Obama Reform Plan Fails to Fix Whats Broken

[girl gone mad]

Obama Reform Plan Fails to Fix Whats Broken
Barry Ritholtz, http://www.ritholtz.com/blog/2009/06/obama-reform-plan-fails-to-fix-whats-broken/">The Big Picture


So much for “not letting a crisis go to waste.”

The initial read on the Obama Regulatory plan was an enormous disappointment. Both supporters and critics who expected him to take a hard turn to the Left have been left either surprised or disappointed, depending upon their leanings.

To the pragmatic center, including your humble blogger, what stands out is the number of half measures and omitted actions that were viewed as necessary to prevent a replay.

Some very obvious omissions from the plan include:

1) No major changes for the ratings agencies!

This is a giant WTF from the White House. It implies that the team in charge STILL does not understand how the problem occurred.

The ratings agencies are not the only bad actors, but they are a BUTFOR – but for the rating agencies putting a triple A on junk paper, many many funds could not have purchased them, the number of mortgages securitized would have been much less, the insatiable demand on Wall Street for mortgage paper would have also been much lower.

Why is this important? If mortgages originators couldn’t sell a mass amount of loans, they would not have had the need to give a mortgage to anyone who could fog a mirror — and that means no Liar Loans, no NINJA loans, and no huge subprime debacle.

Better Solution: Take apart the ratings oligopoly! Eliminate the Pay for Play/Payola structure. Strip Moody’s S&P and Fitch from their uniquely protected status — they have proven they are neither worthy nor competent. Open up ratings to competition –including open source.

2) Turn Derivatives into Ordinary Financial Products: The Obama team does a series of minor steps for Derivatives, but they don’t go far enough.

Better Solution: Force derivatives to be traded like option/stocks, etc. (including custom one off derivatives) Trade them only on Exchanges, full disclosure of counter-parties, transparency and disclosure of open interest, trades, etc. REQUIRE RESERVES LIKE ANY OTHER INSURANCE PRODUCT.

3) If they are too big to fail, make them smaller.

That is the famous quote from Nixon Treasury Secretary George Shultz, and it applies to the banks as well as insurers, Fannie & Freddie, etc.

We have a situation where 65% of the depository assets are held by a handful of huge banks - most of wom are less than stable. The remaining 35% is held by the nearly 7,000 small and regional banks that are stable, liquid, solvent and well run.

Better Solution: Have real competition in the banking secrtor. Limit the size fo the behemoths to 5% or even 2% of total US deposits. Break up the biggest banks (JPM, Citi, Bank of America)

4) The Federal Reserve, Despite its Role in Causing the Crisis, Gets MORE Authority:

Under Greenspan, the Fed did a terrible job of overseeing banking, maintaining lending standards, etc. Why they should be rewarded for this failure with more resposibility is hard to fathom. Yet another example of rewarding the incompetent.

Better Solution: Have the Fed set monetary policy. They should provide advise to someone else — like the FDIC — who haven’t shown gross incompetence.

5) Require leverage to be dialed back to its pre-2004 levels. Have we even eliminated the Bears Stearns exemption yet? This was a 2004 SEC decision to exempt five biggest banks from the mere 12 to 1 prior levels. Note that all 5 are either gone, acquired or turned into holding companies.

Better Solution: 12-to-1 should be enough leverage for anyone . . .

6) Restore Glass Steagall: The repal of Glass Steagall wasn’t the cause of the collapse, but it certainly comntributed to the crisis being much worse.

Better Solution: Time to (once again) separate the more speculative investment banks from the insured depository banks.

All of which suggests that the status quo preserving, sacred cow loving, upward failing duo of Lawrence Summers and Tim Geithner are still in control of economic policy. The more pragmatic David Axelrod and the take-no-prisoners, don’t-give-a-shit-about-Wall Street Rahm Emmanuel have yet to assert authority over the finance sector.

[Robert Oak]

1. More economics bloggers weigh in

I just put an update on other economics bloggers and their analysis, with links, excerpts on
The Economic Populist

Ritholz is an excellent critique because he is recommending alternatives but these other bloggers have been "on the case" as well.

raw link:

http://www.economicpopulist.org/content/obama-regulatory-reform-plan

I also wrote up some of the recent Congressional hearings

The Ostriches in the Sand

Raw link:
http://www.economicpopulist.org/content/whats-been-happening-house-finance-committee-lately-lots

To me the fundamental question is do you want the Federal Reserve gaining even more power over our financial system?

[bvar22]

2. The more I read, the worse it gets.

FDR took on Wall Street full-force in 1933. His New Deal included the Glass Steagall Act, which separated banks into consumer (or commercial bank) and speculator (or investment bank) entities. Only the commercial banks, relegated to conventional, ‘boring’ activities, got federal backing. His reforms also allowed for independent audits of the banking system to ensure financial soundness (as opposed to taking just their word for it, which is what Geithner’s stress tests did) and established the Home Owners’ Loan Corporation to provide mortgage money to people at risk of foreclosure.

Obama’s plans didn’t even come close. They accepted the banking landscape, with its giant, complex firms, as a given, and went from there. To be fair, certain items like enhanced issuer accountability for loans and securitized products, greater capital requirements for banks, and relegating certain derivatives to exchanges, are useful tune-ups of the system. But, giving the Fed more power, creating an additional layer of bureaucracy through the 'Financial Services Oversight Council,' and allowing the biggest Wall Street players to maintain their status and size, is not reform. It’s more of the risky same.

<snip>

But, the absolute, worst part of this financial ‘overhaul’ is giving the Fed any more power. The Fed should instead be slapped and audited for screwing things up as badly as it did. It has destabilized our future economic environment by approving all sorts of mega-mergers during the heat of the crisis last fall, instead of putting on the brakes.

http://firedoglake.com/2009/06/17/obamas-financial-overhaul-more-like-a-tune-up/

I'm really opposed to giving The Fed even MORE power.
The Fed is a shadowy, private organization of Millionaire/Billionaire elite Bankers who answer to NO public account or oversight. They are even immune to Congressional oversight (not that I trust our current Congress to provide it.

The solution is MORE transparency and public accountability...NOT less.

[dgibby]

4. Kind of makes you wonder what the "real" agenda is, doesn't it? n/t

[bvar22]

5. Kinds lets me KNOW what the "real" agenda is....

...and it ain't good for Americans Who Work for a Living

Fat Cat Party for the Ownership Society! :party:

[dgibby]

6. Gawd, I hope that thing didn't get that big eating your garden!

:rofl: If so, you are screwn! Of course, with the economy, health care, and global warming, we're all screwn!

[Autumn]

3. You know I have started looking for your posts

lately, very clear and concise. Thank you

[truedelphi]

7. About Glass Steagall and point six - Dammitt!

I have been overbearing in telling my husband this won't happen.

Now I have to cook dinner for one full week.

Damn. I will miss his cooking.

Though I can console myself it is for the good of our country.