. In the end, nothing changes.

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Soros proposed alternative to Glass-Steagall

It looks like "too big to fail" will be with us until the next crisis. So, as a way to deal with them Soros proposed creating some sort of firewall between commercial banking and trading functions of a financial conglomerates. The trading function should be required to trade with only its money and no money from the commercial bank side.

I would take it a step further and say if a financial conglomerate gets zombified again then FDIC or who ever has the authority of taking over the commercial banking function and the rest goes by way of bankruptcy.

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here come the special interests

I was really shocked. Public Citizen, who is usually pretty accurate is promoting a group Americans for Financial Reform and this is just so amusing, I'm sorry. It's packed with the illegal alien lobby. That is La Raza, the ultimate corporate ethnic agenda company (they are Inc.) promoting illegal immigration, cheap labor, guest workers, you name it.

Then, ACORN is involved and if you haven't heard all of the issues there you haven't been breathing.

Ya gotta ask why the illegal alien lobby is trying to get involved in regulatory reform of the global financial system.

Sorry, but these cats don't acknowledge fundamental labor economics, try to stop anything that would curtail the flow of illegal labor into the country....

Here is a claim from their website:

Systemic discriminatory lending practices and residential segregation were major causes of the current financial crisis.

hmmmm, really? I thought it was giving out predatory loans to people who could not afford or qualify for the most part. So, isn't there a little two way street on this story?

Claiming this is the major cause? Well, we can't prove it but those foreclosure maps sure do correlate well with residential areas where the majority of the population are illegal immigrants.

Hmmm, are we supposed to now hand anyone who crosses the border illegally a new house with a fictional mortgage and a new car?

Seriously...there is this thing called derivatives and asset backed securities....

I guess that doesn't come into play, it's all about making sure more people who cannot afford a home can get one I guess.

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A potential simple answer

The end of the US$ as a global reserve currency means separate currency exchange rates for tangible goods vs straight currency exchange rates, or at least that's so according to Prof. Michael Hudson, which was the system before WWII.

I think the real reason La Raza is concerned is because this means a possible Banker's Tax on international money transfers.
Maximum jobs, not maximum profits.

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Maximum jobs, not maximum profits.

regulatory reform

has little to do with the U.S. being currently the reserve currency and the agenda, led by China to move to another reserve currency.

That has nothing to do with the current financial regulatory reforms, proposals, criticisms before Congress and being pushed by Summers, Geithner.

Remittances, sure but then USINPAC would be involved, huge remittances to India as well.

There is evidence, strong evidence that predatory lending skewed towards minorities...but that really isn't what this regulatory reform agenda is about, except a consumer financial protection agency, which is almost a separate issue beyond lobbyists trying to kill the idea of any financial consumer protection.

The real thrust of the financial regulatory reform has to do with OTC derivatives, the lack of credit rating agencies reform and more importantly, who is going to have the ultimate power and will they actual impose real reforms or just shuffle around the alphabet soup?

Of course some of this is going to be about stopping liar loans, subprime, option ARMs etc but it's more about structured finance, ABS, shadow banking system (or it should be).

So what are they even doing now being involved in this?

We know they will push for economic insanity over and over again, so why would they be interested in regulation of all derivatives, ABS and the restructured, giving more power to the Federal Reserve, not reinstating Glass-Stegall, etc.?

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