New York Times Editorial: Real Reform in an Election Year

New York Times Editorial: Real Reform in an Election Year
Copyright by The New York Times
Published: March 22, 2010
http://www.nytimes.com/2010/03/23/opinion/23tue1.html?th&emc=th


The White House and Democratic leaders in Congress won’t have much time to savor their victory on health care reform if they hope to achieve the next big goal: enacting financial regulatory reform before the midterm elections. A year and a half after the country’s banking system nearly imploded, it is still operating under the same inadequate rules and regulations.

Unless President Obama throws himself fully into the fight, there is not much chance of pulling this off in an election year, when many lawmakers are more focused on deep-pocketed donors than on the public interest. The House passed a flawed reform bill last year. After months of talks that led to some compromises between Democrats and Republicans, no Republicans voted for the Senate’s version when the banking committee passed it on Monday. That bill, too, is flawed, and the banks are lobbying relentlessly to water it down even more. Here are the areas that must be fixed:

PROTECT CONSUMERS The administration has called for an independent Consumer Financial Protection Agency, with power to police banks and nonbanks for bad lending in mortgages and other forms of consumer debt. Caving to the lenders, the current Senate bill would instead house the new bureau in the Federal Reserve, a diminution of status at odds with robust regulation.

The proposal does take steps to isolate the bureau from Fed influence, including making the new regulator a presidential appointee. But that is a consolation prize for loss of autonomy, not a guarantee of independence. Mr. Obama will also have to push back against the Senate’s proposal to give other regulators the power to veto the agency’s rules in certain circumstances. To protect consumers, the new agency must be truly autonomous and have full rule-making and enforcement authority.

REIN IN DERIVATIVES Even bankers couldn’t understand these largely unregulated instruments that were supposed to reduce risk, but ended up spreading it throughout the system. The Senate bill would still allow many derivatives to continue to trade outside of transparent and fully regulated exchanges. It also gives regulators too much discretion to exempt derivatives from full regulation. And it continues to block the states from imposing antigambling rules on unregulated derivatives deals, although many are purely speculative.

ENDING TOO BIG TO FAIL The Senate bill contains “resolution authority.” Much the same way that the Federal Deposit Insurance Corporation shuts down failing banks, this authority would allow the government to seize and dismantle bank holding companies and major financial firms — like Lehman Brothers or the American International Group — if their imminent failure threatens the system. That is a start. But more is needed, including derivatives regulation.

Unless derivatives trading is made vastly more transparent, regulators would be at a loss to understand how derivatives link one troubled firm to other firms. That could make it nearly impossible to determine how seizing a firm would affect the broader system. True reform must also shrink firms that are too big to fail and prevent others from becoming too large and complex.

The Senate proposal instructs regulators to impose higher capital standards, limits on borrowing, and other measures to make it costlier for banks to engage in activities that increase their size and complexity. Those are important safeguards. But the bill punts on the so-called Volcker rule, endorsed by Mr. Obama, which would begin to restrict the size and activities of big banks.

The Senate proposal calls for a six-month study of the rule, followed by a nearly three-year long implementation process. That’s needless delay, and the president should call lawmakers on it.

A watered-down bill could be easier to move through the Senate, and certainly would be welcomed by bank lobbyists. But weak reform would be worse than no reform, because it would entrench the status quo under the guise of change.