Sometime in the next week or so the Senate Banking Committee will be releasing it’s version of new regulations for the financial industry.

New regulations for the financial industry are needed because the old regulations were removed and to the surprise of no sentient human being Alan Greenspan, Robert Rubin, Phil Gramm and the current banksters, having no regulations resulted in a financial free-for-all that crashed the economy and plunged our nation into the Great Recession.

Let’s follow the $$$ …


How We Got Here

Former Federal Reserve Chairman Alan Greenspan famously said:

“Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief.”

Just like others we know from the Bush era who suffer from a failure of imagination (“who could have predicted fill-in-the-blank”), this seriously makes you wonder what the former Fed Chairman did think about. The Dot Com bubble, no…missed that. The housing bubble? Sorry, missed that too.

What happened is clear and indisputable: people acting in their own self-interest bought and sold things that had no value and crashed the world economy. The U.S. government stepped in to prop up the banks and financial institutions that were considered “too big to fail” and averted a complete meltdown of the economy. There are ongoing investigations into which individuals and institutions are to blame and if there was fraud it is hoped that there will be criminal indictments so that those who gained are brought to justice.

The term re-regulation refers to re-establishing the safeguards that were removed by Clinton Treasury Secretary Robert Rubin and Fed Chairman Alan Greenspan because they felt they were too restrictive. (Definition of too restrictive obviously was “had kept the world economy from crashing since 1933”. This is part of the disdain for “quaint” rules that we later heard Alberto Gonzales use to describe the Geneva Conventions during the Bush Administration).

The Gramm-Leach-Bliley Act repealed The Glass-Steagall Act of 1933 on November 12, 1999 paving the way for the financial crisis of 2008-2009.

Where We Are Today.

The House of Representatives has already passed their version of re-regulation: H.R. 4173 Wall Street Reform and Consumer Protection Act of 2009. The key provisions are:

Directs the Federal Reserve Board to impose stricter prudential standards on a financial holding company in certain circumstances.
Authorizes the Council to subject a financial activity or practice to stricter prudential standards for financial stability purposes.
Consumer Financial Protection Agency Act of 2009 – Establishes the Consumer Financial Protection Agency (CFPA) as an independent agency to regulate the provision of consumer financial products or services.
Accountability and Transparency in Rating Agencies Act of 2009 – Amends the Securities Exchange Act of 1934 to revise requirements for regulation of nationally recognized statistical rating organizations (NRSROs). Requires the SEC to examine NRSRO credit ratings to review whether an NRSRO has established a system of internal controls and adhered to it.

The Senate bill is the result of bi-partisan compromise (definition: republicans are allowed to water down the bill in return for their promise to not vote for it. What, you ask? That makes no sense? Hey, this is the Senate!) The Senate bill: “Restoring American Financial Stability” (warning: PDF) describes itself in this way:

Two years ago today, Bear Stearns was collapsing. In the time since, Americans have faced the worst financial crisis since the Great Depression. Millions have lost their jobs, businesses have failed, housing prices have dropped, and savings were wiped out.
The failures that led to this crisis require bold action. We must restore responsibility and accountability in our financial system to give Americans confidence that there is a system in place that works for and protects them. We must create a sound foundation to grow the economy and create jobs.

Key provisions:
Consumer Protections with Authority and Independence
Ends Too Big to Fail
Advanced Warning System
Transparency & Accountability for Exotic Instruments
Federal Bank Supervision
Executive Compensation and Corporate Governance
Protects Investors
Enforces Regulations on the Books

The Importance of Consumer Protections

Dr. Elizabeth Warren is the goddess mother of financial reform:

Elizabeth Warren (born 1949) is an American attorney and law professor. She is the Leo Gottlieb Professor of Law at Harvard Law School — where she teaches contract law, bankruptcy, and commercial law — and has devoted much of the past three decades to studying the economics of middle class families. In the wake of the 2008-9 financial crisis, she became the chair of the Congressional Oversight Panel created to investigate the U.S. banking bailout (formally known as the Troubled Assets Relief Program). In that role, she has provided a critical check on the U.S. Department of the Treasury and has been a leading advocate for accountability and transparency. Since 2007, she has advocated for the creation of a new Consumer Financial Protection Agency, which President Barack Obama has supported and Congress is now considering

Dr. Warren on the new Consumer Financial Protection Agency (CFPA):

Warren said the new agency should have four simple attributes:
• A chief appointed by the president, confirmed by the Senate;
• Independent budget authority, so it won’t be subject to the whims of Congress or an anti-consumer administration;
• Independent rule-making authority, without interference by bank regulators or others who may focus on bank profitability before focusing on consumers;
• And independent enforcement powers, so the agency’s investigators can go after abusive lenders.
“Those are the basic elements of an independent agency,” Warren said. “It’s not as if there’s some fifth thing that was left off that list — that is the list.”

The Senate bill has all of these. There are many people including many progressives who think this proposed legislation does not go far enough. Many want an independent CFPA (not under either the Fed or the Treasury). Many want the Volcker Rule implemented which would “restrict banks from making certain kinds of speculative investments if they are not on behalf of their customers”. Some want to see the addition of Senator Bernie Sander’s Too Big to Fail, Too Big to Exist amendment.

The main point of the legislation is to put in place safeguards to insure that the greed of a few cannot destroy our economy, wipe out our life savings and plunge us into another Great Recession.

