Here Are the New Financial Regulations

Tim Cavanaugh | June 17, 2009

As announced earlier this week, the White House has issued its near-final version of a new regulatory framework for the financial industry. The official rollout will be televised shortly. Meanwhile, here is the current version [pdf] of the regs, courtesy of the Washington Post.

One ominous part of the new regs is a proviso that would subject "large, interconnected" firms to consolidated oversight by a special Financial Services Oversight Council -- a prospect that, as commenter CoyoteBlue noted, sounds like nationalization. Here is the discussion of this idea from the working document (all typos mine):

We propose the creation of a Financial Services Oversight Council, chaired by Treasury, to help fill gaps in supervision, facilitate coordination of policy and resolution of disputes, and identify emerging risks in firms and market activities. This Council would include the heads of the principal federal financial regulators and would maintain a permanent staff at Treasury.

We propose an evolution in the Federal Reserve's current supervisory authority for BHCs to create a single point of accountability for the consolidated supervision of all companies that own a bank. All large, interconnected firms whose failure would threaten the stability of the system should be subjected to consolidated supervision by the Federal Reserve, regardless of whether they own an insured depository institution. These firms should not be able to escape oversight of their risky activivties by manipulating their legal structure.

Under our proposals, the largest, most interconnected, and highly leveraged institutions would face stricter prudential regulation than other regulated firms, including higher capital requirements and more robust consolidated supervision. In effect, our proposals would compel these firms to internalize the costs they could impose on society in the event of failure.

That doesn't necessarily imply nationalization, but there's a pretty severe issue of cartelization here. If all the too-big-to-fail firms are meeting, even for merriment and diversion, in cahoots with a special Treasury Department stovepipe organization, how can the conversation not end in a conspiracy against the public?

Shorter description, from Rep. Jeb Hensarling (R-Texas):

It's kind of like taking rotted wood and putting a fresh coat of paint on it -- to some extent, it doesn't solve the problem and it can make make it worse by hiding flaws that lie underneath.

Here are some preliminary comments from President Obama:

Comments

|6.17.09 @ 12:16PM|#

This Council would include the heads of the principle federal financial regulators and would maintain a permanent staff at Treasury.

As long as they don't nationalize spelling, we're OK. I guess joez law applies to the Right People In Charge too.

Fluffy|6.17.09 @ 12:16PM|#

One real concern arising from cartelization of this kind can be discerned from observing the way the tobacco litigation settlements have been implemented.

You'll have a handful of very large firms being subjected to punitive litigation that would, if new competitors were allowed to arise, place those firms at a marked competitive disadvantage.

So in order to keep those firms fixed in place and make sure the system doesn't unravel, new competitors will simply not be permitted to arise.

This is what will happen in practice. Mark my words.

Fluffy|6.17.09 @ 12:20PM|#

Sorry, that should have read "punitive regulation".

stuartl|6.17.09 @ 12:27PM|#

I guess the simpler "no firm is too big to fail" solution is a non-starter. I wonder how much growth this will knock off of our GDP over the next 25 years?

New World Dan|6.17.09 @ 12:29PM|#

How about we just impose an across the board market cap on publicly traded companies and split up anything that's too big to fail(tm). Or just an exponential tax on companies according to market cap. I like simple solutions.

Tim Cavanaugh|6.17.09 @ 12:32PM|#

Like I said, Tulpa, all typos are mine. Fixed. Thanks.

Christ on a Cracker|6.17.09 @ 12:35PM|#

All large, interconnected firms whose failure would threaten the stability of the system should be subjected to consolidated supervision by the Federal Reserve, regardless of whether they own an insured depository institution

It sound like "Too Big To Fail" is turning into "Too Big To Run Without Government Regulation and Ownership"

|6.17.09 @ 12:35PM|#

Other highlights, from p54:

The spread of unsustainable subprime mortgages and abusive credit card contracts highlighted a serious shortcoming of our present regulatory infrastructure. It too easily allows consumer protection values to be overwhelmed by other imperatives -- whether short-term gain, innovation for its own sake, or keeping up with the competition. To instill a genuine culture of consumer protection and not merely legal compliance in our financial institutions, we need first to instill that culture in the federal regulatory structure.

Got that? Merely obeying the law is not enough in Obama's Amerika.

