Financial Reform that Isn’t

Yesterday was quite a news day. BP capped the well. Congress passed what AP headline writers termed a “stiff financial reform bill.” And the SEC  announced a $550 million settlement with Goldman Sachs. The coincidence of those second and third items is quite remarkable, don’t you think?

The SEC made its announcement within hours of the bill passing, while the stock market was still open. Generally, Capitolnews like that is kept under a tight lid while the stocks concerned trade, ideally until early the next morning. But then the bill and the settlement would have been in different news cycles.

I must say, as an aside, that I am saddened by the settlement. The SEC’s case was largely imaginary and I am particularly irked by the $250 million going to a pair of European banks, apparently to compensate them for being idiots. I am sure that had Goldman gone to court it would have, eventually, won. But truth and justice are sometimes subordinate to good business. $550M is about two weeks of profit for Goldman, and if the deal comes with a gentleman’s agreement to be left alone for a few years then it was money well spent. Goldman’s market cap is up more than $5 billion on the news.

The presumably manufactured coincidence of the Goldman settlement and the financial reform package on the same day speaks volumes about the reform bill, likely the last memorable piece of legislation produced by this Congress, and possibly the last one from this administration.

For all the hue and cry about the evils of Wall Street and posturing by politicians of both parties, the law that finally got produced was a pallid collection of mostly cosmetic changes and vague promises of future regulation. It is so bloodless, in fact, that the administration announced the Goldman deal at the same time in order to conflate the two and give the impression that they were getting tough and doing something.

Those who assume the bill really is “stiff” might want to click on the link and actually read the content of the AP story. It anticlimactically begins:

In the end, it’s only a beginning.

The far-reaching new banking and consumer protection bill awaiting President Barack Obama’s signature now shifts from the politicians to the technocrats.

The legislation gives regulators latitude and time to come up with new rules, requires scores of studies and, in some instances, depends on international agreements falling into place.

In other words, do not be dismayed, ye true believers. The new law may not actually do much, but it empowers regulators to do things at some point in the future.

Off the top of my head, I can think of two big issues that this bill could have addressed but didn’t.

Fannie Mae and Freddie Mac were at financial meltdown ground-zero and are still an unresolved black hole for taxpayer money. But doing anything meaningful about them would have involved a discussion of government culpability in the fiasco and would have been particularly embarrassing to the party in power, traditionally the companies political patron.

The other great absence from the bill is significant reform of how the government deals with financial institutions in crisis. As somebody clever once put it, too big to fail is not a policy. But on this topic the folks in Washington were hampered by the problem that nobody seems to be able to think up a practical alternative.

Of course, that did not stop the politicians from doing all they could to give the impression that they had addressed the problem. There will be a new Financial Services Oversight Council made up of senior bureaucrats that will, as the AP explained a few weeks ago, “have the power to break up large financial firms if they pose a grave threat.”

That sounds helpful, but what does it really mean? Will the government break up any firm whose potential failure would be a systemic problem, i.e. anything too big? There are probably a dozen firms like that right now, and I am pretty sure that they are not going to be broken up by the feds any time soon. Or does it mean that the government will be able to intervene when large institutions are teetering on the edge of failure? And is that, in fact, anything other than an institutionalized too big to fail?

The 2300 page bill is largely an amalgam of cosmetic non-fixes and trivial changes to things unrelated to the great collapse. There will be a new Consumer Financial Protection Bureau, which will be a part of the Federal Reserve and will enforce the Fed’s consumer rules on large banks. If you are turned down for a loan, you will get a free peek at your credit score. Colleges, universities, and the federal government will be allowed to limit how many miles you get by charging tuition and taxes. And trading in movie box office futures will be banned.

If there is a consistent theme, it is that with regard to the bigger stuff the bill empowers regulators to fix problems in unspecified ways in the future. This is good news for the bureaucrats. Today’s story in the New York Times gives us a sense of the excitement inside the beltway.

Officials are already working to prepare for the expansion of government, including finding buildings in Washington to house the new agencies.

But even the Times, for whom the phrase “expansion of government” has no negative connotations whatsoever, ends its report with what sounds like the beginnings of doubt.

The legislation will be carried out mostly by the same federal workers who were on duty as the financial system collapsed. The new consumer bureau, for example, mostly will be staffed with employees transferred from the consumer divisions of the existing banking regulators, which have been excoriated by Congress and other critics for failing to protect borrowers from obvious and widespread abuses.

Administration officials said they were confident that providing new leaders for those employees and granting them new powers, would produce better results.

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