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U.S. Treasury Secretary Timothy F. Geithner says the Obama administration's overhaul of U.S. financial regulations is aimed at creating a "boring" financial system.
But after President Barack Obama unveils this boring – and not-so-new – regulatory structure tomorrow (Wednesday), expect a pitched battle that will pit the interests of Wall Street players against those of everyday Main Street investors.
The outcome could well determine how quickly and completely this country's financial system rebounds from the ongoing crisis. And that outcome will also likely determine whether or not we'll ever have to face something as dangerous and damaging as this again.
By unveiling its proposals for revamping the U.S. regulatory architecture that houses the agencies and watchdogs responsible for safeguarding the financial system that supports our way of life, President Obama is touching off a bruising battle – but one that probably has an unfortunate, and predictable, outcome. Unlike the more-aggressive overhaul proposals Money Morning previously outlined for both the regulatory system and the U.S. banking system, the reality here is that the current set of regulators will survive.
The $64 trillion dollar question was whether or not the existing limp and dysfunctional alphabet soup of regulators that were supposed to be the watchdogs of our way of life will actually be reconstituted into a new stew with the same ingredients – or whether a new kitchen crew would be empowered to stop Wall Street from force-feeding the public its same old toxic menu.
Thanks to details that have already been leaked to the public, the answer is already clear.
Front running its own public offering of a regulatory makeover, the Obama administration has been systematically leaking the guts of the "white paper" it plans to deliver tomorrow. The reason for the soft opening is that President Obama wanted to avoid a knee-jerk reaction in the financial markets. Plus, there's a history of political backlash and negative public opinion when it comes to any balancing act regulating the powerful cabal of bankers and brokers.
The crazy patchwork quilt of regulators overseeing our banks, bankers, brokers, investment products and markets is an inventory of acronyms that includes:
- The Federal Reserve Board (FRB).
- The Office of the Comptroller of the Currency (OCC).
- The Office of Thrift Supervision (OTS).
- The Federal Deposit Insurance Corporation (FDIC).
- The National Credit Union Administration (NCUA).
- And the U.S. Securities and Exchange Commission (SEC).
But that's not the end of it. Operating under the SEC are certain "self regulatory organizations" (SROs), including the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB), which police their own registered and licensed persons, the products they sell and trade and the public who they deal with.
Then there's also the Commodity Futures Trading Commission (CFTC), and a slew of state regulators who also act to ensure the integrity of financial intermediaries, products, and markets.
The question on everyone's mind is this: "Where were any of these kitchen hands when all the burners on the financial stove were turned all the way up and every pot on the stove was boiling over?"
Citing the myriad signals and obvious cracks that regulators missed or egregiously overlooked would easily fill a few volumes. And while it is instructive and incumbent upon us to not forget our history – lest we repeat it – there is enough still fresh in our minds to avoid dwelling on the past in favor of taking steps to make sure something this potentially ruinous never happen again.
With such a mindset, it's natural to conclude that our failed regulatory architecture needs a serious overhaul.
In his inaugural speech, President Obama directly addressed the need for more effective and protective regulation of Wall Street. Echoing the president's public position, Treasury Secretary Geithner recently said to the Independent Community Bankers of America (ICBA) trade group, "I think the president believes we need to have a much more simplified, consolidated oversight structure."
But sadly, true to the inviolate nature of politics and the power of entrenched and vested money interests, this once-in-a-lifetime opportunity to actually tear down the failed structures that guarantee another economic collapse and to replace them once and for all with a substantive regulatory structure that can stave off future financial tsunamis isn't likely to happen.
It seems that the Obama administration's sensitivity to potentially jeopardizing what some are pointing to as signs of recovery by not calling for radical regulatory surgery has resulted in signals that the approach will instead be to empower existing regulators with more patches and some needles and thread. In a clear about-face, the administration is quietly soft-selling its upcoming agenda for regulatory reform by making the case that the overlap of multiple agencies actually prevents any one agency from being subjected to undue political or commercial interests or influence.
