Wall Street needs to return to the basic principles of regulation

By Damon Silvers
April 27, 2010

– Damon Silvers is director of policy and special counsel for AFL-CIO. The views expressed are his own. —

The Wall Street Accountability Act is a conservative piece of legislation.  It is a return to the basic principles of financial regulation that helped our country and the world avoid major financial crises from the 1930’s to the 1980’s, principles that our country turned away from in the name of free market fundamentalism and under pressure from the political power of the financial sector itself.

While the legislation is long and detailed, the principles of financial regulation it embodies are simple and straightforward.

1)    Insurance should only be sold to parties that have something to insure, and a company that sells insurance should have to put capital aside to back up their promise (derivatives regulation).
2)    If you are buying and selling stocks and bonds and other investments on behalf of other people, you have to be loyal to your customers and provide them with enough information for them to oversee what you are doing (hedge fund regulation).
3)    A stable banking system requires deposit insurance, and insured institutions must be regulated to limit their leverage and keep them away from highly risky activity (systemic risk regulation and the Volcker rule).
4)    If an insured institution fails, it must be shut down in a way that protects both its depositors and the financial system, but that wipes out the management, stockholders and long term creditors to the extent the insured institution’s liabilities exceed its assets (resolution authority).
5)    You can’t ask a regulator to at the same time ensure banks are financially healthy and to ensure that consumers are treated fairly (independent Consumer Financial Protection Agency).

Derivatives, hedge funds, private equity firms, off balance sheet vehicles, the repeal of Glass-Steagall—all these so-called financial innovations were and are really nothing more than successful efforts by smart lawyers to undermine these principles, and the Wall Street Accountability Act is nothing more than an effort to restore them.

Of course the Wall Street Accountability Act is an imperfect effort to end the Swiss cheese system of financial regulation.  It is, after all, the product of a political process that continues to be far too much under the influence of the financial firms.

The Act needs to be strengthened by covering private equity funds as well as hedge funds, and giving the SEC the power to force disclosures by these funds to their investors.  Congress should close loopholes in the derivatives section.  Most of all, the Senate should adopt limits on bank size such as those in Senator Sherrod Brown and Ted Kauffman’s amendment.  We should understand by now that as banks get bigger, it becomes harder for our political system to obey these common sense principles.

The Act is missing the basic idea that if you make a mess you should have to clean it up—which means the financial sector needs to pay the public back for the costs of the financial collapse.  Wall Street should be taxed not just for the direct costs of TARP, as President Obama rightly proposes, but for the real costs of addressing the job loss that continues to escalate and the trillion dollar subsidies provided by the Federal Reserve to the financial sector in the form of free credit in response to the crisis.

Finally, though, the Wall Street Accountability Act is conservative in another deeper sense—it is a test of whether our government can respond to the reality of the damage done to our republic by a failed generation long experiment in market radicalism.  In the end that raises the question of whether we still have, in the words of another president from Illinois, “government of, by and for the people.”

2 comments

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Excellent!

Posted by yr2009 | Report as abusive

I could not have said it better.

Posted by fred5407 | Report as abusive