Commentaries

Now raising intellectual capital

New US consumer body needs broad mandate

-

Securities regulators are famous for fighting the last war and not paying enough attention to the newest financial products that Wall Street banks are pushing.

The Securities and Exchange Commission, for instance, was still doling out fines for mutual fund market timing — a 2003 offense — up until last year. Yet the regulator played ostrich as the banks kicked it into overdrive in churning out risky mortgage-backed securities.

That’s why the new Consumer Financial Protection Agency the Obama administration wants to create must have a broad mandate and not be narrowly focused on mortgage abuse. But disturbingly, too much of the early discussion surrounding the proposed agency appears focused mainly on stamping out past excesses in the mortgage market.

Now there’s no disputing the need for a regulator to force banks to write mortgage documents in plain English.

Putting investors first

-

While the Obama administration’s financial overhaul plan falls short on a lot of big issues, it does get some of the smaller things right. One smart move by team Obama is a call for brokers to put clients first when making financial decisions.

The Wall Street Journal did a good job today in noting that one proposal buried in the Obama’s 88-page plan would change the legal standard of accountabilty for brokers. Right now, brokers are only required to put clients into investments that are “suitable” for them–a pretty squishy standard. But Team Obama would like to change this and require brokers to have a fidcuiary duty to their clients.

Obama treads lightly on Wall Street

-

President Obama, in a speech on the financial crisis at Georgetown University in April, spoke eloquently about the need to move away from a Wall Street-fueled “bubble and bust economy.” But Obama’s proposal for overhauling the financial regulatory system falls well short of his stated goal of making “sure such a crisis never happens again.”

In fact, another major crisis is all but certain if the administration’s plan is enacted as is. I can’t tell you when. Nor can I tell you which financial institutions will be hardest hit. But it will happen because Obama took the path of least resistance when it came to the thorny issue of handling financial institutions that are deemed too big to fail.

Regulation as will and idea

-

It is somewhat strange that a disgraced elected official has now repositioned himself as an expert commentator on financial regulation, but that is exactly what Eliot Spitzer, the former New York governor, has done.  His most compelling article for Slate to date is a critical look at the Obama administration’s proposed financial overhaul.

Regulators failed in the financial crisis not because they lacked the proper tools, Spitzer says,  but because they lacked the “will to use existing power.” 

Just say no to CDOs

-

Enough of tinkering around the edges, it’s time for tough reform. The Obama Administration’s plan to overhaul the regulation of the financial system doesn’t go far enough when it comes to the securitization market — a source of credit that both it and Wall Street see as vital to the future of consumer and commercial lending.

If the administration wants to ensure that the excesses seen during the credit boom don’t happen again, it should ban the repackaging of these securities into even more complicated debt structures like collateralized debt obligations.

No fix for the derivatives monster

-

It’s still not clear if the Obama administration has a plan for dealing with the derivatives monster, which is one of the biggest problems regulators must confront in dealing with the potential collpase of a “too big to fail” financial institution.

The administration’s financial regulatory reform package would give the FDIC, and in some cases the SEC, broad authority to transfer a firm’s derivatives book to a “bridge instititution” to avoid “termination of the contracts by the firm’s counterparties.” But that may be easier said then done.

Obama loves hedge funds

Photo
-

Matthew GoldsteinThe big winner in the Obama administration’s financial regulatory reform package is the beaten-up hedge fund industry.

Hedge funds get a particularly “light touch” when it comes to government oversight in the Obama plan. Essentially, the administration is calling for a reinstatment of a Securities and Exchange Commisison rules that requires managers to register with the agency as investment advisors.  The rule was overturned by the federal courts, but many large hedge funds remained registered with the SEC–even though they weren’t required to do so.

The people not in the room

-

President Obama says he wanted a “light touch” in his adminstration’s approach to regulatory reform. And he certainly appears to have gotten that, after a quick read of a draft copy of the administration’s 85-page “white paper.”

Much of the meat of the reform package has been known for quite a while and some of it–like the plan to create a new consumer financial products protection agency–is good. But too much of the reform proposal seems more aspirational than anything else. I stopped counting, but the word “should” appears throughout the text far too many times.

It’s time to audit the Fed

-

The centerpiece of the Obama administration’s long awaited financial regulatory reform package is to give more power to the Federal Reserve to oversee any financial institution deemed too big to fail.

Team Obama seems to have decided that the Fed should emerge as the premier financial regulator, even though it has just as much egg on its face as the much-maligned Securities and Exchange Commission for failing to blow the whistle on Wall Street’s excesses.

Really, a new type of rating will make a difference?

-

The Obama Administration’s expected to require rating agencies to differentiate the ratings it applies to corporate bonds and more complicated securities to give investors a heads up that some debt is not the same as others.  Wall Street, unsurprisingly is opposed to the idea, since it could sap demand out of the already lackluster securitization business. But, this all seems a bit silly. If investors need a different rating to let them know what they are investing in, they’ve hardly learned much from the debacle of the last two years.

  •