Chris Dodd's Toothless Banking Reform

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Richard Drew / AP Photo As the Senate takes up financial reform, the future of the economy is at stake. So why is the debate about a bill that protects Washington's Wall Street friends?

If you thought the financial crisis marked a turning point in American history, and that Democrats and Republicans were committed to making TARP the bailout to end all bailouts, you'd be sadly mistaken. As Senator Chris Dodd's financial reform bill makes its way through the Senate, there is a broad conviction among experts that it will do little to prevent yet another financial crisis.

So the whole ordeal that has played out over the miserable months since the collapse of Lehman will hit us again within the next decade, only this time the banks will be bigger and more systemically important than ever. Indeed, as Neil Barofsky, the Treasury's TARP watchdog, has put it, "These banks that were too big to fail are now bigger. Government has sponsored and supported several mergers that made them larger. And that guarantee—that implicit guarantee of moral hazard, the idea that the government is not going to let these banks fail—which was implicit a year ago, it's now explicit."

The regulators and policymakers who are supposed to prevent the next crisis are on auto-pilot.

Given the intense popular anger over the fecklessness of the financial industry, you'd think the stars would be aligned for a truly aggressive reform plan, one that established stronger margin and capital requirements. Instead, we have a bill that essentially says, "trust us, we'll sort this one out." That is, trust the infinite wisdom of Congress and the regulatory agencies to steer us through the rocky shoals of the inevitable next crisis. The hope is that the Dodd bill might make it slightly easier to sort out the mess by creating an Orderly Liquidation Authority that will allow the FDIC to take effective control of and dismantle a financial firm heading off a cliff. And if the authorities do their job well and anticipate danger and react to it swiftly and fairly, all will be well.

The trouble is that, as Eric Lichtblau's reporting in The New York Times reminds us, the revolving door between Congress and the financial industry is very much intact. There is no question that Wall Street's interests will be protected in closed-door meetings. If key government decision-makers are effectively on retainer with the big financial firms, who exactly is going to represent the interests of taxpayers?

It's not obvious that congressional Democrats or Republicans are up to the job. Republicans have been waging a scorched-earth campaign against fairly modest regulation of derivatives, a vitally important piece of the puzzle. One of the main reasons Lehman's collapse proved so destructive is that hardly anyone understood the value of its derivatives book, a collection of impenetrably complex and often highly opaque financial instruments. The White House has called for more transparency in how derivatives are traded, a step that could go a long way towards easing if not preventing the next crisis. And to her great credit, Senator Blanche Lincoln of Arkansas, a widely-despised moderate Democrat set for an all-but-certain defeat in this year's midterm elections, has put together a fairly tough derivatives proposal that goes further than the Obama administration in tightening the rules.

Unfortunately, a large number of Republicans, and more than a few moderate Democrats, believe that requiring that derivatives are traded on exchanges and subjecting them to tough margin and capital requirements—tools designed to give investors and regulators a sense of how much money is really changing hands—would harm U.S. industry. They are almost certainly wrong. As long as they stick to this view, they will have a tough time improving others aspects of the bill.

View as Single Page 12 Back to Top April 16, 2010 | 8:46am Facebook | Twitter | Digg | Share | Emails | print var OutbrainPermaLink=document.location.href.replace(document.location.search, '').replace(/\/\d+\/$/,'/').replace(document.location.host, 'thedailybeast.com'); var OB_Template = "The Daily Beast"; var OB_demoMode = false; var OBITm = "1255455386150"; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ''; document.write(str); } Financial Reform Bill, Chris Dodd, President Obama, Politics, Economy, Nicole Gelinas, Moral Hazard, Neil Barofsky, Sheila Bair, Tarp, Treasury Department, Democrats, Banks, Freddie Mac, Fannie Mae, Republicans, New York Times, Fdic, Lehman Brothers  (–) Show Replies Collapse Replies Sort Up Sort Down sort by date: benp1986

though it clearly is a stunt I disagree that it is a meaningless gesture. Asuming that absurd bonuses aren't given it shows a CEO's dedication to their company and their long term goals in the company. Millions might be a pittance to CEO's, but they won't work forever for free.

Flag It | Permalink | Reply 11:34 am, Jan 31, 2009 RevPettibone

Salam forgets how the previous administration as well as Brooksley Born in 1998 attempted to rein in the financial sector, only to be met time and time again by opposition. Given that info, now remember Geithner and Summers are currently at the helm for the administration; so why is it a surprise to learn the current administration is stymied by the idea of curbing spending by regulating sectors? By including them in his cabinet, Obama has empowered most of the same people who were responsible for the financial collapse to begin with.. and because of the tarnished integrity of Dodd or Frank, one has to remain skeptical of anything those 2 recommend.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 11:26 am, Apr 16, 2010 JayHoliday

I love how some Republicans dont want to take accountibility for the previous failed decade...its all Clintons fault or Obamas fault. Clinton can take accountibility for his part, but Obama just got into office and is not going to take accountibility for something he did not cause thank you all very much. Lets not forget that Bush passed the $700 billion dollar bailout with no strings attached therefor already putting this current President into a box with very few options on how to get the money back (as a result the money basically had to be paid back on the banks own timeline). Say what you will about the GM bailout, but at least they had rules to follow. Every time the Obama administration suggest something you folks are running around with your hair on fire...a lot of critisim with no solutions of your own. The Democrats certainly aren't anything to call home about but no one should beleive anything the Republicans have to say at this point...had your party taken care of the economy over the previous decade this President wouldn't have to do half the things he is doing right now. You and Salams logic is basically your party is the best party to solve all the problems YOUR party caused. Give it a rest because the Republicans certainly have not done anything to help this President govern this country out of the mess they created. The problem we have in todays media is there are entirely too many partisan people (on either side) on tv or blogsites giving their opinion and not giving FACT.

Flag It | Permalink | Reply 12:05 pm, Apr 16, 2010 AliceJ

Discouraging and frightening. Can't we rally behind Brooksley Born and Elizabeth Warren to get reform?

Flag It | Permalink | Reply 11:53 am, Apr 16, 2010 OneCitizen

The only way our country will achieve real financial reform is through lengthy prison terms for the hundreds of government regulators, politicians, and corporate leaders who have conspired to perpetuate this fraud against America and the world.

Flag It | Permalink | Reply 11:53 am, Apr 16, 2010 $('#c_total span').html('5'); $('#c_total').show(); Share this comment on Facebook

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