This morning, we learned of a huge compromise in regulatory reform. The expectation was that no one was happy with the bill, but the politicians, who all get to go home to the voters and say “Well, at least we passed something.”
Overall, I give this a C minus: There are simply too many Fs to give them a much higher grade. Let’s look at what was passed and grade each section of reform:
TOO BIG TO FAIL: Grade: F
The new regulation does not directly address either the repeal of Glass Steagall or TBTF. The crisis legacy is a financial services sector that is highly concentrated with dramatically reduced competition. The six largest financial firms — combined assets: $9.4 trillion — will still dominate the industry. Too-Big-to-Fail remains the law of the land.
MORTGAGE UNDERWRITING STANDARDS: Grade A
Establishes new minimum underwriting standards for mortgages. No more no doc, NINJA, or Liar loans. Lenders must verify income, credit history and job status. Would ban payments to brokers for steering borrowers to high-priced loans. Of all the regulatory changes passed today, this seems to be the only one that, if in place a decade ago, would have prevented (or at least dramatically reduced) the crisis.
NEW REGULATORY AUTHORITY: Grade: C+
Gives federal regulators new authority to seize and break up large troubled financial firms without taxpayer bailouts; creates a sector rescue fund from banks with > $50B in assets. The time to assess this fee is before a crisis, not after — when banks need every penny of capital.
LEVERAGE: Grade: F
Inexplicably, all of the new regulations fail to reduce leverage rules today .
FINANCIAL STABILITY COUNCIL: Grade: B-
10-member Financial Stability Oversight Council to address system-wide risks to stability, with the power to break up financial firms. Oh, and about that leverage thingie? Directs them to look into it.
Question: Why not address leverage NOW, instead of kicking it down the road? Is Congress really THAT cowardly?
CREDIT RATING AGENCIES: Grade: F
Sets up a quasi-government entity to address conflicts of interest. Allow investors to sue credit-rating agencies. Establishes new SEC oversight office. Retains Oligopoly; Fails to open ratings to more competition. Considering that the ratings agencies were the prime enablers of the crisis, this failure is shameful.
DERIVATIVES: Grade B+
Moves most derivatives to exchanges, routed through clearinghouses,e etc. Customized swaps remain OTC, but have reporting requirements. New capital, margin, reporting, record-keeping and business conduct rules for firms that deal in derivatives. Failed to overturn CFMA.
VOLCKER RULE: Grade A-
Curbs propriety trading by FDIC insured depository institution. Would not have rpevented this crisis, but addresses the moral hazard of banks in the future due to the bailout.
CORPORATE PAY: Grade F
Give shareholders a non-binding vote on executive pay. No clawback provisions. Does not address imposing liability on management for excess risk taking, corporate collapse or taxpayers bailouts.
FEDERAL PRE-EMPTION OF STATE BANKING RULES: Grade C+
Overturns OCC tool John Dugan Federal pre-emption of state regulations. states to impose their own stricter consumer protection laws on national banks. National banks can seek, and will likely receive exemptions from state laws, undercutting this entire law.
DEPOSIT INSURANCE: Grade B-
Permanently increases FDIC for banks, thrifts and credit unions to $250,000. Fly int he ointment: Congress failed to fund this, although the FDIC will be covered by taxpayers if and when they run out of cash . . .
CONSUMER AGENCY: Grade D+
The new Consumer Financial Protection Bureau is a half decent idea, but the exemption for Auto Dealers — the typical family’s 2nd biggest purchase is a car — is unconscionable. Putting the agency inside the Federal Reserve is beyond idiotic.
Bet you lunch at a deli of your choosing that nothing of this will prevent or even forestall the next financial system calamity, coming to a theater near you, my guess the opening will be sometime around the latter half of 2012.
I saw the screaming headlines on other sites and waited for your measured comments. As it develops, I’d like more on this.
Barry Ritholtz said, “Good suggestions, all. I hope someone in the White House pays attention.”
The above was the final paragraph in Bailout Nation. Barry, please send them a copy.
I just finished reading this book and it should be required reading for all pols. I would disagree with one thing, however. I do believe they practice self regulation in their best interests. What I disagree with is recognizing who they and their are. The assumption was that they and their referred to companies when in reality they and their refer to the company execs. They acted in their own best interest at the expense of their companies’.
[...] Giving a grade to financial reform. (Big Picture) [...]
“Bet you lunch at a deli of your choosing that nothing of this will prevent or even forestall the next financial system calamity, coming to a theater near you, my guess the opening will be sometime around the latter half of 2012.”
I’d take your bet one step further and say that the remainder of the content in the 2000 page bill is so corrupt that it will incrementally make things worse in America than if the bill had not existed.
“DEPOSIT INSURANCE: Grade B-
Permanently increases FDIC for banks, thrifts and credit unions to $250,000. Fly int he ointment: Congress failed to fund this, although the FDIC will be covered by taxpayers if and when they run out of cash . . .”
So that means…if the bank owes you money, the gov’t will tax you to pay you?
Let’s Not Allow Our Largest Donors To Embarrass Us Again Act of 2010. http://www.thereformedbroker.com/2010/06/25/financial-reform-bill-is-like-watching-an-r-rated-movie-on-tnt/
[...] Grading Financial Regulatory Reform – Barry Ritholtz [...]
If it didn’t address leverage, the ratings agencies and CFMA, they’ve done nothing to prevent the next panic. Everything else is window dressing to plump up their already over-inflated egos.
In response to Barry’s rhetorical question: “Is Congress really THAT cowardly?”
No, they’re just that well bought and paid for.
Indeed Tarkus. The FDIC ensures that a) banks will play fast and loose with your money, and b) they won’t be made to pay for their inevitable malfeasance.
If everything is insured, then, in the long run, nothing is.
The fact nothing at all real has happened to reform the inherent moral hazards and conflicts of interest in the financial system means we stay on the Gradual Decline to oblivion.
On the corporate pay issue…
In case of a taxpayer bailout, a clawback provision should kick in AUTOMATICALLY.
There’s no excuse for any other policy.
Great, more oversight panels to be dumbed down with political hacks…
Agree its generally a piddle
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