Friday, March 19, 2010

Financial Reform Legislation

As Steve Ramirez noted earlier this week, Senator Dodd has released his new financial regulation bill which the Senate is likely to take up after health care is completed. The bill moves toward providing additional information to regulators about systemic risk and giving more authority to regulators to manage collapses when they happen, but will likely do little to prevent the next collapse. The bill is as Senator Dodd said:

“I’m not predicting that we’re going avoid forever, in the future, any kind of financial crisis. The question is: Are we putting in place the tools that will minimize when that crisis occurs so it doesn’t create the kind of economic carnage that we’ve seen over the last several years?”

The bill will not resolve many of the continuing ills present in the financial sector, such problems having recently been exposed in the Valukas report on Lehman Brothers. Still, the bill has the backing of Elizabeth Warren, chairperson of the Congressional Oversight Panel of TARP, despite the fact that the Senate bill situates the new consumer protection agency within the Fed and the status of the Volcker rule remains unclear. The bill appears to be a step in the right direction, even if Goldman Sachs lobbyists are likely to be unfazed by its provisions.


  1. As long as we start legislating in the right direction, the economy can begin to stabilize to avoid these financial crises. Although this legislation if passed may not stop an impending crisis, it is a good step to getting more control/accountability in the financial sector.

  2. On Friday, a whistleblower's lawyer notified the media that his client told Lehmen's executives in May of 2008 that he believed "the manner in which the firm is reporting these assets is potentially misleading to the public and various governmental agencies," Lee wrote. "If so, I believe the firm may be in violation of the code."

    The Associate Press reported today that, "this report {Valukas} doesn't conclude whether executives violated securities laws. It does say that the executives' decision not to disclose the effects of its business judgments appears to be sufficient evidence to support the awarding of civil damages in a trial.

    The executives named by the report include former CEO Richard Fuld and three chief financial officers. Fuld has denied knowing what the transactions were or the accounting for them.

    Securities and Exchange Commission Chairman Mary Schapiro said Wednesday that the agency is investigating several companies' actions in the run-up to the financial crisis of 2008. She said the SEC's review of the Lehman disaster "has taken us down a path where we're looking broadly" and that Valukas's report will be helpful to the agency in its investigation. She did not name other firms."

  3. I commend Senator Dodd for acknowledging and addressing the short falls of our financial system. However, “a step in the right direction” is not what we need. We need a system that works. A system that is effective and will reasonably ensure that a financial crisis would be highly unlikely. I am not asking for a perfect system because no system is perfect. But, we can strive towards creating the most “perfect” system that we can.

    Simply giving more authority to regulators to manage collapses when they happen is not the type of legislation that will prevent a financial crisis. Americans need proactive legislative not legislation that is merely reactive.

  4. On March 20, 2010, Sewell Chan of the New York Times wrote an interesting piece on the Ben Bernanke speech given to a convention of the Independent Community Bankers of America. There Ben Bernanke increased his emphasis on the dangers posed by giant banks. One excerpt from Mr. Bernanke: “One of the greatest threats to the diversity and efficiency of our financial system is the pernicious problem of financial institutions that are deemed ‘too big to fail.” Mr. Bernanke also indicated “It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms.” He stressed that institutions perceived as “too big to fail” can borrow money on better terms and take on excessive risks because they face limited “market discipline.” According to Chan, Mr. Bernanke outlined a three-part strategy: create “significantly tougher rules and oversight”; improve the resilience of the system; and establish a process to seize and then sell, merge or break up a systemically important institution on the verge of failure. Even though I totally agree with Mr. Bernanke, I have yet to find any reform that is going to accomplish these purposes. The Volker Rule has so many loop holes that Lehman and Goldman are not even bothered by this proposal and seems to be doing business as usual – not expecting change or any sweeping reform in the future. It also doesn’t answer the question why the large financial institutions were not forced to go through bankruptcy like any citizen in this situation. Additionally, the bill by Dodd, though a start, is admittedly not a solution or prevention, but help for minimizing the next crisis. I agree with Mr. Goodson, we need solid proposals for solutions to the problem.

  5. There is no doubt we need more financial reform in this country. Senator Dodd's recognition that no legislation will allow us to completely avoid another financial crisis is certainly true. I believe a good faith effort to pass more financial regulation legislation will indeed minimize the adverse effects of the economy that we recently experienced. Even if a separate agency is not formed to oversee financial regulations, I believe it is imperative to grant existing agencies more authority to penalize those companies who use abusive practices.

  6. Zshakira CarthensMarch 26, 2010 at 8:19 AM

    I believe that preventing a financial crisis is almost impossible. It's impossible because the source of the problem changes, and its never just one factor but a combination. To me, what is most memorable about this crisis is the sub-prime fiasco. So many people have lost their homes because of bad loans, irresponsible lending, and banking practices. Looking back on the crisis, we can think of plenty of things that we could have done, or should have done, but the truth is no one considered it a big enough problem then to do something. Hindsight is 20/20.

    Nothing gets your attention better than a financial crisis. However, ten years before the crisis, many did not think anything was wrong with lending practices. Overall, I agree that legislation is a step in the right direction. I do think that we can learn from history and act accordingly. Also, effective legislation will soften the blow. We can all appreciate softening the blow, but I can't say we can always prevent the blow because its a guessing game as to exactly where the blow is coming from. Good legislation can keep us from being knocked out in the first round again, maybe we can put up more of a fight.

  7. Below is a link to a clip (In Dodd We Trust) from the Daily Show that links the conversation on Dodd's proposed regulation of financial instruments and banking to the recent Supreme Court decision (Citizens United) allowing campaign finance investments as free speech. Logic in the world of corporations is not the same as logic in the world of ordinary persons. Overall, it appears that no one is particularly impressed with the characteristics of proposed government watchdog, as comprised by Dodd bill's limited provisions. Probably, it's an effort to push something uncontentious through before the November elections. Dodd is not running for reelection, and so the Democrats are probably pushing to have "something" on the books to point to as "regulation of the financial sector" to check off a campaign promise.