Regulatory 'Reform' is Prelude to Next Crisis
I base my opinion in part on the insights of a man who has worked through three major financial crises, former Chairman of the FDIC, William Isaac. In an interview earlier this week, Isaac says these reforms accomplish nothing but "rearranging boxes." I firmly agree.
The current regulatory system is broken. Period. Yet when you consider everything in the financial regulatory system that could have been overhauled, you see a lot left out of the current bill.
When you consider everything in the financial regulatory system that could have been overhauled, you see a lot left out.
The original reform bill presented by Senator Chris Dodd last November proposed a new financial institution regulatory authority. This would have been an independent agency headed by a board appointed by the President. For political reasons, the idea didn't get very far.
What we're ending up with, then, is a regulatory "overhaul" that includes the same agencies (minus the Office of Thrift Supervision), doing the same things that they've done for the past 40 years -- and why should we expect this system to give us different results? All this reform package will give us is more regulation (about 2,300 additional pages of rules for everyone), and smaller financial institutions will feel the most pressure. One ex-FDIC official, Christie Sciacca, says he won't be surprised if some of the smaller institutions just throw in the towel and sell or merge with bigger banks.
As for the average banking institution, the compliance yoke will be even heavier with all of these new rules. The compliance officer's job will expand tremendously, I fear, broadening the responsibilities to the point where the real regulatory matters that need constant attention (i.e. information security risks) might get pushed to a back burner.
Another area that isn't getting attention is the Securities and Exchange Commission. Now, here's an agency that hasn't exactly done a stellar job regulating its own industry. Heck, it couldn't even locate Bernie Madoff's $50 billion dollar Ponzi scheme, despite 10 years of a persistent whistleblower bringing it to the agency's attention.
The reform bill also doesn't touch the now nationalized Freddie Mac and Fannie Mae lending arms. Remember what got us into this last financial crisis? An overabundance of loose lending practices by a large part of the industry. If lending practices aren't part of the regulatory reform overhaul, we're headed for another crisis of BP oil spill proportions.
There are a few things that this reform bill should change -- the regulation of derivatives is good, to the extent that Congress is trying to regulate them.
The Consumer Financial Protection Agency may add some teeth to existing agencies in terms of curbing unfair practices in consumer loans and credit cards. But I see trouble in setting the examination for safety and soundness apart from consumer protections. Some banks may back out of consumer financing. Wells Fargo, for instance, has just announced it is no longer writing mortgages for anyone without stellar credit ratings. The new agency will add yet another layer of confusing regulation that institutions have to wade through.
Another piece Congress got right is the Volcker Rule. This will limit just how much banks can invest in private equity and hedge funds. Already some big banks are looking to sell their investment arms and hedge funds or spin them off into separate companies.
Yet, in balance, all I see ahead is the next wave of a financial crisis. How bad will it be? I've got to stand alongside Isaac's prediction: Tomorrow's crisis may well be worse than this one. Because of what we didn't do today.