Friday, April 23, 2010

Financial Regulatory Reform - Supplement

On more reflection, reading and research, I've decided some additional comments relative to my recent post are needed, and I hope the points made are included in the lobbying and hopefully bipartisan debates in Congress in the days and weeks ahead as the reform legislation moves toward a vote for approval.

1. I was favorably impressed with the comments made by BNY Mellon CEO and Chairman Robert Kelly in an interview covered by the Jim Lehrer PBS News Hour program yesterday. (For those not familiar with his firm, BNY Mellon, one of the largest financial institutions in the country, based in New York City, was formed in 2007 in a merger between Bank of New York and Mellon Financial.) He said he and most of his banking CEO colleagues agree with the need for financial reform and 80-90% of what's in the latest draft of the bill, but he has some concern with the details in several parts of the bill. It is interesting to compare these views with the very negative characterization of the entire bill made by Republican leaders in Congress.

However, another noteworthy comment he made was that he and his colleagues were concerned that the pending bill taken as a whole, particularly those parts relating to regulation of the complicated financial derivatives business, would likely make the major U. S. banks much less competitive with the large European and Asian banks, unless this aspect could be satisfactorily coordinated with regulators in those areas to make regulation fair to all the banks that are active in this business. Since competitiveness affects shareholders and employment at the American banks, I think it's a fair comment that should be addressed, but it will be very difficult to accomplish the needed coordination in this legislation. But that doesn't mean his point can't be pursued separately from this legislation.

Finally, Kelly noted there was a vital issue which was not included in the bill and that was what to do with the quasi-government housing finance agencies, Freddy Mac and Fannie Mae, whose poor performance was a significant factor in causing the financial crisis. He was right to bring it up, but apparently Congressional leaders have agreed to look at that issue next year.

2. It seems that the key part of the Senate bill where the majority of Democrats and Republicans have strongly different views relates to the $50 billion fund to be established with fees from the larger financial institutions to help wind-down any future failing firms. The Republicans are concerned that this represents a large and unneeded expense for the banks and that it will be used inappropriately to bail out failing banks. The Democrats are adamant that this is not the case. I've read that President Obama is prepared to drop this fund from the legislation. But if that's not the case, I don't see why clear agreement between the two parties can't be quickly reached. Agree on language that spells out clearly what is intended and what is not!

3. Another point of serious contention between Republicans and Democrats is apparently the part of the bill that would establish the Consumer Financial Protection Agency (CFPA) to protect consumers when they borrow money, make deposits, or obtain other financial products and services. As I understand it, the CFPA would focus especially on protection for subprime mortgages, credit card terms and conditions, and overdraft fees.

The Democrats generally feel this is critical to protect consumers from deceptive and unfair bank practices, which people definitely have experienced. Most Republicans, as I understand it, feel this issue was not a big factor in causing the financial crisis and is concerned that this legislation represents another unneeded layer of federal intervention and expense that will add extra costs to banks which they'll need to pass on to consumers. Additionally, I think Republicans feel that market competition and more transparency will adequately protect consumers, and there is merit in these views.

However, if done right I think it's reasonable to have a lean CFPA with a fairly limited number of clear guidelines and regulations to deal with the more blatant practices which are of widespread concern. For example, lenders should be required to make it very clear verbally and in the documentation what the primary pros and cons are of the main terms of a loan that is marketed or requested by the borrower. All fees and charges must also be made clear verbally and in the documentation. There ought to be reasonable guidelines for maximum interest rates for different types of lending, including interest on credit cards. It should not be difficult to get broad bipartisan agreement on this, but it will probably turn out not to be the case.

4. I agree with the critics that needed reforms should not require a 1,300 page bill. I should think 100 pages would be more than enough, but I'm sure at the end of the day the bill will still be fairly close to the 1,300 pages. Unfortunately legislators and the lobbyists continue to act like they get paid by the page!

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