Sunday, June 13, 2010

Financial Overhaul Bill

Now that the healthcare reform bill has been signed into law, one of President Obama's top legislative priorities is to complete action on the pending financial overhaul bills currently being worked on in the U. S. House and the U. S. Senate. The Democratic congressional leadership's goal is to get a final bill to him before the lawmakers leave Washington for their July 4th break, less than three weeks away. It definitely won't be easy. Many of the key issues are very complicated, there's a great deal at stake that can have a big impact on our economy, there is strong Republican opposition which contends that the Democrats are rushing too much to get a final bill approved, and a filibuster delaying action is certainly possible. Furthermore, the large financial institutions most likely to be affected are lobbying hard to soften some of the bills' provisions. Underlining the complexity factor, the Senate bill at last count was 1,336 pages long!

As a reminder to my readers, the primary purposes of the bills are to help stabilize our economy, particularly the roles played by our major financial institutions, reduce the systemic risks in our financial system, and take other regulatory and oversight actions to minimize the chances that we could once again have another very serious economic recession like we're now recovering from, or, much worse, enter into another devastating depression like our many of our parents and grandparents suffered from in the early 1930's. Certainly the bills represent the most sweeping change in our national financial rules since the Depression. The main point reflected in the bills is that the Federal government will play a more active role in policing the investment banking activities on Wall Street in New York managed by our largest and most powerful financial institutions, including firms like Goldman Sachs, Morgan Stanley, Citigroup, J. P. Morgan Chase, and Bank of America, as well as the U. S. arms of major foreign institutions like UBS, Credit Suisse, and Deutsche Bank.

Some of the key parts of the bills? The plan is for a nine member council, the Financial Stability Oversight Council, to be established under the leadership of the Secretary of the Treasury, currently Tim Geithner. Their job will be to watch for systemic risks and direct the Federal Reserve (our central bank) to supervise our nation's largest financial institutions, not just banks, but also insurance companies and other large players who extend credit and other financial services, with the aim of containing or reducing systemic risks that can have a broad adverse impact on our entire economy if not managed prudently. Another important part is a new Consumer Financial Protection Bureau to provide oversight to how financial institutions are treating retail customers with respect to basic banking services, credit cards, auto loans, lines of credit and mortgages, among key products and services. Of primary interest to the Bureau will be such as the level of fees and charges imposed, the manner these services are marketed, and the clarity and fairness of documentation. The main outstanding controversial issue appears to be how the complex subject of financial derivatives should be handled. The Senate seems to want tougher action than the House is willing to accept.

The key players in getting the bills reconciled into a final bill to be presumably signed into law by President Obama at some point will likely be, aside from the president, Chris Dodd, Chairman of the Senate Banking Committee; Barney Frank, Chairman of the House Financial Services Committee; and Rahm Emanuel, the president's Chief of Staff. Other important players include House Speaker Nancy Pelosi, Vice President Joe Biden, Fed Chairman Ben Bernanke, Tim Geithner, and the Republican leaders in Congress, Representative John Boehner and Senator Mitch McConnell.

As someone who was a career banker, including ten years as an investment banker with one of the majors, what are my views? Firstly, I think it's ridiculous that the Senate bill needs to be as long as 1,336 pages! 300-400 pages ought to be more than sufficient. I think getting these bills right is too important to rush or to stifle good input from the opposition, in this case the Republicans. Given the unfavorable public opinion polls and the upcoming mid-term elections in November, I perfectly understand the desire of the Administration and Democratic leaders in Congress to get a reconciled bill signed into law sooner than later, but, if the time is put to good productive use, a delay of a week or two or even three should not be harmful. While it's wishful thinking these days of strong hyper-partisanship on most issues, it would be beneficial if Congress members would do on these bills what they believe is in the best interest of the country, as opposed to following party ideology or what's lobbied for by special interests.

The leaders named above in finalizing input on these bills should keep well in mind the likely consequences of their actions on other high national priorities, including creating favorable conditions for sustainable economic growth and a high level of good paying new jobs in the private sector for an extended period, reducing our sizable annual budget deficits, returning the country to a balanced budget as soon as possible, and developing a viable near-term plan for reducing our excessive national debt. These priorities are highly important for the nation's and also the world's welfare as we move forward. The priorities are more important than clamping down hard on Wall Street and the other financial institutions, unless the clamping down actually helps us achieve the priorities.

The Republicans are right to question why the overhaul bills apparently do not currently address reforms of the quasi-government agencies involved in mortgage finance, the Federal National Mortgage Association, known as "Fannie Mae," and the Federal Home Mortgage Corporation, known as "Freddie Mac." However, I'm OK with that if the definite plan is to deal with these institutions separately in another related bill.

As mentioned, the big outstanding issue is how the bills should deal with the huge market for financial derivatives, the complex products that have generally been used by financial institutions to hedge financial risks or to speculate on movements in interest rates or commodity prices with the aim of gaining a substantial profit for the institution and large bonus at the end of a performance evaluation period for the individual traders involved. Because the risks can be very high, depending on the transaction and size of the deal, higher capital requirements are a reasonable option to help safeguard an institution. Another option is to limit the scale and types of derivatives activity. A third is to separate the activity from the commercial banks to limit their exposure to high losses and thereby help protect business and individual customers.

Because it's such a complicated business, independent experts need to guide Congress members on the best approach. I'm OK with either taking more time to get this right and get adequate bipartisan agreement on the final input, or, alternatively, agreement to deal with derivatives separately at a later time, after more consultation with the independent experts.


wondarwie said...

It is clear that the reason the Senate Financial Overhaul Bill is 1,336 pages long is to obfuscate this complex issue. Politicians should keep their hands off this and allow more knowledgeable minds to sort this thing out. The main danger, as I see it, are the derivatives. The secondary issue is finding competent people to write the bill who are willing to put the U.S. economy ahead of their personal interests. Both of these problems seem insurmountable, but I try to be optimistic. History has not been on my side, however, as I once believed the revered chairman of NASDAQ, Bernard Madoff, was the salt of the earth and that he always put national interests ahead of personal interests. We need to be very careful about who is writing this bill and whose interest they are covering.

Viking Views said...

I'm not sure about Wondarwie's first sentence on the Financial Overhaul Bill, but he may be right. However, I generally agree with his second and last sentences, although Senate staffers writing most of the bill must, I assume, have consulted with a number of experts, since it's highly doubtful many of them really know much about a lot of this highly technical stuff, especially including derivatives.