More unicorn dust and protestations that "we do not want to do what we're trying to do":

We do not propose a new regulatory agency because we seek more regulation, but because we seek better regulation. The very existence of an agency devoted to consumer protection in financial services will be a strong incentive for institutions to develop strong cultures of consumer protection.

Invisible Finger|6.17.09 @ 12:37PM|#

All large, interconnected firms whose failure would threaten the stability of the system should be...

...split up so that any failures DON'T threaten the stability of the system. The only thing worse than government trust-busting activities are government trust-sustaining activities.

|6.17.09 @ 12:40PM|#

Not to mention that those "other imperatives" are the reason financial institutions exist in the first place. To make money (sorry if I offended our leftist comrades with that blasphemy).

Paul|6.17.09 @ 12:42PM|#

And of course, the next question that should be on everyone's mind: Who will run such a regulatory agency? The people who so successfully saw the housing bubble and subsequent leak? What cadre of men and women will be qualified (this time) to make sure that nothing bad in the markets ever happens again. That no one ever loses any money (market failure) or that the values of our investments never go down.

Cloner|6.17.09 @ 12:46PM|#

"Who will run such a regulatory agency?"

The One.

Seward|6.17.09 @ 12:49PM|#

For all the obvious and predictable reasons, this is ripe for abuse.

Creech|6.17.09 @ 12:51PM|#

Oh, there's no cadre of men and women qualified to make sure our investments never go down. But there are such cadres who can make sure our investments never go up!

stuartl|6.17.09 @ 12:51PM|#

It sound like "Too Big To Fail" is turning into "Too Big To Run Without Government Regulation and Ownership"

This isn't an unreasonable position. Insurance companies inspect the companies they insure for fire hazards. If the government is going to insure these companies against failure, isn't it logical for the government to inspect them and require certain restrictions? We all know the government will either be overly cautious and prevent growth, or be useless and require extra paper work, but if companies are too big to fail without restriction, the moral hazard problem becomes huge.

Kevin|6.17.09 @ 12:52PM|#

Consumer protection IS good business. If a company is "overwhelmed by other imperatives", they should be driven out of business. Which would have happened naturally, without government intervention. Hence government is the cause, not the solution.

Also, the open ended wording in this is scary. What other industries are too big to fail? Software? We need to limit your executive pay, Microsoft. How about food production? Kraft, you need to go organic.

|6.17.09 @ 12:58PM|#

stuartl,

I think the point is we should avoid both "Too big to fail" and the other one.

|6.17.09 @ 1:01PM|#

WooHoo - mentioned on Hit&Run!

I can also see how the up-and-coming financial companies would do all that they could to avoid the dreaded "large-interconnected-firms-whose-failure-would-threaten-the-stability-of-the-system" designation. After all, once you hit that very precise size and level of global financial influence, you're suddenly under the thumb of special "Council."

Companies will now base their business plans on either avoiding or gaining admittance to this fun regulatory category. I'm sure there will not be a host of unintended consequences from THIS regulatory regime.

MNG|6.17.09 @ 1:06PM|#

Is that pic of one of the Guardians from Green Lantern or the Marvel Grandmaster?

stuartl|6.17.09 @ 1:11PM|#

I think the point is we should avoid both "Too big to fail" and the other one.

Tulpa, I agree totally. My first comment was an unsuccessful attempt to say that allowing failures is simpler and promotes growth. The flip side is that not allowing failure absolutely requires increasing government regulation.

|6.17.09 @ 1:18PM|#

Yes, all we need in financial services are more barriers to entry and more promotion of gigantomastia in the industry.

Ska|6.17.09 @ 1:20PM|#

MNG - I thought it was Mister Mxyzptlk.

|6.17.09 @ 1:26PM|#

That would be one of the Green Lantern Guardians.

Tim Cavanaugh|6.17.09 @ 1:27PM|#

He's a guardian of Oa. Nobody reads Green Lantern anymore, I guess?

MNG|6.17.09 @ 1:32PM|#

I thought so!

But no Tim, though a big comics reader, I don't read Green Lantern anymore. In fact I pretty much never read him. He was in JLA at times, which I did read, and loved him on Super-Friends. I always wanted to see him fight and best Supes...

|6.17.09 @ 1:44PM|#

Companies will now base their business plans on either avoiding or gaining admittance to this fun regulatory category.

