All Blog Posts from Econwatch

Senate Banking Committee Chair Chris Dodd is planning to push a financial reform plan that would restructure the government's control of the banking industry, according to today's Wall Street Journal.

Dodd, the Democratic senator from Connecticut, has been praised by President Obama for his financial reform efforts, particularly for his work to establish a consumer protection agency.

His new plan, however, would significantly diverge from efforts by the Obama administration and the House Financial Services committee to overhaul the nation's financial regulation system.

The bill Dodd is proposing would almost completely restructure the federal financial regulation system, taking almost all bank-supervising responsibilities away from the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), the Journal reports. Bank-supervisory responsibilities would fall to a new agency that would oversee all national financial institutions: one single financial regulator. Currently, America has four federal regulatory agencies.

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This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

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While the world continues to be distracted by the sideshow over executive compensation, there was finally a bit of good news from Washington yesterday. The House Financial Services Committee (in conjunction with the Treasury Department) finally released details of financial regulatory reform. Under the proposal, the Fed would become the primary systemic risk overseer, with input from a council of regulators. I like to think of this as the nation's superheroes - admittedly, a somewhat aspirational vision.

The proposed legislation gives the FDIC resolution authority - that is, the power to resolve financial holding companies that fail. Instead of the taxpayers being on the hook for the bill, the burden of bailouts would be on the financial industry itself. Firms with more than $10 billion of assets would pay for the rescue or unwinding of a collapsed competitor.

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Wall Street investment giants are not happy with the SEC's proposed rules to restrict short-selling, according to a Wall Street Journal report ($) Tuesday.

Firms from Vanguard Group and Goldman Sachs filed several letters with the SEC last week, arguing that limits on short-selling, including the reinstatement of the so-called "uptick" rule, would bog down the market and hurt individual investors.

"We've always felt that short-sellers enhance liquidity and provide a positive impact on the marketplace," Gus Sauter, chief investment officer at Vanguard, told the Journal.

Short-selling involves borrowing stock from a third party to sell. If the stock price goes down, which short-sellers are betting on, they buy back the stock, return it to the original owner and pocket the difference.

Under the "uptick rule," investors can only short a stock after its price goes up. The rule was tossed aside in 2007 and many in the business world, including some money managers, felt its absence fed the financial crisis.

Now the SEC is considering instituting a modified rule.

You probably don't realize it, but there is a mammoth securities regulator that is not a government entity. The Financial Industry Regulatory Authority (FINRA), is the largest independent regulator for all US securities firms, overseeing nearly 4,800 brokerage firms, about 173,000 branch offices and approximately 647,000 registered securities representatives.


Why should you care about FINRA? Because it is the regulator that oversees licensed brokers and their firms. FINRA was created in July 2007 through the consolidation of National Association of Securities Dealers (NASD) and the member regulation, enforcement and arbitration functions of the New York Stock Exchange. Its funding comes from the folks it regulates, hence it's referred to as a SRO, or self-regulating organization.

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Several blue chip companies signed on to a plan to change their executive pay structure, possibly to placate lawmakers considering more severe restrictions, according to a Wall Street Journal report ($) Monday.

AT&T, Cisco, Hewlett-Packard and Tyco are among the corporations backing the Conference Board's proposal, which includes tying a "significant portion" of incentives to long-term success – such as offering shares of restricted stocks – instead of short-term rewards that could promote greater risk-taking, the report states.

The proposal would also eliminate "overly generous golden-parachute payments" and long-term employment contracts for executives.

The Obama administration has been looking for ways to rein in executive pay, which has been a sore spot in Washington after the government doled out billions of dollars to prop up a number of corporate giants. A White House-appointed pay czar is currently overseeing compensation at companies that have received significant federal aid.

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Uncle Sam is wearing many hats these days, one year after the collapse of Lehman Brothers marked a seismic shift in the economic landscape.

As The New York Times writes today, government spending (which today includes stimulus programs and bailouts) accounts for a bigger share of the nation's economy — 26 percent — than at any time since World War II.

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Treasury Secretary Timothy Geithner appeared to have lost his cool in an hour long meeting with financial regulators last Friday, according to a report in the Wall Street Journal today.

Deemed by the Journal as "an expletive-laced critique," the meeting involved such top financial regulators as Federal Reserve chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair.

An official told the WSJ that they felt surprised at Geithner's tone and attitude at the meeting. Mr. Geithner stated that "enough is enough" after listening to concerns over the proposed financial overhaul by the Obama administration.

Since the plan was released in June, it has faced much criticism from the industry, and some financial regulators are weary of allowing the government to enter their "turf." The administration's proposals include creating a new federal agency to oversee consumer regulations, merging two bank regulators and allowing the government to take over large financial companies.

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While everyone was celebrating Dow 9000 and deliberating the potential overhaul to the US health care system, I was depressed. What has happened to regulatory reform? Yesterday, the Senate Banking Committee heard testimony from FDIC Chair Sheila Bair, at left, SEC Chair Mary Schapiro and Fed Governor Daniel Tarullo on the regulation of risk.

You probably didn't hear much about it, though. As is often the case, the appetite for reform wanes as time passes and conditions improve. Additionally, with lawmakers overwhelmed by the health care debate, they can't seem to focus on another issue concurrently.

You can almost smell it–the same lamebrain members of Congress who were all too happy to castigate every participant in the crisis, don't have the energy to deal with solutions to help prevent the next crisis. That's a shame, because we need smart regulatory reform and we need it soon.

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In many ways the regulatory reform being proposed by the Obama Administration will reshape the American financial industry as we know it. It is historic and worthy of all the effort and time thousands of people will put into making them the law of the land.

But it's also important to understand what these new rules can and cannot do.

What these regulations may do is prevent a crisis just like the one we are living through right now.

Make no mistake -- this has been a hugely expensive crisis for family balance sheets digging out of debt and the U.S. Treasury shoveling money into the economy.

The International Monetary Fund warns that U.S. Government debt may rise to 75 percent of gross domestic product by 2011, nearly twice what it was in 2008. By September 1 out of 10 Americans will be out of work.

Preventing a systemic failure due to over leverage based on real estate and credit is absolutely needed. The idea of a consumer protection for financial products is also long overdue.

Anybody who has spent time reading the small print in credit card offers or an exotic mortgage agreement can see the minefields sown around consumers.

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In the first few weeks of the then-new Obama administration, Treasury Secretary Timothy Geithner announced a sweeping but vague overhaul of the U.S. financial system. The stock market showed what it thought of that idea by tumbling nearly 400 points.

Don't expect a repeat of that exercise when Geithner and President Obama announce another regulatory revamp on Wednesday: their aides have tried to avoid the possibility of surprising the market by assiduously leaking details. After a week of disclosures, bit by bit, the broad outlines of tomorrow's news may turn out to be the least-surprising White House announcement this summer.

In Wednesday's announcement, Geithner and Obama are expected to outline another reshaping of the financial system -- scaled back from earlier drafts -- that would put the Federal Reserve in charge of overseeing companies so large or significant that their collapse would lead to market turmoil. But a bigger consolidation into one uber-regulator is unlikely.

The administration believes the change is necessary because of the crop of regulatory agencies, with acronyms including SEC, FDIC, FINRA, OCC, NCUA, FFIEC, OTS, FHRA, and the FRB, that grown like weeds in the nation's capital. One possibility is the elimination of the Office of Thrift Supervision, which is tasked with the job of maintaining the soundness of savings banks and savings and loans, with poor results.

"Our framework for financial regulation is riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk. In recent years, the pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated," Geithner and National Economic Council director Lawrence Summers wrote in an opinion article this week in the Washington Post.

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