What the administration is billing as a "sweeping reorganization" of financial supervision actually results in few major changes – and does nothing to address the turf wars and political power of the congressional fiefdoms that serve the greater interests of their lobbying masters.
To say this is unfortunate is an understatement with no rivals.
There is nothing in the offering plate that addresses the failed doctrine of "Too Big to Fail." While there are proposals to rein in leverage and to toughen capital and liquidity standards there are no proposed limits on curbing the monster machines of finance that will only get larger and larger and will eventually figure out how to break out of any paper cage they're put in, meaning at some point they'll be at large and able to threaten the world again.
There is nothing that directly reins in over-the-counter derivative products, or the sales and trading of these highly speculative (make that "gambling") devices. Lately, we've been joined in our concerns by George Soros – king of speculators in his own right – calling for the complete abolishment of certain derivatives. But that's not going to happen, because too many banks make too much money off these "instruments" of economic destruction.
As we've noted previously, there is nothing to stop clever players from shopping the regulatory smorgasbord of supervision servicers to find a friendly hall monitor who will accept their made-up class cutting and test-avoidance excuses.
There is nothing to rein in the U.S. Federal Reserve's independent power as omnipotent God wagging the tail of the U.S. Treasury Department as it sees fit. In fact, the Fed will be offered more power and more control over the nation's largest financial institutions. That makes the too-big-to-be-controlled Fed a vested partner in the drive to make the system too big to do anything but fail.
There is nothing to address who really will have the newly proposed power to unwind institutions deemed to be a systemic threat. The idea is to empower a "council" to determine just who those systemic threats actually are. Will the council's power be absolute, or will that power go to the Fed, the Treasury, the FDIC, or all three to fight about? Although it's unlikely that special interests would ever try to lean on any of the competing supervisors charged with threatening the life of a major corporation making many insiders very rich, it conceivably could happen. Let's be honest – it already has.
What's supposedly new is the idea of a consumer-protection regulator. But here's the problem: Weren't all the regulators supposed to be consumer advocates all along?
The inclination to retain the failed patchwork of a regulatory-quilt-in-tatters would be a major victory for Wall Street. Unless the American public wants to subject itself to more and deeper financial catastrophes, it must weigh in on the battle against the Wall Street machine.
The opportunity to recreate the walls and bridges that once were in place and have been dismantled – and to build a new and better fortification to protect the country from the greed and avarice of a few too many – is right in front of us.
And we may not have this opportunity again.
To that end, we should not be lulled into a sense of false security by believing that the existing regulatory architecture can be fixed. What's being rolled out tomorrow is more about rolling over and pretending everything is now okay than it is about engineering real, substantive change.
It is now or never.
By electing President Obama, the majority of Americans voted for change. Whether or not we actually get that change is now largely up to each of us, and promises to be a function of whether or not we actually demand that change loudly enough.
[Editor's Note: Is it a new bull market, or just a bear-market rally that's going to separate investors from the last of their cash? For the shrewdest investors, it may not matter. A new offer from Money Morning is a two-way win for investors: Noted commentator Peter D. Schiff's new book – "The Little Book of Bull Moves in Bear Markets" – shows investors how to profit no matter which way the market moves, while our monthly newsletter, The Money Map Report, provides ongoing analysis of the global financial markets and some of the best profit plays you'll find anywhere – including such markets as Taiwan and China. To find out how to get both, check out our newest offer.
To read a related story on how the long-term dismantling of U.S. banking regulations set the stage for the U.S. financial crisis, please click here. That story, which appears elsewhere in today's issue of Money Morning, is available free of charge.]
