Money Morning Mailbag: Readers Eager For Effective Financial Regulation

[Editor’s Note: We want to hear from you! Do you have a comment, a suggestion or story idea, or a question? Let us know at [email protected]. (**) And be sure to check back for responses to reader questions and comments.]

The Money Morning mailbag continues to overflow with reader thoughts and concerns regarding financial reform – which is finally making slow progress in Washington. After three failed attempts to bring a financial regulation bill to the floor this week, the Senate on Wednesday finally agreed to start debate.

Following is a collection of this week’s Money Morning reader comments on our articles regarding reform, inspired also by more news from the Securities and Exchange Commission case against Goldman Sachs Group, Inc. (NYSE: GS) as executives faced a Senate committee hearing.

Goldman Hearing Disappointed

The hearings broadcasted [Tuesday] nationally on television all day long I thought were totally a waste of time and embarrassing to both Goldman and our government. To think that they could rein in the Goldman execs and show the world how bad they are on national TV was crazy. Goldman had an answer for everything. Yes, they were in effect operating a gambling casino, but the investors in those transactions are just as much to blame. They knew that to take a long position on those collateralized debt obligations there had to be a short on the other side – whether it was Goldman itself or another investor. 

These sophisticated investors are “big boys” playing in a huge game that our government officials barely understand. And Paulson & Co.’s group had no great influence in the selection process.  Yes, there should have been a more clear disclosure of Paulson’s role in the transaction, but this is a very minor infraction that our government is trying to play “gotcha” with just in time to ram through a huge reform bill.

I am truly disappointed that the SEC doesn’t have anything better to bring against Goldman.  In fact, the real crime in the past 18 months was allowing the big banks (Goldman and others) access to 0% interest money at the FederalReserve window, which they turned around and made billions with, betting on risky commodities trades.  Give me money at 0% interest with a bailout backstop and I can make billions, too.

Let’s get down to the real problems within our system that don’t just include Wall Street, but our government’s entire system.  We have weak prosecutors, weak investigators and weak regulators.  The SEC is a total joke.  The answer to all of this is capital, capital, capital.  And no more free money for Wall Street to gamble with.

– Robert M.  

More info on the Goldman hearing:

MM: Shah Gilani has been analyzing and dissecting Wall Street’s actions using his experience as a hedge fund manager and Wall Street executive. The next two reader comments are regarding Gilani’s recent insights to the world of financial reform in the articles “Warning: This is Not Another Wall Street Conspiracy Theory, These are the Facts” and “Heavy-Handed Politics Could Boost Bank Reform, Stock Prices and the Economy.”

Knowledge is Power

Thank you for the many fine articles by Shah Gilani that have helped clarify the financial developments both historically and recently.  I was so impressed by the list of questions that Shah said our elected representatives should be asking that I sent the list to them on one of the many occasions they requested my donation.

It may appear that they got it.  Although I'm sure that Mr. Gilani had been doing plenty of footwork before my little two cents was sent.

I've noticed that the annual reports of companies are often including a request from shareholders for more say on compensation.  This is followed by the company saying that it anticipates guidelines coming in financial reform and to wait for that. 

I appreciate your recap of proposed reforms so I can support it with more clarity. Clarity and transparency are good for everyone. We are a great and innovative nation; let's step into this greatness.

–  L.T.

MM: Executive compensation has been scrutinized since the meltdown as huge Wall Street bonuses rattled shareholders’ trust in management. The Obama administration enforced a “say on pay” provision in June 2009 allowing shareholders to vote on whether or not they should approve executive compensation.

Despite a roar of remuneration complaints, some shareholders have recently voted against exercising their “say on pay.” Johnson & Johnson (NYSE: JNJ) held a vote April 22 where opponents won, 52% to 48%. Dupont Co. (NYSE: DD) investors also passed on their chance to approve pay with a 55%-45% vote.

