Friday, September 11, 2009

Financial Regulatory Reform One Year Later

One year on from the month of the most severe equity market collapse in twenty years, financial regulatory reform seems to have hit a brick wall.


I wrote quite a few posts concerning financial regulatory reform over the past year. This one, among them, stands out as being concise and pretty exhaustive in its prescriptions. Of course, that post doesn't deal with federal government-initiated problems such as Fannie Mae and Freddie Mac being directed by Congress to securitize too-thinly capitalized, unseasoned adjustable rate mortgages. But, rereading it a year later, I'm still okay with it as a useful set of regulatory solutions.


The recent action has moved from industry competitors to the regulators. With the new administration, much hot air has been spewed arguing for, or against, empowering the Fed to be the single, omnipotent regulator.


Isn't it odd that none of these financial sector regulations have managed to be enacted in the past year? About all we have is income caps on the CEOs of bailed-out banks. Those which have repaid the forced 'loans,' such as Goldman Sachs, are back to paying large bonuses again.

But what of the development of exchanges for derivatives, so that a Bear Stearns of Lehman bankruptcy would no longer imperil long daisy chains of derivatives executions?

What of the packaging of questionable debt into collateralized obligations?

What of the GSE's pumping too-green, too-leveraged mortgage loans into their own securitized issuances?

How about the fact that the FDIC, Fed and OCC all missed what appear, in retrospect, to have been obvious inadequate mortgage loan documentation and/or improper lending to unqualified borrowers?

None of this has been resolved.

It's very curious and disturbing. Some of these regulatory steps would be very helpful in lowering the risk of a rerun of the mortgage lending bubble that did so much financial damage to the US financial sector and economy.

Why has nothing been done in the past year?

2 comments:

Anonymous said...

Mr. Sceptic,

Nothing has been done on the financial reform front for the same reason Glass-Steagal was repealed, the Feds refused to regulate derivatives, the Feds refused to shut down FNM and FRM, and States refused to regulate CDS as insurance -- lobbying by the big banks/brokers of Geithner, Summers, Rahm, Dodd, Lieberman, etc. Look at the bank bailout votes last year, significantly higher contributions to "ayes" than to "nayes".

That and the fact that the neoliberal economists like Summers and Kohn don't really believe in regulatinf finance. I'm not sure how bad things will have to get before those people are discredited.

C Neul said...

You may well be correct.

Certainly, the finance and banking sector has not been calling for improvements in the derivatives trading and clearing process, including establishment of an exchange. Or rules to minimize more distribution of unseasoned collateralized debt in the form of securities which neither the originators nor the distributors would keep for their own investments.

-CN