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Our Financial "Regulators" Just Let Us Down Again

The Dodd-Frank Act became law 18 months ago, and it may be hard to believe, but we still aren't any better off now than we were then.

Indeed, the regulators that are supposed to be protecting us from a repeat of the 2008 financial crisis can't – or refuse – to get the job done.

In fact, just yesterday (Tuesday), the Commodity Futures Trading Commission (CFTC) voted to move the effective date for rules that would add oversight to the $600 trillion derivatives market to July of 2012.

Derivatives were one of the primary culprits in creating the financial crisis in 2008.

Originally the regulations were to go into effect on July 16 of this year, but the CFTC pushed the date back to Dec. 31. And now, regulations of the item most responsible for the 2008 meltdown won't go into effect until two years after Dodd-Frank was enacted and nearly four years after the crisis occurred.

Other agencies responsible for finalizing the rules set forth in Dodd-Frank, such as the Securities and Exchange Commission (SEC) and the U.S. Federal Reserve, have been just as derelict in their duties.

In short, nothing has been fixed.

As Bad as Ever

"The structural problems are worse," Simon Johnson, a professor at the MIT Sloan School of Management and a former chief economist at the International Monetary Fund (IMF) told the Huffington Post. "[The institutions'] size, incentives — none of that has changed."

Meanwhile, American citizens still suffering from the fallout of the last crisis are left to worry about vulnerabilities in the system and the ramifications of having a group of financial institutions that are still "too big to fail."

"Dodd-Frank is baby steps," said Money Morning Capital Waves Strategist Shah Gilani. "Much of it is yet to be written. Some of it may never be written."

Gilani lays part of the blame on U.S. President Barack Obama, who he said could have used the tide of public opinion to usher in far tougher financial reforms had he focused on it immediately upon taking office in 2009.

Instead, the banks were able to sell the argument that punishing them would restrict their ability to perform their role in the economy, and could even make matters worse.

Now the window for real reform has closed.

"We won't get another chance to fix the system until the next crisis," Gilani said.

Gilani likens the current feeble attempts at regulation to trying to fill an earthquake fault with sand. "They'll say, "If we see any more trouble, we'll just throw in more sand.'" That won't work. We need to get down to where the earthquake is happening."

The MF Global Example

If anyone needs proof that delaying the Dodd-Frank regulations is risky, they need only look at the recent MF Global Holdings (PINK: MFGLQ) fiasco.

When asked by a Congressional committee where $1.2 billion of missing customer money went, former CEO Jon Corzine had no answer.
Dangerous Delays
While that scandal unfolded, the CFTC tried belatedly to push through another delayed regulation that would have prevented trading firms from using customer money for investments in foreign sovereign debt funds.

As Gilani pointed out recently in his free Wall Street Insights and Indictments e-letter, Corzine had lobbied the chairman of the CFTC, Gary Gensler, to delay that regulation. The pair had spent 18 years working together at Goldman Sachs Group Inc. (NYSE: GS).

It's apparent that the government – from President Obama to Congress to the various federal agencies entrusted with enforcing the rules – has let the American people down once again.

"Even the regulations that have been created are completely inadequate," Gilani said. "We'll have another crisis – and the next time it will be worse."

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  1. Benton H Marder | December 21, 2011

    The next crisis is already happening. The fall-out from the MF Global fiasco is becoming more apparent by the day as additional details of the monstrous fraud reveal themselves. The market mechanism for the protection of Customer Segregated Funds has utterly collapsed, bringing on a coming loss of confidence in the integrity of the system. Smart money may soon be moving off-shore in search of more honest markets. HongKong, Singapore, Bombay? Wall Street may have just committed suicide.

  2. J. Dube | December 22, 2011

    I'm literally sick of all this dishonesty, greed, selfishness, robbery of the lower and middle classes, particularly the weaknesses of character and action seen in SEC and CFTC. Where are the good guys with power to fix and change? Is it not time to clean house totally? Where is Mr. Obama in all this mess? I seriously consider not investing again in the US. in any form. Let's see some jail sentences, some justice and rejuvenation of the system. Let the Citicorp, Bank of America, JP Morgan, Goldman Sachs companies go down.

  3. Nelson Merritt | December 28, 2011

    Mr. Obama is our only hope. If he is not there, then another ten or twenty percent of politicians will become billionairres.

    The cause of the 2008 financial crisis was obvious. The Federal Reserve financed the bubble and when it came to dump the short sellers took several trillion dollars a day out of the economy. The rest is easy to follow. They couldn't bury this money in their back yards so they bought gold with it, driving up the price and doubling their ill gotten gains again. Then they changed the ownership of GM and Citi (etc) from us to them. Corrzine was part of the game in 2000, made a lot of money, but somehow got left out in 2008–says he doesn't know how–probabaly because he was working for Goldman Sachs in 2000.

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