A vote on financial reform Monday failed to produce the 60 votes needed to move ahead, as Republicans said they felt the bill was rushed and not ready to take the floor.
The Senate's second attempt at bringing the reform bill to debate occurred yesterday (Tuesday) on the same day as Goldman Sachs Group, Inc (NYSE: GS) executives – including vice president Fabrice Tourre, the only individual named in the suit – faced the Senate Permanent Subcommittee on Investigations in Washington. Tourre denied the Securities and Exchange Commission's charges and said the product in question "was not designed to fail."
Goldman was the recipient of $10 billion in bailout funds – one of the most contested topics halting financial reform progress.
The uproar over taxpayer-funded financial institution aid along with the looming financial regulation overhaul prompted our fifth installment of Money Morning "Question of the Week:" How do you feel about the status of financial reform? Has it gone far enough – will too much regulation crimp our free market system? Or does it need to go much further – and can the powers-that-be create an effective reform proposal?
Here is a collection of reader responses showing concern for the future, questions over government spending, and ideas for improvement.
Where There's a Will to Deceive, There's a Way
One of the primary reasons for the prosperity of the United States over the last century or more, or even since its inception, has been that most investors have felt that the system was trustworthy. That is, if you put your money in a bank, you could expect to get it back again. If you entered into a contract, you could be confident that the other party would fulfill his obligations, or would be liable in court. And we were blessed with a cultural/religious/moral society in which honesty, fairness, generosity, and just general "goodness" were taught and practiced by the majority of our citizens. And all of this was very good for business.
This is not to say that all was motherhood and apple pie. There have always been cheaters and con men among us, and we learned to watch out for them – usually by losing money to them, which is the kind of tuition that always seems to be the most educational. However, if you were dealing with a bank, you could be very confident that they would deal honestly with you, because they valued their reputation and knew how easily it could be lost. And this was true not just of banks, but most businesses, whether a locally-owned corner store or a nationwide chain.
As a corollary, if you tried to deal dishonestly with them, you could expect no mercy, and if you attempted to get them to assist you in an underhanded scheme to profit you both, you would almost certainly be escorted from the premises and warned in no uncertain terms not to return.
There were laws and regulations to support this, of course. When banks began failing in large numbers during the Great Depression, the Federal Deposit Insurance Corporation (FDIC) insurance gave people confidence to keep putting money in the banks with the assurance that if the bank failed, the government would make sure that people didn't lose their money. Likewise, there were many other regulations that governed the banks and other financial institutions, and businesses in general. But above and beyond all the regulations, most institutions still felt deep in their institutional guts that it was vitally important to protect their reputation, and they behaved accordingly.
Sadly, this appears to be fading, more rapidly in some places than others, and I have a hard time believing that we can implement regulations to restore it. If people want to cheat, to game the system, and to take unfair advantage, the awareness creeps in to all participants that the person you are dealing with may be seeing you as a sucker, rather than as a customer or client with whom they want to develop a long-term mutually beneficial relationship. Regulations can be written to try to control this, but trust is fundamentally not subject to regulations. If I can trust you only to abide by the regulations, then there is almost certainly a loophole that will allow you to screw me, so I am going to be reluctant to do business. And this is bad for business.
Fundamentally, the best kind of place to do business would be one with no regulations at all, but where all the participants were honest and honorable. I don't know of any such place, but the less we need to worry about protecting ourselves against "badness," the better for both society and business. It is no accident that during the best times in the United States, the majority of people didn't find it necessary to lock their doors. Regulations certainly have a place in our markets today, but I fear that we will find that regulations cannot protect us against the "badness" that seems to be more and more prevalent in our society. This is not to say that the majority is bad, because I do not believe it is true, but I worry about the direction of the trend.
– Gordon F.
Bank Bailouts Not the Answer
One has to wonder how much different the economy would be if we had poured those mega billions into infrastructure rather than the banks, who have used it to bolster their balance sheets.To be sure, the regulators are getting tougher on reserves, but that too is government.
My thoughts are along the lines of rather than sending $165 billion to American Insurance Group, Inc (NYSE: AIG), this money be used for bridges, highways, and sewer plants, etc.I think it is a safe bet that if construction workers and contractors received this money it would have been spent and we would have tangible results. I also think it is a safe bet that those same construction workers would have spent that money in shops and malls across the country.
That in turn would have helped the banks with their underwater mortgages and installment paper.
– Glenn T.
Political Reform a Priority
Financial reform of all derivative securities is badly needed. Most are sold similarly to an insurance policy that covers defaults of securities backing the derivative security. Often, the financial institution backing the derivative does not have sufficient financial backing should the securities go bad and default.
Our government and foreign governments currently do not have thepolitical will to truly regulate this industry worldwide as it should be regulated. The investment banks, hedge funds and others have the current economic power to keep the reform process in slow, delaying mode. To truly solve our financial regulation challenge in a reasonable, responsible way will require a true reform of both the Democratic and Republican parties and a changing of the mindset of the government's bureaucratic leadership.
For now at least, since both parties have failed the American people in preventing this financial and political mess, it is best to clean out the worst of the current office holders and anyone having been in office more than three terms, to elect only independent candidates to office.These candidates must pledge to be true reform-type people who will work to begin efforts to clean up the big Washington office holders.
Regulation: Quality Over Quantity
Unintended consequences will prevail with additional regulation and that will not be good for our country. We need to let businesses fail without bailouts as bad practices/bad business models should bear the consequences.
There is ample evidence to point to the role government and Congress played in the real estate market collapse. The roles of Fannie [Mae] and Freddie [Mac], the role of the Community Reinvestment Act, and the roles of Rep. Barney Frank, D-MA, and Sen. Chris Dodd, D-CT, and Sen. Chuck Schumer, D-NY, are disgraceful; the use of [the Association of Community Organizations for Reform Now] (ACORN) to castigate/embarrass/coerce banks into granting loans that obviously could not repaid and then securitized by Freddie and Fannie is beyond the pale.
Additionally, allowing banks to loan money to individuals and then sell them to the government to be pawned off to investors is wrong. This supports growth without consequences and was also a key factor. Greed is a powerful force and there is no denying that it ran amuck and still does, but additional (incremental) regulation is like pouring sand down a rat hole.
I do not trust government that wants to control everything. We need to step back from the abyss, remove ineffective laws and regulations before it's too late.
– Jim T.
Spend More At Home
To have money for improving the U.S. economy, the first step is to stop the "phony" wars in Iraq and Afghanistan, and reduce the 800+ foreign military bases we currently have around the world.Also, there is no need for massive foreign embassies like in Iraq, Pakistan, and now the United Kingdom.Our national security would not be affected at all, except in the screaming of warmongers.
Nearly all spending for these is foreign sourced – we pay foreign groups, and the U.S. economy gets little benefit. The annual tab is around $300 billion per year.Think how much the United States would benefit if we authorized this for upgrading our roads, harbors, airports, railways, electric grids, and provided loans for small start-up companies.
Let's get the United States rolling again and focus on spending our taxes at home!
– Tib C.
[Editor's Note: Thanks to all who responded to our fifth installment of the Question of the Week feature regarding U.S. financial reform. Be sure to answer next week's question: Do you think booming corporate profits are the sign of a strengthening U.S. economy? Can these billion-dollar earnings be sustained for the rest of 2010? Or are these first-quarter numbers too good to be true?
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Thanks to everyone who took the time to participate – via e-mail or by posting their comments directly on the Money Morning Web site.]
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