Global financial regulatory reform falls apart

By Felix Salmon
January 28, 2010

Is financial reform shattering into so many different pieces that it’ll never become the strong, coherent, globally-unified project that it needs to be to get popular support and avoid regulatory arbitrage? I fear so.

For one thing, there are literally more representatives of Bill Clinton here in Davos than there are of Barack Obama. If the Obama administration is serious about its newest ideas for regulatory reform, especially the Volcker Rule, it would have made a great deal of sense to send Paul Volcker — or at the very least someone like Austan Goolsbee — to Davos, to try to get the rest of the world excited about it. But they didn’t.

And even the president himself doesn’t seem to wedded to it. Here’s the relevant bit of his address last night:

I am not interested in punishing banks. I’m interested in protecting our economy. A strong, healthy financial market makes it possible for businesses to access credit and create new jobs. It channels the savings of families into investments that raise incomes. But that can only happen if we guard against the same recklessness that nearly brought down our entire economy.

We need to make sure consumers and middle-class families have the information they need to make financial decisions. (Applause.) We can’t allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy.

Now, the House has already passed financial reform with many of these changes. (Applause.) And the lobbyists are trying to kill it. But we cannot let them win this fight. (Applause.) And if the bill that ends up on my desk does not meet the test of real reform, I will send it back until we get it right. We’ve got to get it right. (Applause.)

This is all so vague as to be meaningless; the one thing that’s for sure is that House has not passed financial reform with a Volcker Rule embedded — mainly because the Volcker Rule didn’t exist when the House was putting its bill together. Yet it seems that Obama is reasonably happy with the House bill in its present form.

What I’m worried about here, then, is that the Obama administration’s financial-reform proposals are being driven much more by domestic political calculus than by a coordinated international attempt to create a global financial system that is less leveraged and more stable than the one we’ve grown used to.

Obama proposed in his speech “that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat” — which is a good idea, and one I support, with strong echoes of the admirable Move Your Money campaign. (And, just like that campaign, I hope and trust that the concept of “community banks” will be expanded to include credit unions.) But this is a tactical move on the fiscal front, not a strategic one on the regulatory front. And my biggest fear right now — one reinforced both by Obama and by what I’m seeing in Davos — is that global financial regulatory policy is being constructed on an ad hoc, country-by-country basis. That doesn’t bode well for the future.


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Felix, doesn’t the current US reform package contain clauses that give the regulators discretion to implement things – like the Volcker rule – without legislation? That would speed things up. Though of course it begs the question whether the regulators would actually push through these rules.

I completely agree with your broader point though.

Posted by petertl | Report as abusive

The problem with the president is that he is afraid to upset he status quo of the Washington way of doing business. He came out with tough talk on regulating the financial industry–which I fully supported and still do.
Then the U.S. Supreme Court ruled in favor of giving businesses the right to voice their political views in the form of unlimitd conributions which–I believe–is why the president made this sudden about face.
If he does not go forward with the Volcker plan then it tells me he is not worth giving a second term. If he insists on pursuing that fooldardy healthcare reform (which I believe is a Clinton reform bearing Obamas name) that too would indicate that he is not worth a second term for then we can all be certain that he is not the “Kennedy” in the whitehouse but just another closet Clintonite!
I do not believe that when we voted for Obama were informed that we were really voting for Clinton.

Posted by IdiotSavant | Report as abusive

During the last year, whole world fight the recession by pouring the money in various sectors of economy. In the current year, the economy may see a lot of policies decisions taking the global view rather than the more attrective national view. The President Obama should take the global view in economic era. WTO will emerge as more relevent organisation to fight with the protectionist measures taken by different national governments. President Mr. Obama has indicated some protectionist measures within the framework of WTO.

Posted by rajayagarwal | Report as abusive

By the way GE/NBC supported OB he promised they would get Gov$ to built wind/solar and the medID system, now that that is falling apart , they will get a bone from this high speed train we don’t need!!! Supreme Court didn’t side with big/corp; under the Campaign reform rules if a company like GE owns a media outlet – NBC they can say anything anytime effectively by-passing all the “rules”. Tell me how this is fair. OBlame’ah is upset because this levels the playing field.( for better or worse)

Posted by grr | Report as abusive

How War-Dog(prezOB) makes changes.

