If there is one phrase that will be printed in every history book discussing the financial meltdown of September 2008, it will be “too big to fail.” Since that time we’ve been treated to a litany of epithets denouncing the evils of capitalism (as if that had anything to do with government bail-outs) and the criminality of greedy bankers who brought our economy to the brink of collapse. We were assured by President Obama and our leaders in Congress that they would usher in sweeping new laws and regulations, leashing Wall Street to the interests of the American people under the control or our federal government. Never again, we were promised, would firms deemed “too big to fail” be allowed to take dangerous financial risks that could impact the taxpayers and destroy the economy. After an all-nighter conference meeting between the Senate and House, Finreg has emerged as the vehicle to do just that ... and it will fail remarkably.
As Daniel Foster noted in his article entitled “‘Wall Street’ ‘Reform’ ‘Compromise’ Reached”:
Why all the inverted commas? Well, there is much in the bill that has nothing to do with 'Wall Street' or the root causes of the crisis (i.e. debit card and interchange fee rules); there is little in it that will 'reform' too big to fail or change the incentives for the kind of behavior that led to the crisis (implicit subsidies and bailout authority galore); and it was a 'compromise' mostly between Democrats.
Supporting that point is a list of major provisions from the bill posted by the Wall Street Journal, which includes these nuggets:
CONSUMER AGENCY: Would create a new Consumer Financial Protection Bureau within the Federal Reserve, with rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. ...
PRE-EMPTION: Would allow states to impose their own stricter consumer protection laws on national banks....
MORTGAGES: Would establish new national minimum underwriting standards for home mortgages....
INVESTMENT ADVICE: Would give the SEC the authority to raise standards for broker dealers who give investment advice after the agency studies the issue....
CORPORATE GOVERNANCE: Would give shareholders of public corporations a non-binding vote on executive pay and "golden parachutes," and would give the SEC the authority to grant shareholders proxy access to nominate directors.
HEDGE FUNDS: Would require hedge funds and private equity funds to register with the SEC as investment advisers and to provide information on trades to help regulators monitor systemic risk.
Another consumer protection agency? Shareholder control over “golden parachutes”? How are those going to stop another Wall Street collapse?
Arguably, provisions regarding how mortgages are issued and to whom would attack a good bit of the real problems that caused the market to implode, but seeing as how Fannie Mae and Freddie Mac have been left untouched by Finreg, even those provisions are superfluous. The remainder, like virtually the entire bill, is all about the government seizing control of the financial industry, nominally to decide what risks can and cannot be taken:
If Wall Street had become a high-flying Las Vegas casino -- as several lawmakers recently put it -- it's about to become a little old lady buying lottery tickets.
It took more than 20 hours of wrangling after many more weeks of bickering, but finreg finally passed around 6 a.m. ET on Friday. Some of the harshest elements against big banks were watered down just enough to get a coalition of Wall Street-friendly representatives from New York to pledge their support.
But, overall, the Restoring American Financial Stability Act of 2010 is much harder on big banks than anyone had suspected at the start.
Among the more surprising wins for the anti-Wall Street crowd was passage of the Volcker rule. Named after former Fed chief Paul Volcker, the provision will effectively reinstate the Glass-Steagall Act enacted after the Great Depression -- something that seemed unthinkable just a few months ago.
The provision will disallow big banks from proprietary trading, or making bets with deposits and other liquid assets for their own profit. As a concession, banks will be allowed to own small stakes in hedge funds and private equity shops, since they can't make such investments on their own.
In addition, practices such as derivatives trading are greatly curtailed by the legislation, and selling financial products without “consider clients' best interest[s].” In other words, according to Congress, Wall Street bankers are too cavalier with your money. Well, they are experts in that area, so ...
And of course, with it all comes miles and miles of government “oversight” and control with respect to the market.
It would ... give the government new powers to break up failing companies and assign a council of regulators to monitor risks to the financial system. It would also set up strict new rules on big banks, limiting their risk and increasing the costs.
The legislation gives the Securities and Exchange Commission new powers to regulate Wall Street and monitor hedge funds, increasing the agency's access to funding. The Commodity Futures Trading Commission would also have new powers under the bill, which would try and force most derivatives to face more scrutiny from regulators and other market participants.
Boiled down, all this really means is that the federal government will have the power to decide whether or not your business is engaging in too much financial risk, and to dismantle your company if it decides that you are. Unless, of course, you fund the right congressman’s campaign and pay for the best lobbyists, in which case the government will decide that your competitors are engaging in too much risk.
Recall that mantra of “too big to fail” -- that was what we supposed to be saved from. Ironically, it is laws like Finreg which create companies that are too big to fail in the first place. With more and more rules enacted, government lawmakers and regulators have more and more power to decide who survives in the marketplace. That means they have something to sell to the highest bidder, whether payment comes in the form of open political support or campaign cash.
Since the only companies rich enough to handle that sort of largesse are the biggest firms, they tend to be the ones who help write the rules either exempting themselves from regulation (as we saw with the DISCLOSE Act), or applying costly new regulations that hamper their less well-off competitors (“too small to succeed”?). Eventually what’s left are the giants, such as we formerly had in automotive industry known as the “Big 3”, who form a rather incestuous relationship with the people who are supposed to oversee them and protect the interests of the public.
Instead of saving taxpayers from the reckless whims of firms that are “too big to fail” Congress has basically ensured that such firms will be the only players in the game. Far from being a giant-killer, Finreg is really just a monster-maker that practically ensures further industry contraction (i.e. fewer firms).
With the entire financial sector dependent upon just a handful of companies to keep the economy running, when the next crisis hits the mantra will likely be “too few to fail.” And once again Congress will ride roughshod to the rescue, much to our nations detriment.