So where do we compromise? Does it matter where the CFPA is housed as long as it has a budget to hire people to enforce the new regulations? If we had a CFPA under Bush but he had chosen to not staff it (which happened in many federal agencies) would it have helped? Before we insist that the Fed is not a good place to house it, it is important to realize that the face of the Fed will be changing :

… the names the Obama administration is floating to fill the Fed Board seats have been consistent voices of reason on economic policy: San Francisco Federal Reserve President Janet Yellen, Maryland Commissioner of Financial Institutions Sarah Bloom Raskin and M.I.T. economist Peter Diamond. Moreover, each candidate would help counter fundamental shortcomings in the Fed’s policymaking over the past decade

Compromise is inevitable. Drawing a line in the sand may sound nice as a metaphor but in real life the sands shift. In a Morning Feature diary series back in November 2009, NCrissieB explored the Overton Window and what progressives need to do to shift it back to the left. We start with the Unthinkable and move to Radical to Acceptable, Sensible, and Popular to Policy.

In the Overton Window concept, response to policy ideas ranges from [Unthinkable] through Radical, Acceptable, Sensible, and Popular, to Policy. As a public relations tool, it suggests an [Unthinkable] idea can make what was a Radical idea seem Acceptable or even Sensible by comparison. The point being, we can’t offer [Unthinkable] ideas expecting them to be accepted immediately or in toto. We must expect and be ready to meet criticism, even from within our own party. Not every [Unthinkable] idea will eventually be Policy, and those that do may require years or decades to develop.

– snip –

When we idealists offer [Unthinkably] Progressive ideas with that in mind, we do important work regardless of whether our ideas become Policy. But progressivism is premised on the idea that government can work to help real people with real needs. When we’re the majority party and we portray short-term rejection of an Impossible idea as a “sellout,” we reinforce the conservative meme that “government is the problem,” and we undermine the progressive premise that government can work to help real people with real needs.

In the context of re-regulation, we have this reality:

– Unthinkable – Nationalize the Banks

– Radical – Break up the big banks

– Acceptable and Sensible – Put regulations back on banks

When the Acceptable and Sensible become Popular they become Policy.

In Realworldia, we are not going to get the Unthinkable or Radical. It will be politically difficult for republicans to vote against anything that is Acceptable and Sensible because the crisis is NOT over and this is an issue that ordinary people (including Fred, our median voter ) understand. In 1987 when the stock market tumbled 20% in one day, not many Freds had money in the stock market. In 2008, after the virtual elimination of private and union pension plans, Fred, his neighbors and his co-workers lost money in their investment plans. 401ks became $4.01 and people’s dreams of a comfortable retirement vanished. The financial crisis was not just a Wall Street thing that affected “others”…it hit all of us.

While it may seem politically difficult to vote against sensible regulations (see yesterday’s Front Page story with the poll numbers), the power of the banking lobby will certainly make it tempting for Senators to vote against their constituents wishes. If you wait too long to make rule changes that are needed to avert another crisis you run the risk that people will have forgotten why you needed them. If a re-regulation bill had come up for a vote in early 2009 right after the 2nd round of TARP money was doled out, it would have passed easily. In the meantime, the foes of regulation have had a chance to muster their resources (thanks to our money!!) and they hope that the memories of the American people have faded.

Let’s hope they have not and let’s push for the Warren Plan enhanced with the Volcker Rule and sweetened with the Sanders Too Big to Fail, Too Big to Exist amendment.

Where We Go Now

A March 13th New York Times editorial weighs in on what a bill should do:

What Mr. Dodd needs to do is to introduce the toughest and smartest legislation he can to revamp the financial system and protect American consumers. And he and President Obama need to twist the arms of Democratic committee members to bring the strongest possible bill to the Senate floor. Their rallying cry couldn’t be any clearer: Whose side are you on? The banks or the American people?
The American people need a bill that strictly regulates all derivatives — the complex, and often speculative instruments that caused so much trouble here and abroad. It must establish a mechanism for downsizing too-big-to-fail banks, and create a credible procedure by which the government can seize and dismantle financial firms that pose a threat to the system. It must instruct regulators to impose safeguards, like higher capital requirements and limits on borrowing, to curtail risk-taking before it runs amok.
And any legislation worth its salt must have at its core a strong Consumer Financial Protection Agency. That agency needs to be an independent body, with broad power to police the financial system for unfair, abusive and otherwise unsound lending in mortgages, credit cards, auto loans and other forms of debt.

The politics of pushing for and passing a strong re-regulation bill are clear:

Unions, consumer groups, party activists and liberals on Capitol Hill see regulatory reform as a win-win issue: They get either a strong bill or a strong campaign argument for the midterm elections.
“If they pass something and it’s relatively strong, it’s seen as a big victory for consumers, and if they get a strong Republican pushback, electorally Democrats think they would benefit from it,” said a Democratic aide for a member involved in the effort.

The White House seems to be on board:

Invoking the 2007-2009 financial crisis in an appeal for action, Deputy Treasury Secretary Neal Wolin said: “We will fight hard against any effort to weaken that legislation, and we will work to strengthen it further where we can.”
“We cannot afford to let the memory of the crisis fade without taking action.”
Speaking at the same conference as Wolin, Federal Deposit Insurance Corp Chairman Sheila Bair said:
“When economic conditions return to normal, risk aversion on the part of investors will decline and risk-taking by banks will return … Unless we act now on financial reform, we could soon be planting the seeds of the next crisis.”

A solid financial re-regulation bill will be good policy and good policy is what leads to electoral victory for Democrats. Electoral victory for republicans comes from stopping good policy…it is all they know how to do. While it may be attractive to suggest that this bill is simply not good enough, we have to be careful about ignoring what is good about it. We need to advocate for the possible. For our sakes and the sakes of our children and our children’s children.