Taming Wall Street

Wall Street ReformI admit; I love it when President Obama feels on top of the world. Last week, he passed into law what is considered the most comprehensive overhaul of lending and high finance rules and regulations since the Great Depression. Its goal is simple. Wall Street should never again have the power to set off a recession. Or, as Obama put it, “Because of this law, the American people will never be asked again to foot the bill for Wall Street’s mistakes.”

The new law is complex, but Washington insisted it also be translated in pocketbook terms, giving emphasis to safeguards for borrowers against manipulative and dishonest lenders. The lawmakers claim that this historic piece of legislation will be “the strongest financial protection for consumers in the nation’s history.”

It came with the price, though. Obama has lost quite a bit of public support in the heated discussions leading to last week’s passing of the bill into law. Republicans also disagreed, viewing the bill as an unnecessary burden on small banks and small companies relying on banks’ help to keep their credit lines and doors open for business. Stifling this symbiotic relationship, the opposition argued, could cost the U.S. economy even more jobs.

Obama counteracted, stating, “Wall Street’s near collapse was a crisis born of a failure of responsibility from certain corners of Wall Street to the halls of power in Washington.”

Of course, Washington can drag this particular horse only halfway to the water. The financial sector and market regulators will have to go the rest of the distance by rewriting their own regulations to meet the requirements of the new law, which could open a whole other can of Wall Street lobbying worms. Even Obama is aware of the dangers ahead that could pull teeth right out of his financial reform bill. He warned, “Regulators will have to be vigilant.”

What has angered those opposing the bill? After billions of dollars have been poured into the financial systems at the height of the credit crisis to soothe the markets and provide at least an illusion of stability, at the same time the ordinary taxpayers failed to grasp why they would have to be the ones left paying the tab for big banks. Almost two years later, Obama’s new law gives financial institutions’ regulators the authority to liquidate weak firms, regardless of how big they are and how interconnected they might be.

“There will be no more tax-funded bailouts, period,” said Obama.

Bold words, by any account, although the bill leaves the little back door open. The Federal Deposit Insurance Corporation, for example, is allowed to borrow from the Treasury, in effect borrowing from the U.S. taxpayers, to help with costs of winding down a failing large financial firm. The good news is that large firms that remain standing will have to pay the Treasury back, not the taxpayers.

Of course, Wall Street spent some serious man hours poring over the huge bill, trying to find where it will hit and hurt the most. As I wrote on Monday, credit rating firms, for example, are not likely to allow issuers of securities backed by debt, like mortgages, to put their ratings into public offering documents. The reason lies in the provision of the law that allows aggrieved investors to sue rating agencies more easily. In other words, credit agencies will think twice before they rate something and post it for everyone to see. They can no longer escape unscathed if they rate something inadequately.

This is not where the law stops, far from it. It has also created within the Federal Reserve an independent and powerful consumer financial protection bureau, which will be responsible for writing and enforcing new regulations dealing with lending and credit practices in the U.S. The umbrella of this bureau will be large enough to capture obscure markets that have previously escaped regulatory oversight, such as subprime lending. Shadow economy no more. If there are firms or market segments threatening everyone else, it will no longer be difficult to simply dismantle them.

The bill has been pushed off the jumping board into delicate and unpredictable political waters, with many fractions hating it simply on face value, that it is being one of Obama’s swan songs. Republicans are howling about jobs and what this bill will potentially do to the labor market. Many business leaders believe that Washington is not listening to their woes. Ordinary Americans are losing faith in almost everything, including Obama’s policy initiatives.

I think the White House has been too aggressive in trying to make this law broadly appealing. I also think that such eagerness wasn’t necessary. Those who don’t understand the need for financial reform have learned absolutely nothing from the Great Recession. Financial reform is not about politics; it should transcend bipartisanship. What it is about is risk management and financial prudence, which is why I couldn’t care less which party has put it in place. Sure, I’m all for constructive criticism, but I haven’t seen much of that. What I’ve seen has mostly been vocal partisan parlance without any real supporting arguments. Yet, oddly, many critics of the bill managed to show up at the bill signing ceremony.