More info on Shah Gilani’s financial reform insight and executive compensation: 

Good Writing on Reform

I read Shah Gilani's articles - good writing.  I have several comments on Shah's article about finance reform (Gilani's words in bold italics):

SG: Give government the power to dismantle "too-big-to-fail" companies.  This amounts to bailing out the TBTFs. The law should not support bailing out failed financial institutions.  The TBTFs should be allowed to fail.  The law should provide for capital and asset size restrictions to prohibit the creation of TBTFs.

SG: Divest commercial banks of their proprietary trading arms (the Volcker rule). Agree - why not just restore the former Glass-Steagall Act?

SG: Create a consumer protection agency.  Numerous government agencies exist to "protect" the public. The Federal Reserve is the worst possible choice for a consumer protection agency. This is the fox guarding the hen house.  The Federal Reserve is not a consumer finance organization, but an entity that wants to protect TBTFs.

SG: Better empower shareholders by giving them "more say on pay," as well as input on compensation incentives.  Current corporate executives and boards are nothing more than bank robbers. The best way to solve this excessive compensation problem is prohibit mutual fund companies from offering both mutual funds to individuals and retirement services to corporations. Mutual funds [don't object to] excessive corporate compensation because they want the corporation's retirement fund business. Without the corporate business conflict of interest, the mutual funds would start protecting their shareholders' interest by voting against excessive corporate compensation.

-  Arnold C.

More info on Glass-Steagall and consumer protection:

MM: The following two reader comments came in response to last week's Money Morning Mailbag: What's More Broken, Washington or Wall Street?

Washington Laid the Ground Work

I definitely believe Washington is more broken. 

Let's start with Fannie Mae and its just-as-corrupt twin spawn of a different mother, Freddie Mac. Why were these firms allowed to recklessly "invest" in the housing market by creating toxic mortgages? These were then given a government guarantee so they could be resold, allowing more capital to flow into the housing market.  With the assistance of the [Alan] Greenspan/[Ben] Bernanke Federal Reserve, they were able to create an entire supply of should-be-renters pretending to buy homes with almost no money down (sounds like a tenant instead of an owner to me). 

By keeping interest rates so low for so long a time, these triplets enabled people to ratchet up house prices (bids) beyond any sense of equilibrium.  After all, in what economic sense would more supply (new construction of houses) create rising prices?  Yet this is exactly what happened. 

Wall Street just created a way to multiply the money by separating the principal and the interest payments on the bundled mortgages, which had a government seal of approval (AAA-rated paper) that allowed them to be sold to "investors" who were unable to assess the individual assets in the pool.  But they were told that repayment was guaranteed by the government. 

How is this not a broken system, especially when we had respected commentators telling us for most of the last fifteen years that we were creating a housing bubble? Looking back, I am thankful that I knew to stop selling real estate back in 1995.  I did miss the bubble, but I also missed the pop.

- Kevin B.

Fixing Washington Will Fix Wall Street

In my opinion Washington is more broken than Wall Street.

The partisan politics of the left and the seeming negativity of the right have created an atmosphere that does not bode well for the American people. What we need is reasonable people making reasonable decisions on what will fix the issues.

I find it incomprehensible that Washington is blaming Wall Street for the housing crisis and then the recession. They forced the banking industry to loan people money to buy a house even though they could not afford to buy it - and could even less afford to pay for it. Washington opened the door and then cried foul when the financial sector took the situation to a level they never foresaw or intended.

Also, those people who are supposed to regulate and stop these issues from occurring seem to be incompetent or inadequately staffed or both do their jobs. If the new regulatory process does not truly address the issues then it will be another failure of Washington and another chance for Wall Street to take advantage.

In any case, until Washington creates the scenario where the housing market will again begin to build houses and people can get mortgages, the recession will linger on. Housing drives the economy and has for the past fifty years - fix it and things will begin to get better.

Beyond that, Washington must provide incentives and force banks to lend money for business to grow. Most businesses in the United States need a credit line and access to capital to survive and this is an issue. Washington must force Wall Street to lend money.

Throwing out the Democrats may seem like an answer, but only if the new Congress will work together with the president and produce legislation that will allow us to grow and prosper with special interests taking a back seat to progress.

Bruce R.


(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Web site. Please include your name and hometown with your email.

News and Related Story Links: