Financial Reform: Now the real work begins
So it looks like we have a reform bill
that will pass and be signed into law. And in many ways, it’s a pretty good one. It’s curbing what banks can do with their money (i.e., restricting derivatives trading, etc.), it’s guaranteeing consumers a new order of protection (i.e., no more prepayment penalties on mortgages, disincentives for brokers to foist lousy mortgage on you, access to credit scores). It’s using carrots as well as sticks — e.g., there are financial incentives, in the form of lower requirements for risk-retention capital, for banks to issue high-quality mortgages rather than subprime loans. And it’s strengthening oversight in general.
But there’s the rub.
Once that bill passes, it will be up to regulators to interpret and enforce it. And the lobbyists who weren’t able to derail the letter of the bill are now gearing up to derail the spirit.
Here are a couple examples from the Times:
The much-debated prohibition on banks investing their own money, for example, leaves it up to regulators to set the exact boundaries. Lobbyists for Goldman Sachs, Citigroup and other large banks already are pressing to exclude some kinds of lucrative trading from that definition.
Regulators are charged with deciding how much money banks have to set aside against unexpected losses, so the Financial Services Roundtable, which represents large financial companies, and other banking groups have been making a case to the regulators that squeezing too hard would hurt the economy.
Scary stuff. On the one hand, I take heart that they couldn’t scuttle the bill altogether (although I do tip my hat in ironic and rueful respect to the Detroit lobbyist(s) who managed to get auto dealers exempted from new financial rules). On the other, I can’t help but worry that some of the behind-closed-doors discussions involved Congressfolk reassuring their big financial industry supporters, telling them not to worry about the bill, it’s for political show, we’ll take care of you when it comes time to actually enforce it.
I have worries about the consumer protection part, too. There’s a provision that says that tighter regulations must be run by a panel of small business reps, to be sure the proposed rules don’t accidentally adversely impact small businesses. It is one thing to listen to lobbyists and take their concerns to heart; it is quite another to write lobbying into law. I’d be much happier if the government made sure that at least one of the new regulators had small-business experience.
There are other worrisome things in the bill, too, of course. I agree with Gretchen Morgenson’s take:
For example, the bill still lets the Office of the Comptroller of the Currency bar state consumer protections where no federal safeguards exist. This is a problem that was well known during the mortgage mania when the comptroller’s office beat back efforts by state authorities to curtail predatory lending.
And Dodd-Frank inexplicably exempts loans provided by auto dealers from the bureau’s oversight. This is as benighted as exempting loans underwritten by mortgage brokers.
Finally, the Financial Stability Oversight Council, the überregulator to be led by the Treasury secretary and made up of top financial regulators, can override the consumer protection bureau’s rules. If the council says a rule threatens the soundness or stability of the financial system, it can be revoked.
That last one is particularly scary — any financial system that can be destabilized by a consumer-protection rule has got to be rejiggered immediately, whether that rule is passed or not.
And my jury’s out on the annuities issue. No question they need some intervention. Lots of people invest in those because, even though they don’t pay big, they seem pretty safe. But they involve huge penalties for early withdrawal of money, so they really aren’t a great idea for elderly folks. Yet old folks make up a huge proportion of annuity holders, probably because talented snakeoil salesmen persuaded them to buy.
The new bill deems annuities to be insurance products, and thus not subject to SEC regulation. That has some consumer advocates crying foul. I don’t have an opinion…yet. The SEC’s track record hasn’t been wonderful, maybe the insurance commission will do a better job. What’s important is that someone will be on the case!
In fact, as I said up top, now the real work begins. The bank lobbies will do their best to turn this nylon purse back into a sow’s ear; here’s hoping Washington holds firm and continues to aim for silk. All told, to borrow a line from BP, it’s a start.