Is Wall Street Reform Destined to Fail?

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By now, most of you have probably heard: on Thursday night the Senate passed Wall Street Reform after a debate that had proceeded remarkably smoothly up until the last week or so.  In fact, throughout the whole process, not much out of the ordinary for what the people should expect of the Senate happened until it came down to the wire and some of the most-controversial amendments came up for debate, including a proposal to limit ATM fees and exempt auto dealers from new regulations.  Neither of those made it into the final Senate bill, but plenty remains.  The real question is, will it work?  It is true that the Senate’s bill still has a lot in it, including some very promising provisions, and that the House of Representatives has its own bill that must now be merged in conference, however any number of things could be done to weaken it.

Unlike health care reform, however, most of the main parts of the financial reform bill should survive the conference committee; both the House and Senate bills are quite similar, with only a few parts needing attention.  According to Senator Chris Dodd (D-CT), quoted in the New York Times, “This is one of those rare occasions when the two bills really are very close to each other”.  Despite this, there are major differences in the way the bills treat proprietary trading, or the practice of banks profiting off of trades using their own money and interests rather than acting in a service to their clients, the CFPA, and the “resolution authority”.

In fact, I would seriously question Senator Dodd’s statement above, except for the fact that we all saw the health care debate unfold; if you want a reminder of what the effort to merge bills passed by the House and the Senate considered to be normal or even very different from each other, look no further than the health care debate.  As far as the actual conference goes, there are things I like about both bills, and things I don’t.

The Good, Bad, and Ugly of Wall Street Reform

Perhaps the most visible difference is the treatment of the CFPA.  In case this acronym is unfamiliar to you, this is the proposed Consumer Finance Protection Agency that is so controversial that  a petition to stop it is still ranked far above any description of the proposal in Google search results for the CFPA.  The main point of contention was whether this would be a strong new government agency or whether it would be squeezed into the existing regulatory framework, and the split between the two bills reflects that debate.  The House would establish it as an independent agency with a diversified source of funding, while the Senate wants it folded into the Federal Reserve, where it would take money from the Fed’s budget, but with a director appointed by the President.

I understand the GOP’s objection to even more government, but the fact is that we will only have effective regulatory protections if the agency responsible for it is completely independent.  Furthermore, do we really want the Federal Reserve responsible for this in addition to its other duties?  Not only did the Fed’s economists do a pretty bad job anticipating the recession and its sluggish recovery, but also various figures, most notably Daniel Carpenter, a Harvard professor, have pointed out what may not be as obvious as my previous point: the Federal Reserve’s primary job often runs counter to the goals of effective consumer protection.  It does not need to get any clearer than this; an independent Consumer Finance Protection Agency, as proposed in the House’s version of the reform bill, is the only way to go.

Another difference between the two bills is the treatment of auto dealers under the protection agency.  According to the first New York Times article, the House specifically exempts auto dealers from the CFPA, wherever the agency is ultimately created.  In recent days, the Senate was considering an amendment proposed by Senator Sam Brownback (R-Kansas) to duplicate that exemption.  In a twist, Senator Brownback killed his own amendment apparently in order to kill another amendment, Merkley-Levin, attached to his that would have addressed proprietary trading, aka the Volcker Rule, according to the Huffington Post.  This is a mixed result, because I applaud the ironic twist that killed off the dealer exception in the Senate, but the protections afforded by Merkley-Levin are necessary.  Now, I’m obviously no expert on complex financial issues, but for the financial services industry, the concept of fiduciary duty needs to be reinforced and redefined in order to include the restrictions on proprietary trading called for under the Volcker Rule.

Continuing with the Volcker Rule, the New York Times article, re-linked here for clarity, the House’s bill would let regulators decide whether and how to regulate proprietary trading, while the Senate would direct them to study it and then ban it.  At first, the House’s approach looks better, but after really thinking about it, I would have to say that the Senate’s version has a greater chance at being successful mainly because of the twists in the language: the House leaves it up to the regulators, but the Senate almost explicitly calls for a ban.  Now, this is by no means final, and not just because of the fact that the reform effort is now in conference; no matter which proposal makes the cut, the nation’s regulators could still screw it up.

Is It Ultimately Doomed?

And that brings me to my main point: as much as I, along with most of you out there, want financial reform to succeed, I am doubtful that it will.  There is just too much that could go wrong with what is at the minimum a very noble effort.  First, there is the conference process itself, in which there will be a great temptation to make the House accept large pieces of the Senate’s bill in order to maintain the votes that Senate Majority Leader Harry Reid (D-Nevada) managed to round up for the vote on Thursday night.  While this could be a good thing on several counts, especially with regard to the Volcker Rule’s implementation and the exemption of auto dealers, consumers would lose because as part of it the Senate’s negotiators might force through their version of the CFPA.

As I said earlier, the House’s approach, that of an independent government agency, is the absolute only way such an agency will be effective.  Further, the process is left open to all sorts of lobbyists; not just the legislative, mind you, but the implementation of it.  According to the Huffington Post, far too much in the Senate bill is left up to the nation’s financial regulators, and we all know about the quiet, off-books lobbying of government officials that isn’t supposed to be going on.

This kind of thing needs to be done by statute; give the regulators room to make the ultimate decisions, but force them to do so within a relatively tight scope of the law.  Not only to combat lobbying efforts, but also to codify the reforms now, while the sense of urgency is still there.  If implementation is left up to bureaucrats and political appointees, where does that put us ten years down the road?  An empty shell of a reform effort that is not being enforced, allowing history to repeat itself?  Do we really want that to happen again?  I don’t think so; Congress must put some legislative backbone into this effort, or it may all be for naught.  Of course, there is the possibility that the next crisis will be based on something that we cannot even begin to imagine now, not to mention the possibility that what we have won’t fix what is already broken in the system.  As I said earlier, I am no expert on high finance, so maybe we should listen to the markets on this one: a neat little chart on the Huffington Post on Friday night shows that megabanks’ stocks were up in the first day of trading after the Senate’s bill passed, compared to a relatively flat day on the overall market.  I’m not superstitious, but I know enough about the way the markets work to be a little concerned about the reality of the reform effort thanks to that.  Hopefully the market’s reaction is due to relief at clearing up a legislative ambiguity; somehow, I have a sneaking suspicion that there is more at play.

The Is Wall Street Reform Destined to Fail? by The New Age of Politics, unless otherwise expressly stated, is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.

Tags: CFPA, conference committee, Consumer Finance Protection Agency, current events, Dow Jones Industrial Average, Federal Reserve, Federal Reserve System, financial reform, Financial services, finreg, Harry Reid, House of Representatives, Merkley-Levin, Paul Volcker, Politics, proprietary trading, Sam Brownback, Senate, Volcker Rule, Wall Street