The Devil in the Details

A blueprint of the Obama administration plan to extend Federal Reserve Role in the markets was released last night. I postc_accops2have to agree with Felix Salmon at Reuters about the increased density of DC alphabet soup.  If  you want to wade through 85 pages of sleep inducing regulatory policy, knock yourself out here. Frankly, this sort’ve stuff is my job and I had to run for another cup of coffee.  Then again, you can rely on some of the folks that get paid to suffer through that kind of torture, like Salmon.

Do you know a FHC from a BCBS? If not, you’re going to have a hard time wading through the government’s white paper on financial reform, which is full of such things. (An FHC is a financial holding company; the BCBS is the Basel Committee on Banking Supervision. The link is to the WaPo leak of the paper, there might be minor changes in the final document.) This, for instance, is a real sentence from the paper:

The United States will work to implement the updated ICRG peer review process and work with partners in the FATF to address jurisdictions not complying with international AML/CFT standards.

But never fear! Your tireless blogger has waded through all 85 pages, and I’m pretty sure I’ve got the gist of it at this point.

In a nutshell: If you thought this was going to make the current horribly-complicated system of financial regulation less complicated, think again.

148154~The-Devil-tarot-card-from-the-Grand-Etteilla-PostersYou can also head on over to WaPo where the focus is on the ever expanding power of the Federal Reserve Bank.  This is something that will have all those Fed conspiracists and both Ron Paul and Dennis Kucinich up in arms.

The proposals would greatly increase the power of the Federal Reserve, creating stronger and more consistent oversight of the largest financial firms.

It also asks Congress to authorize the government for the first time to dismantle large firms that fall into trouble, avoiding a chaotic collapse that could disrupt the economy.

Federal oversight would be extended to dark corners of the financial markets, imposing new rules on trading in complex derivatives and securities built from mortgage loans.

The government would create a new agency to protect consumers of mortgages, credit cards and other financial products.

And the administration would increase its coordination with other nations to prevent businesses from migrating to less regulated venues.

One of the most interesting things about this white paper is that it continues to perpetuate differences in financial intermediaries were fewer and fewer differences exist.  Why is there still a distinction between federal and state chartering and between credit unions and banks?  Salmon explores this anachronism further.

And so to the specifics. Were you hoping that the present alphabet soup of regulators would get rationalized and downsized? I know that I was. But there’s only one place that’s going to happen: the OCC and the OTS are going to be folded into a new regulatory entity called the National Bank Supervisor (NBS), which (along with the Fed, natch) will oversee federally-chartered banks.

The National Bank Supervisor will not oversee state-chartered banks: those will remain under the umbrella of the FDIC, which is not being folded into the NBS. And the NBS will similarly not oversee credit unions: the NCUA will retain its independence and continue to regulate those itself.

Why perpetuate these distinctions between federally-chartered banks, state-chartered banks, and credit unions? I have no idea. But in order to get some measure of cohesion over all this, a second brand-new regulatory entity, the Financial Services Oversight Council, or FOSC, which will consist of the leadership of the NBS; the FDIC; the NCUA; the SEC and the CFTC (yes, they are remaining separate too); the FHFA (that, too, gets to remain independent for no obvious reason); the Treasury; the FOMC; and the brand-new Consumer Financial Protection Agency.

Or, to put it another way, FOSC = NBS + FDIC + NCUA + SEC + CFTC + FHFA + FOMC + CFPA + Treasury.

I know what you’re thinking — it can’t possibly be as simple as that. And you’d be right! There’s also a Financial Consumer Coordinating Council, which comprises the Consumer Financial Protection Agency, the Federal Trade Commission, and the SEC’s Investor Advisory Committee.

Oh, and I almost forgot, they’re also creating an Office of National Insurance.

Well, it appears the keystone cops are alive and will still be functioning in the enforcement of banking laws.  I do agree with this assessment.

Which is not to say that there aren’t any good ideas in this white paper. I like the fact that the CFPA will have the power to conduct Community Reinvestment Act examinations, for instance, and I love the fact that stockbrokers will — finally — have a fiduciary responsibility to their clients. The Obamacrats have also managed to sneak in legislation forcing opt-out, rather than opt-in, retirement plans for corporate employees.

The point about giving stockbrokers’ fiduciary responsibility is a key one.  This increases the liability an investment firm will incur when managing other people’s money. Becoming a fiduciary implies an increased level of responsibility for outcomes and with that increased responsibility comes increased liability.  That means legal and financial liability for mismanagement.  People like Bernie Madoff will be held to much higher standards and much stricter legal retribution when actively engaged in betraying people’s trust.

That last point is very important.  The opt-in, opt-out clause plays directly to corporate interests and against consumer interest.  The plan and its marketing have been said center on protecting and furthering the consumer over business interests.  This again appears to be a bone for the wrong people.

The WSJ has also weighed in on the blueprint.  Here is their take.

One new detail is that any large, interconnected company that the government wants to take over and break up could be pushed into government seizure by the Treasury Department, if certain conditions are met. Once taken over, the companies would typically be run by the Federal Deposit Insurance Corp., but the proposal gives the government discretion to change the way this might work. The Treasury has said these powers were necessary, but the details of how they would work were unveiled for the first time in this proposal.

Hedge funds and other private pools of capital would have to register with the Securities and Exchange Commission. Thousands of financial institutions would be required to hold more capital in reserve to protect against unexpected losses, and companies would also have to retain a portion of the credit risk for loans they have packaged into securities.

The Fed emerges from the plan with the power to oversee from top to bottom almost any financial company in the country, including the firms’ foreign affiliates. It would also hand the central bank another victory by allowing it to oversee any commercial company that owns a banking charter known as an industrial loan company.

I’ve said this before, but the biggest flaw I saw with this proposal is it’s failure to recognize the systemic problems that led to the financial meltdown.  This basically says that the meltdown was not a systemic problem but a shock that is unlikely to recur.  I believe this is a faulty assumption.  The problems were not only due to lack of oversight and standardization in key markets, they were also about behavior in assessing and embracing risk.  I do not think anything that I’ve read at the moment really solves this basic problem.  The suggestions appear to keep the basic game in play.  There’s been a reshuffling of referees who have been given shiny new whistles and a better view of the field.  I don’t see anything that will essentially encourage the players to give up the juicing or stop them from trying to get away with those behind the back penalties.

Oh, goodness, I think I need to go drink more coffee.  I’m using sports analogies now and I’m not working around quite so many men these days.  Watch your money because I doubt any one else will really do it for you.