Financial Services Reform – How’d We Do?

Now that a Financial Reform Bill has been passed by Congress and signed into law, it’s worth taking a step back to see how well the bill achieves what some (such as myself) saw as the essential tasks of financial reform, to prevent a similar meltdown from blindsiding us in the future.

Here’s some background:

In November 2009, I was getting upset at the organized, well-funded campaign of “disinformation” and obstruction taking place in the nation’s capital to put the kibosh on any truly effective consumer protection in the banking and financial services industry, (where I began my career). I sent a letter to Christopher Dodd, Chairman of the Senate Banking Committee, whose consumer protection efforts I’ve been involved with in the past. In the letter, I outlined 7 principles that I believed had to be included for financial reform to achieve its objectives.

How well does the Dodd-Frank Wall Street Reform and Consumer Protection Act make the grade? Below, I’ve assigned a letter grade for each of the 7 principles, with pertinent comments:

1. First, there needs to be a clearly-stated mandate and set of principles for the Bill that assures that those in government who are to serve as watchdogs in enforcing the provisions of the laws, understand their duty on a basis that resists the influence of politics. The job of the watchdog in government is to give pushback, to level the playing field, to publicize wrongdoing, and to deter others in the industry from following down the same wrong path.

Grade: A

Comment: While specific rules in some cases are still to be drawn up, there is clearly a new sheriff in town and the previous “anything goes” atmosphere has been brought to a screeching halt.

2. Second, there needs to be a system of checks and balances put in place to assure that accurate information is being produced and reported, and that the law is being carried out.

Grade: B+

Comment: The requirement for exchange trading of derivatives, and creation of an oversight process for systemic soundness are needed steps in the right direction. Having consumer protection under the Treasury Department remains a concern.

3. Transparency must be created via a process of auditing and public reporting.

Grade: B+

Comment: Congress will be auditing the Fed for greater transparency. Jury is out on this, we’ll have to wait and see.

4. Capital adequacy must be enforced relative to the types of risks being incurred and the type of stakeholders being exposed to these risks.

Grade: B+

Comment: With no limitations on leverage, and considerable latitude for the regulators, much will depend on the competence and diligence of those in charge, who are being paid by the taxpayers, but not always controlled by their interests.

5. There needs to be a clear distinction between “risk capital” and “safety capital,” but neither the taxpayers nor the safety return stakeholders should be put at risk for what should be appropriately private equity risk-taking.

Grade: B

Comment: While a Glass-Steagall separation of commercial banking and investment banking activities was not restored, new capital requirements and restrictions on depository institutions are important steps in the right direction.

6. The banks should be chartered to serve the public, while making a decent return. They should not rip off the public with exorbitant and unavoidable fees so they can make risky investments suited to investment banks, private equity and hedge funds and risk capital.

Grade: A

Comment: The new Consumer Protection Agency, together with stronger bank practices and regulatory authority, are needed fixes. Now, they must show they can get the job done.

7. A consumer financial services agency must have teeth. It must be primarily a watchdog, enforcing and, when necessary, prescribing remedies, and clarifying rules when there is a clear pattern of abuses taking place against the public’s interest.

Grade: A

Comment: (See comment #6)

Overall Grade: B+

Comment: The Bill was repeatedly weakened to gain needed votes and yet still barely passed, against unyielding partisan opposition. Under the circumstances, I give it an overall grade of B+, with one important caveat: Now, it will take determined vigilance to assure that the rulemaking process and its results will not be allowed to compromise these principles.

In short, while far from perfect, the Dodd-Frank Wall Street Reform and Consumer Protection Act is a very good step in the right direction. It establishes (or re-establishes) some of the sound principles that were wantonly abandoned, leading to the financial meltdown of 2008-2009. It creates a new ethos of enforcement, accountability, and oversight, which must be maintained if we are to avoid a similar recurrence in the future.