Where’s the Reform?

We keep hearing about the global financial collapse and how several things played into its creation. Since the credit markets are mostly dried up, loose credit to purchase overpriced assets is no longer an issue. Still hanging out there with no real substantive policy discussion is Financial Reform. Has the current administration forgotten the complete lack of oversight by the SEC in the areas of derivatives, credit default swaps, and all those fancy little arrangements that allowed imprudent lenders to pass the trash? Where also is a hard look at Moody’s and other raters that actually applied a triple A label to stuff that is still unraveled?  Why aren’t we fixing what is obviously broken?

Dizard at Financial Times asks the question. What is the status of the structural reforms and laws required to fix the broken securities markets? It’s a very good question because both the SEC and the FED failed in their oversight duties of several markets. They’ve both asserted they didn’t have the legal standing to act or to provide that oversight. In that case, we have another example of oversight malpractice by the congressional committees designed to keep the financial and banking systems strong. They need to sort out responsibilities and enact laws to ensure oversight exists.

Here is one of the articles major points which is reform of rating agencies. He sees no progress on that front and believes we’re seeing some major maneuvering that ensures job security and protects fragile egos.

The financial system has a peacetime officer corps in a wartime situation. The people in positions of responsibility are principally interested in preserving their careers and avoiding public embarrassment. There are rare and important exceptions, such as Paul Volcker, who has nothing to prove about his integrity, and who is past any need to advance his career.

To identify what has to be done to put securities markets, banking and regulation on a sound basis for the future, the people at the top might have to admit to the specifics of their own past mistakes. They would also need a command of detail of the workings of the financial system that they have avoided acquiring over the years, since it was much more advantageous to spend one’s time scheming and toadying.

This is a naturally occurring aspect of human nature, but it is usually kept in check by periodic crises, which thin the herd and force the survivors to adapt. The “great moderation”, also known as periodic monetary bail-outs, in developed countries for the past couple of decades has prevented that process.

Let’s consider a specific issue, the reform of the leading US ratings agencies…So what are the federal regulators, and Congress, actually doing about ratings agency reform?

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