New Financial Regulations are Looming - Will They Make a Difference?
Patrick O'Brien 270004PR46 firstname.lastname@example.org | | 0 Comments | 205 Visits
The Senate voted on May 20 to close debate on a far-reaching financial regulatory bill, which clears the path for Congress to approve a broad expansion of government oversight of the increasingly complex financial markets. The goal is to prevent a repeat of the 2008 economic crisis and, according to President Obama, the new financial regulations will “protect consumers, protect our economy, and hold Wall Street accountable.”
I have read several books on the financial crisis over the last couple of months, including:
The common theme through all of these books is that there is plenty of blame to spread around when looking for the root causes of the financial crisis. Mistakes made by regulators, legislators, and ratings agencies had as much to do with the crisis as the greedy and heedless Wall Street firms who were turning subprime mortgages into exotic, toxic financial products that they made a fortune laundering and reselling.
The danger posed by this deranged edifice built on the unstable foundation of subprime mortgages, and the insanity of the growing and highly leveraged trade in mortgage derivatives was not foreseen by government regulators, Treasury officials or the Fed.
Over the last decade, Washington legislators were busy deregulating the Financial Services industry (e.g. the passing of the Gramm-Leach-Bliley Act in 1999 that repealed much of the Glass-Steagall Act) and pressuring financial services companies to provide mortgage loans to low-income groups (Fannie Mae and Freddie Mac were strong-armed into buying subprime loans).
The rating agencies who were supposed to police these securities were completely duped by the financial services companies. They were handing out Triple A ratings to CDOs comprised of adjustable rate, no doc, subprime loans. Not to mention the conflict of interest that is present since the rating agencies are paid by the very firms whose bonds they are asked to judge.
Maybe there is hope on the horizon, since the Senate recently approved a provision that will thrust the government in to the middle of the process of determining who rates complex bond deals. Under the new provision, the SEC will establish and oversee a credit-rating board that will act as a middleman between issuers seeking ratings and the rating agencies.
Can we count on the SEC to make an improvement? Harry Markopolous’s book (“No One Would Listen”) about the Bernie Madoff scandal paints a grim picture of the SEC and the incompetence of the people he interacted with when trying to alert them to the multi-billion dollar Ponzi scheme Bernie was running. I recently had lunch with Harry at OPUS (OpenPages User Symposium) and he was very skeptical about all of the new regulations that appear to be headed our way. His view is that the government is focused on the battle we just fought and the regulators do a poor job at enforcing the regulations in the first place.
Can we really expect that President Obama’s optimism will become reality? Don’t hold your breath.