New York Times Editorial: Whose Side Are They On?

New York Times Editorial: Whose Side Are They On?
Copyright by New York Times
Published: April 17, 2010
http://www.nytimes.com/2010/04/18/opinion/18sun1.html?th&emc=th


Last month Democrats on the Senate banking committee passed a reasonably tough financial regulatory reform bill. Now Republican leaders have suddenly begun lashing out against it.

Did they belatedly discover some problem? No. They suddenly realized that their bet that reform would be watered down as it moved along might not pan out.

Their battle cry of “no more bailouts” is disingenuous. They are not worried that reform will make bankers’ lives too easy, they are worried that it will make them too hard.

The Republicans started loudly objecting only after Senator Blanche Lincoln, an Arkansas Democrat who is chairwoman of the agriculture committee, took an unexpectedly strong stand in favor of reining in financial derivatives, the complex and largely unregulated instruments that were at the heart of the financial crisis. (Her committee has jurisdiction, because derivatives have long been used to trade commodities.)

The agriculture committee’s bill will be folded into the banking committee’s larger legislation, which includes other important reforms like consumer protection and the systemwide regulation of risk.

Of all the regulatory changes under consideration, the outcome of derivatives reform is arguably the single most important issue for the banks. Why? Because derivatives are where the money is.

An overarching aim of reform must be to ensure that all derivatives deals — many of which currently trade as one-on-one private contracts — are moved onto transparent, fully regulated exchanges. If that happens, banks stand to lose potentially billions of dollars in earnings. In addition to reducing systemwide risk, transparent trading would lead to more competitive pricing.

Ms. Lincoln’s proposal is not perfect. But among other smart reforms, it would require that nearly all derivatives be traded on exchanges. The only exemptions would be for unique contracts, which would be policed by regulators, and for a tightly defined group of companies that use derivatives for a narrow range of purposes.

It would be better — and safer — if there were no corporate exemptions. Legislators should fight to make that the law when reform is debated on the Senate floor. The proposal is a very good start, and if strengthened in a few areas, it would be a huge improvement over the status quo. And that is why Republicans are so upset.

Of course, they are not saying that. Instead, they are criticizing the banking committee’s plan for its so-called resolution authority — in which regulators would be able to seize and dismantle too-big-to-fail firms at imminent risk of destabilizing the system. They denounce it as “bailout” authority.

It is not. It is akin to the authority of the Federal Deposit Insurance Corporation to take over failing banks. It would wisely prohibit regulators from providing support to keep failing institutions open, which — if done the right way — should prevent bailouts à la American International Group. This provision, too, needs improvement, but it also would be better than the status quo.

There is still time to make necessary fixes in both committees’ bills. Ms. Lincoln has given Congress a chance to get derivatives regulation right.

The White House and Democratic leaders need to push back hard against Republican posturing, making it clear to Americans that robust reform is the only way to protect the system — and taxpayers — from a repeat catastrophe. When Republicans try to block reform, they are doing nothing more than shilling for the banks.