News and Related Story Links:
- Reuters:
U.S. financial regulation reforms outlined. - Bloomberg News:
Geithner Says U.S. Goal Will Be 'More Boring' Financial System. - Yale Law School Avalon Project:
Articles of Confederation. - Wikipedia:
"Too Big to Fail." - Money Morning Market Commentary:
An Open Letter to President-Elect Barack Obama: How a Regulatory Makeover Can Fix the Financial Crisis. - Money Morning Market Commentary:
Plan to Repair U.S. Banking System Unveiled by Former Hedge Fund Manager. - Independent Community Bankers of America:
Trade Group Web Site. - Derivatives Dictionary:
Directory. - Money Morning Market Commentary:
By "Shopping" for Regulators, Private Equity Firms Have Discovered How to Buy Banks – Leaving Taxpayers With All the Risk.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
Everything I have read so far indicates that the reforms that you are expecting tomorrow are actually going to be placing the Federal Reserve in a management role over the financial institutions, giving them the ability to break up those financial institutions when they see fit to do so and a broad increase in their powers. They will then have control from mortgage underwriting all the way to the securities part of the deal. Nothing I have seen indicates they will report to anyone, basically unchecked power. That is not change for the better.
To some they will believe this is the way to go as they voted for change, I do not agree as the article missed the mark on what those reforms are really going to do.
The entire financial system needs to be rebuilt from the ground up. Unfortunately, no banker, regulator, or politician has the courage to do this. Instead, we’ll create new regulatory bodies that will try to fix the unfixable.
Existing government intervention has created one moral hazard after another and will continue to do so.
For example, Glass-Steagull wasn’t repealed in 1999; it was only modified in the worst possible way. It allowed banks to start taking foolish chances with depositor money that was guaranteed by the FDIC. Had the entire Act been fully repealed—FDIC protection and brokerage/bank separation—it’s highly unlikely banks would have gambled like they did.
At some point—and only time will tell if we aren’t already inches away from the precipice—a crisis will come along so terrible, and so enormous in scale, that printing money will not make it go away. Only then will there be ‘change we can believe in.’ Until that time comes, anything we do will be window dressing.
After all, we’ve learned nothing from this crisis. Things simply haven’t gotten bad enough—yet.
Mr. Gilani,
Michael Ruppert's (of "Crossing the Rubicon" fame) question that he reiterated many times in regard to solving the mystery of who and why certain parties aid and abet criminal activity was cui bono? In revising the tax code over the last 2 decades, federal and State revenues, in order not to raise taxes and thereby lead the citizenry to question the criminal activity in which the government at all levels has become partners to, are more and more derived from the very activity which the alphabet soup of regulators are supposedly paid to curtail.
Should they actually do their job, something most gov't workers are loathe to do anyway, the monies to pay their salaries are cut off…they therefore will do everything in their power to pointedly NOT do their jobs (which, with Condi Rice and Bernanke as stellar examples, is the best way of getting promotions and raises). Nothing Obama has proposed will change that.
So if the answer to the question cui bono? is "The government", then changing the government won't (and quite obviously has yet to) help. The way the government derives its revenue is where the change has to be made. The shreds of the middle class will remain complaisant and passive until its THEIR money they see as being fraudulently abused. Like Wall St. as long as it's OPM, they'll settle for their fix, no matter who the dealer is, even if those "other people" are eventually their own children.
Changes in the regulatory structures will not solve the real problem – irresponsible monetary policy of the FED. This destructive policy over the period of several decades has lead to a total collapse in the US savings rate and to changes in the structure of the US economy – it is no longer a productive economy, where growth comes from investments in production capacities and the consequential rise in employment (and thus the rise in real incomes), but from (debt funded) speculative bubbles. In other words, the US economy can grow only when a new speculalive bubble is created. The latest one – the treasuries bubble – is about to burst. The fall out will be horrific – either the US will default on its debt obligations (because of much higher costs of servicing its existing debt obligations) or the FED will "monetise" the debt by printing mountains of new money and cause hyperinflation. In the context of these two alternative future scenarios, the issue of whether or not the Obama administration will ban some derivatives is probably inconsequential.
New or reinstated Rules and Regulations are not the final remedies that are needed. It is having a single team of Regulators with clear instructions to properly enforce the laws already on the books! Having a variety of Regulators has and will continue to cause conflicting opinions/rulings that only confuse the situation. Companies are given guidelines by one Regulator only to have another one give opposing guidelines. With Banks and Brokerage firms now under the same roof, the OOC/SEC/IRS/FINRA efforts should be combined into one entity. This is a matter of the left hand not knowing what the right hand is doing.