Keeps and fights for Bush appointees .

fights to expand Bush’s “no child left behind”

Attempted to keep Bush’s “Road map to peace” on course (fails)

wants to extend the Bush tax cuts that he once opposed

Make Gov transparent by going behind closed doors bribing Union and house members (is that called bail out)

Troop surge, hmmm sound similar?

On and On bla bla bla

Continues to ruin our image aboard from Iran to China, now Indonesia is contemplating remove their “Barry” statue “he has done nothing for us or the world things have gotten worse”!

The list goes on………

I personally apologize for my own ignorance and lake of good judgment when we elected this guy.

Posted by grr | Report as abusive

The answer here is simple: Timothy Geithner is treasury secretary because Barack Obama has been thoroughly captured by the banking industry.

Posted by Matthew_Saroff | Report as abusive

Reinstate Glass-Steagall. Since 1999, the lack of segregation of financial responsibilites has made it difficult to prevent and detect fraud.

The man made disaster we refer to as the financial crisis of 2008 was brought about by derivative financial instruments with oil commodity prices as the underlying driver. We did not have a financial crisis until after oil prices collapsed between July 2008 and September 2008.

The Government’s reaction to the crisis was to throw out existing laws and norms in favor of a new centrally (the Fed) controlled economy. The concept was not fully developed and now no one is sure what direction we are headed. Global Socialism or Free Market Capitalism?

Posted by averagejoemoney | Report as abusive

You said it Matthew

Posted by grr | Report as abusive

“Reinstate Glass-Steagall”. After we see a firmer recovery (maybe). Oblame’ah unfortunately broke up a years worth of bipartisan work on regulatory reform with one “image boosting proposal” a surprise even to his own people! This a a very dynamic “world economy” unlike the 1920′s, perhaps we need a solution tailored more towards today economy. Geithner Bernanke – represent Oblame’ah’s “resistance to change”

Posted by grr | Report as abusive

averagejoe – I understand your point, but there is so much more. Fannie and Freddie, the housing market collapse, law and law-suits forcing banks to lend to minorities that statistically were not qualified!
Breaking news flash “Debt is our enemy”, and just today Oblame’ah and Congress want to spend another 1.9 trillion ?

Posted by grr | Report as abusive

From a broader perspective.

The number 2 economy has not been looked at here. Felix has interesting analysis that can be measured against the crisis if the number 2 economy should be downgraded. Their debt level is worse than the number 1 economy. Any one single adjustment at a global level could affect the house of cards called debt; National debt.

With out question there is a need for major reform. Before enacting one could hope to be in shallower water instead of this deep water we are in for there will those who will not be able to swim.

Lobbyist for the industry is a major power that needs to be reminded that this Global crisis rest on their shoulders. Was hoping to hear from World Leaders with one voice at Davos to the Banking industry that the importance of a framework of a plan from the industry that would insure the global community that they will reform to help protect economy’s they do business with.

Lobbyist with this industry are so powerful that no National Leader could survive in a battle with.

We need to be in shallow water before making any major reforms. Yet, a deadline from a unified voice would be required to the industry, “Put a plan together that would protect against a global crisis”.
China has now become the most influential and the banking industry in the free world is at your peril. There is to much at stake now.

Nothing is more important than keeping an eye on the number 2 economy. Like the US. The Banking industry has got look a little further down this road instead of reaping rewards today. There is to much distrust in Governments as a result of this crisis. The thought of losing the number 2 economy to the neighbor China will be a capitalist nightmare.

The powerful Lobbyist need to be reminded that it is only a mater of time to reform or face the consequences.

I believe Reuters coverage earlier noted that there was not expecting to be any real drama about change in Davos. Perhaps Flix was right about not having a more powerful US representative that would help set an agenda for reform. Perhaps the Administration is thinking of getting into shallow water first.

Watched Brazil during the late 70′s when they unable to pay the interest on their debt. Watched how a single voice from Brazil was labeled a “Leftist” when he spoke to the same forum as we see in Davos. Spoke of a formula of a “Ground Up” when building an economy. Contrary to what we adopted; “Regonomics”. That lone voice became the leader of Brazil economic success.

Posted by thomas7343 | Report as abusive

If Eliot Ness had said, “I am not interested in punishing gangsters, just in keeping everybody sober…” the results could not have been less, shall we say, popular. Or, in the end, meaningful.

Everybody knows you have to be drunk to appreciate Davos.

Posted by HBC | Report as abusive