. . . This new approach to the "too big to fail" problem grants one of Fed Chairman Ben S. Bernanke's fondest wishes. It addresses the situation that Bernanke and the Treasury Department faced in September 2008, when Lehman Brothers collapsed but the government had no legal alternative to bankruptcy. The proposal raises questions, however. A government list of systemically important firms is tantamount to a list of government-backed firms — though the plan mitigates this risk by requiring them to hold more capital. The biggest challenge could be to the Fed's independence: The broader its control over the financial sector, the more it will get lobbied, directly or indirectly. Any political capital the Fed spends on its regulatory function is capital it might not have to defend monetary policy.
. . . As the Obama plan moves through Congress, many will no doubt ask why the Fed can be counted on to spot systemic risks when it did not use its power to help rein in such high-fliers as Citigroup. There may also be questions about the role of past monetary policy in enabling Wall Street's excessive risk-taking. Regulation is important, but sound monetary policy is equally crucial to systemic stability. Congress should make sure that any new powers granted to the Fed are consistent with the independent fulfillment of its primary mission.
By Joe Nocera | New York Times
. . .The Obama plan is little more than an attempt to stick some new regulatory fingers into a very leaky financial dam rather than rebuild the dam itself . . . But it's what the plan doesn't do that is most notable . . .The Obama plan accepts the notion of "too big to fail" — in the plan those institutions are labeled "Tier 1 Financial Holding Companies" — and proposes to regulate them more "robustly." The idea of creating either market incentives or regulation that would effectively make banking safe and boring — and push risk-taking to institutions that are not too big to fail — isn't even broached.
Or take derivatives. The Obama plan calls for plain vanilla derivatives to be traded on an exchange. But standard, plain vanilla derivatives are not what caused so much trouble for the world's financial system. . . . In a recent article in the Financial Times, George Soros, the financier, wrote that "regulators ought to insist that derivatives be homogeneous, standardized and transparent." Under the Obama plan, however, customized derivatives will remain an important part of the financial system.
Everywhere you look in the plan, you see the same thing: additional regulation on the margin, but nothing that amounts to a true overhaul . . .
… Perhaps the most eye-catching — and certainly the most populist — measure is the creation of a Consumer Financial Protection Agency. Taking some powers from the Federal Reserve and other bank regulators, this would have broad rule-writing and enforcement powers in mortgages, credit cards and the like. In light of the "liar loans" and other nasties that proliferated in recent years, it is hard to argue against an overhaul of such regulation. Still, concern is already mounting that the new agency will take an overly restrictive view of permissible products, limiting access to credit and curbing good as well as bad innovation. Others worry that it will have less leverage than safety-and-soundness supervisors over banks that peddle dodgy products.
A bigger concern is Obama's failure to rationalize America's tangled, archaic mess of regulatory bodies. True, the Office of Thrift Supervision, which oversaw disasters such as Countrywide and Washington Mutual, will be subsumed into another agency, but that still leaves four federal bank regulators, plus state agencies, and these will have to work alongside the CFPA. … Leaving the framework largely intact is risky…
By Eliot Spitzer | Slate.com
In laying the intellectual foundation for the Obama administration's proposed overhaul of financial regulations, Timothy Geithner and Larry Summers… presume that the failure of supervision and regulation was a result of inadequate power, rather than the lack of will to use existing power. …The problem with this grant of immunity is that we then fail to ask why no one used the power they had and whether rigid ideological thinking got us into the crisis. …The SEC already has direct oversight of the rating agencies, yet it never effectively used it. And the critical decisionmakers over the past several years… specifically rejected the use of their authority to impose greater regulation on derivatives. …The reason to focus on this is to ensure that we ask the appropriate question: Why did the government fail to use the power it had? Maybe the answer is that the ideology of the moment simply ran counter to the aggressive intervention that was called for. … Maybe the answer is that the wrong people were in charge of the agencies, and in the new administration the right people are in place. … But we should not fool ourselves into believing that the government didn't have this power in the first place.