The FederalReserve is a cartel of authoritarian criminal elistists who earn money by printing it, and by feeding the beast (congress and administration) with an unending supply of counterfeit money without any limits whatsoever.
The FederalReserve and FractionalReserveBanking ***must*** be terminated, or everyone on earth will become slaves of the new world order criminal elites. This is serious!
And PS: this is an obvious propaganda counterweight to the RonPaul bill to "audit the fed".
Meet the new rules…same as the old rules…only worse.
I voted Obama for a change. But as far as domestic policy goes, what I got is BUSH LITE!!
Will the new rules stop people like Obama from trying to destroy the banking system? Obama with a team of layers went to the banks and threatened large laysuits if they did not make a lot of loans to people that they knew could not pay back the loans about 2yrs. ago. They used the 1994 Federal Fair Housing Act signed into law by Clinton that started the oncoming meltdown. Obama went to any banks using sound lending practices with the threat of lawsuits. How can people be so dumb as to think he will be the savior. He is now proposing a $3Trillion dollar health plan to add further to the hole we are in.
[…] effort to overhaul the financial regulatory system that led to the ongoing financial crisis, please click here to check out a related story that appears elsewhere in today's issue of Money Morning. That story – […]
how can walls and bridges be recreated by the very same persons that dismantled them?
The majority of Americans voted for change, now where's this change gone?
Is Geithner a change? Is Summers? Rubin?
Mr. Galani seems to have the best handle yet in my limited knowledge of how the financial world works.
How do we who were once trusting customers of the large investment houses ever again overcome our distrust and invest in something that will be skimmed and scammed by clever people in fancy clothes, earning unreal salaries, while producing glib statements to attract investors?
Too many voters bought into the "hope and change" of the present administration and now we must wait until those who did, recognize that we all have been "had" by a brilliant politician and supportive Democrat Congress who are knowingly and systematically destroying America by ignoring the constitution and the spririt in which it was conceived.
How is it that other nations can recognize failure in a duly elected government and have a "vote of no confidence" and remove that "failed party" from office?
Moving the chairs around in the room will not restore "confidence" to investors. Seeing crooks become disgraced and removed from their lofty positions may serve that purpose.
This nation cannot wait until we become defunct.
Change is upon us. We should have gotten it when we got the results of the election. We live in a capitalistic society and we have the right people in place to do the job now. Lets face it! It ain't about to change any more than it already has………..
I enjoy reading the results any day of the week and the play by play. But we can't keep saying change when we know where we live and what type of society we have adopted. Do we want to live in a Soviet Society. I don't think so. Socialism is not anything that has ended up with any good from it. I'm not about to give my one and only vote for socialism and I am one for change, but, realistic change. If we were hoping for some other financial windfall from the election, we should have elected someone else with a more promising campaign slogan. Something more like, "give me liberty or give me death", or voting for kennedy.
Change happened with the election. With that said, he is nothing more than a President that we elected and we should let everything else alone. There is nothing else we can hope for in change. So just forget it.Is anyone surprised out there! How could anyone believe that our current economic system, one that is built on capitalist ism, even begin to think that we could shift quietly into a socialistic society that doesn't work to begin with.
I didn't expect anything other than what has already happened. Our economic system needs help and it looks like we got the right folks in the right office to fix our problems. I don't expect our current financial system to be corrected overnight or do I expect a President to change anything during his less than 4 years in office without a panic audience stemming out of mutiny. Rob Lowrey, I agree with you 100%.
[…] The administration’s 88-page “white paper,” released last Wednesday (June 17), goes a long way in identifying most of the weak links in the regulatory chain that was supposed to protect America from a financial freefall. But, as always, the devil is in the details. […]
[…] The administration’s 88-page “white paper,” released last Wednesday (June 17), goes a long way in identifying most of the weak links in the regulatory chain that was supposed to protect America from a financial freefall. But, as always, the devil is in the details. […]
[…] effort to overhaul the financial regulatory system that led to the ongoing financial crisis, please click here to check out a related story that appears elsewhere in today's issue of Money Morning. That story – […]