Page 5 of 6
Will it result in real protection or platitudes?
Fine is concerned about such a monolithic regulator, saying the big boys would be able to influence it more easily than they can the current mélange of the Fed, FDIC, Office of the Comptroller of the Currency, and Office of Thrift Supervision. But the structure of such a new beast is far from set. For instance, Dodd wants the Fed to lose its regulatory hold over banking and consumers (especially credit cards). Conversely, the Obama administration strives to make the Fed the über-regulator of banks and "shadow banks" — nondepository units like Countrywide and GE Capital. You may have heard some TV pundit say that this is a great idea, that the Fed has tremendous expertise, and that Bernanke has done a fabulous job.
But the idea of Super Fed as top financial cop as well as the nation's central bank is colossal and colossally bad, and not just because the Fed is notoriously secretive — the opposite of Obama's pledged "transparency." The Fed chair is, by law, independent and doesn't answer to the president or Congress. A lax chief — and there's every reason to expect him or her to be lax, considering the closeness of the Fed to banking and other financial magnates, and the baleful history of Fed enforcement — could not simply be removed.
But all hope is not lost. The administration and congressional Democrats do support a promising reform called the Consumer Financial Regulatory Agency (CFRA). Obama's 80-plus-page proposal contains yawning gaps that Congress may fill and the financial industry will fight: Insurance isn't covered, nor are 401(k) retirement plans, and the majority of financial consultants and planners (including all the mini-Madoffs out there) evade scrutiny and standards. But the CFRA would actually wrest consumer-protection powers from the Fed, which has them now and has failed consumers utterly.
Critically, such an agency could allow scammed consumers to go to court against the securities industry. This is major. Any claimant who has been through the securities industry's kangaroo court might prefer the courts of Iran. At present, individual rights against financial predation are about where antidiscrimination protections were 60 or 70 years ago.
Of course, this is a bridge too far for the financial industry. Its lobby, the most powerful in recent American history, has won every major legislative battle in the past 20 years. Wall Street lobbyists and their congressional allies can be expected to fight hard. They'll call in all their markers to ensure that securities-fraud and other financial-crimes cases won't be heard in front of hometown juries.
There's something more encouraging: The CFRA, at least as now envisioned, would be a model of financial federalism, allowing states to pass even more stringent protections. In other words, there would be plenty of room for populist attorneys general like New York's Andrew Cuomo, Connecticut's Richard Blumenthal, and California's Jerry Brown to erect more protection for consumers. The money lobby will have more trouble beating down this reform because of the Supreme Court's Cuomo v. Clearing House Association decision, which appears to give the go-ahead to states to pursue big-time financial criminals even if the federal government won't do it.
Too big to contain, probably, are the derivatives, especially the synthetic (also known as naked) CDS that crashed us last fall. Warren Buffett, among others, thinks that this financial plutonium can't be controlled and that it should be outlawed, as it was until 2000. But a new ban may already be off the table. Frank, usually the most avid reformer on derivatives, pointedly left out a ban on naked CDS deals in the proposal he submitted in early October. The Obama team wants default swaps cleared by a "central counterparty" — in other words, on a public exchange. That way, we're told, if the slaughter starts, we'll see it and stop trading before it's too late.
It's not enough. Naked swaps are the equivalent of financial gang rape. As soon as hedge funds, investment banks, and big-time short-sellers sense that a bond is flailing, they can pile on with as many derivatives as they like to make millions in what are, in effect, side bets in a craps game. Today, electronic trades take five milliseconds, according to the New York Stock Exchange. The carcass will be picked clean long before any bureaucrat gets regulatory authority to shoo away the vultures. The central-counterparty market applies only to standard, rather than "customized," derivatives. So if you're savvy enough to put a few bells and whistles on your swap, you can still push it through the dark digital over-the-counter alleys, far from the gaze of prying regulators. We're just as vulnerable as we were in the dizzy days of AIG, JP Morgan, Lehman, and Bear Stearns.
The truth about naked swaps is that they're as sordid as they sound. To be clear: They're the costliest, riskiest form of gambling on Earth. Only a few economic patricians can play: hedge funds, banks, pension funds, insurance companies, and governments. But, as we learned the hard way in 2008, just about everyone, including the system itself, loses when they win.
Geithner told Congress that the government was "blindsided" last year by the explosive risk of the derivatives market, but can regulate it now. That's wrong on both counts. Everyone in Washington knew or should have known the risks in 2000, when the government stopped regarding these complicated bets as felonies and started calling them "investments." Then, as now, the main argument was that if American markets won't clear such swaps, someone else will.
But two wrongs don't make a right; nor do a trillion. Plus, our government takes the opposite stance on, say, bribery in foreign countries by Americans, whom it prosecutes vigorously despite the fact that other nationals could pay the bribes if our companies don't. In fact, the DOJ is emphatic that bribery will stop only when people who pay bribes go to jail (which they do).