Which will be violating the 'spirit' of the new laws. Since we need more than merely meeting legal requirements, those firms will be regulated by this council also. Nobody will know how big you have to be to qualify for this, to prevent just what you predict.

Granted, nobody knowing when the regulatory boom will be lowered on them will have NO adverse results, right?

|6.17.09 @ 1:51PM|#

OA is a fascist police state. They send out "guardians" with weapons of immense power to areas of the galaxy that don't request it in order enforce their arbitrary laws. Oa isn't elected to do these things and there is no oversight at all. They given those weapons to unstable douchebags and totalitarian asswipes. And their first attempt at creating "guardians" resulted in an army of homicidal robots.

|6.17.09 @ 2:02PM|#

He's a guardian of Oa. Nobody reads Green Lantern anymore, I guess?

I recognized him right off, but wasn't fast enough in the comments to beat MNG.

The question is, who in the Obama Administration would be the Green Lantern? And who would be Abin Sur?

monkey on juice|6.17.09 @ 2:04PM|#

"These firms should not be able to escape oversight of their risky activivties by manipulating their legal structure. "


Hey wait, manipulate means change, right? But I thought under president McHopey, change was a good thing?

So then what is the point of LEGAL structures if the government isn't going to regard them for purposes of its regulatory authority? Regulation by divine decree of McHopey?

|6.17.09 @ 2:06PM|#

I have an idea to fix this. We will create a super agency consisting of all the banks of the country and have them vote for boards of directors and then have the politicians put in some of their cronies in place as well and have them take charge of regulating the banks and money supply. We will call this the Federal Reserve, that should stop all those problems with booms and busts. To bad we did not create this 100 years ago so we could have avoided all the inflation of the US dollar and the various depressions and recessions we have endured

Kyle Jordan|6.17.09 @ 2:12PM|#

"He's a guardian of Oa. Nobody reads Green Lantern anymore, I guess?"

I take offense to this seeing as how my name is a combo of Kyle and Hal.

The real question here though is, which Guardian is it? Ganthet would be the obvious answer but this one looks too angular and rigid.

And MNG, do yourself a favor and pick up these tbps:

Green Lantern: Rebirth
Green Lantern: Sinestro Corps War vol. 1 & 2
Green Lantern: Tales of the Sinestro Corps

And in a total fanboy moment, I'd like to take the opportunity to say the Blackest Night looks like it's going to be fucking amazing!

Kyle Jordan|6.17.09 @ 2:15PM|#

"The question is, who in the Obama Administration would be the Green Lantern? And who would be Abin Sur?"

Dunno but Obama himself is a Blue Lantern seeing as how their fictional powers are based on Hope.

|6.17.09 @ 2:16PM|#

Yeah, that's what I want: the Federal government going about the business of "instilling culture".

How about a new cabinet-level department, the Department of National Culture? We could have a Secretary of Culture, and maybe even an Assistant Secretary of Business and Consumer Culture.

|6.17.09 @ 2:17PM|#

I won't say anything against the Guardians, because I want a power ring. To do good things with, of course.

monkey on juice|6.17.09 @ 2:17PM|#

"How about a new cabinet-level department, the Department of National Culture? We could have a Secretary of Culture, and maybe even an Assistant Secretary of Business and Consumer Culture."



The culture club?

Kyle Jordan|6.17.09 @ 2:19PM|#

And to further pollute this thread with off topic Green Lantern talk...

I find it funny that the Reason uses orange as one of their main colors. The Orange Lanterns gain their power through Avarice.

Larfleeze may have taken it a bit too far but hey, greed is good.

|6.17.09 @ 2:22PM|#

And here all along I thought it was a picture of Xenu the Magnificent, all knowing, beneficent and powerful (PBUH).

MNG|6.17.09 @ 3:40PM|#

Thanks for the tips Kyle. I haven't read GL's since the old GL and Green Arrow hippie stuff that O'Neil did. I do read about 3 tpb.s a week though, and am looking for something new, so thanks.

|6.18.09 @ 6:53PM|#

Obama keeps talking about "systemic risk", without understanding that the many boards and committees he's creating are themselves sources of "systemic risk". Even better, political risk is a worse kind of "systemic risk" than financial risk, because you can't hedge or diversify out of political risk.