Shock and Awe: From Massachusetts to the Obama “Volcker Rule” (Part 3 of 10)

Prior to our visit, financial regulatory reform had progressed in the House, but stalled in the Senate.

House Reform Bill Passed in December
In December of 2009, the full House of Representatives passed by a vote of 223- 202, H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009. The bill, if ultimately enacted, would among other things: (1) create the Consumer Financial Protection Agency, (2) establish an inter-agency financial stability oversight council, (3) authorize a dissolution (receivership) authority and process for shutting down “too big to fail institutions” before they cause harm – and this would be prefunded through fees assessed on financial firms, (4) give shareholders an advisory vote on pay (“say on pay”), access to the proxy, a vote on merger related golden parachutes, requirements for certain institutional investors to disclose how they voted on these matters and allows regulators to ban risky compensation practices, (5) strengthen SEC powers to protect investors in light of the Madoff scandal, (6) regulate derivatives by requiring standard swaps (between dealers and major swap participants) to be traded and cleared on an exchange or electronic platform, (7) prohibit predatory lending and reform mortgages, (8) reform credit rating agencies, (9) require advisers to hedge funds and other “private” pools of capital to register as advisers, and (10) create an office of insurance.

Reform is Currently Stalled in the Senate
The reform effort has stalled  in the Senate. In November, Senator Dodd introduced the Restoring American Financial Stability Act of 2009. Dodd received tremendous push back within 48 hours. He then was forced to start over completely with a fully bi-partisan process. He established four different teams. Each team had a Democratic and Republican Senator. Each team was given a different topic to address. Some topics were preventative, others crisis management. The only team that had made meaningful progress is being lead by Virginia Senator Warner (D) and Tennessee Senator Corker (R). The Corker-Warner team owns the topic “too big to fail/systemic risk.”  The Corker-Warner plan appears to have no preventative measures. This (and the Brown victory-kick-in-the-pants) undoubtedly motivated President Obama to speak up on Thursday.

This Corker-Warner approach is described in the Wall Street Journal: “It would create a ‘presumption’  that large, failing financial companies would have to go through a new bankruptcy process. This is different than what the White House proposed, which would give the government immediate control to put large, failing firms through a government-controlled resolution. The Warner/Corker deal would give the government the option to still put failing firms through a government-structured resolution, but they would have to clear hurdles first and it would be a bit more complicated.”

Based upon our discussions (detailed later in the series), this seems to be the Emperor's New Clothes approach as it authorizes another taxpayer funded bailout.

Ten Steps for Restoring Financial Stability:
Beyond the action in the House, Senate and White House, there are other reforms being discussed, including on the SAFER and AFR websites. A useful top 10 list can be found with the shareowners.org recommendations. Shareowners’ ten steps are: (1) “Break up financial institutions that are too big to fail"; (2) “Split commercial and investment banking"; (3) “Create a public-option rating agency"; (4) “Restrict investment banks’ and hedge funds’ access to pension and retirement assets without investors’ approval"; (5) “Restrict Wall Street firms from listing as public companies"; (6) “Bring transparency to the dark corners of the financial markets"; (7) “Strengthen corporate governance and regulatory oversight"; (8) “Clarify and enforce the duties and responsibilities of financial intermediaries"; (9) Protect consumers of financial products; and (10) “Simplify financial market structure.” This is a terrific list. I would also add some concepts I identified in a recent paper entitled Enablers of Exuberance: The Legal Acts and Omissions that Facilitated the Global Financial Crisis. That was a preliminary paper with a limited scope and I have more ideas that will find their way into a book I’m writing on this subject. For full disclosure, in addition to being a participant in SAFER, I am also a member of shareowners.org.