The Inept Financial Reform Bill

May 29, 2010 10:54

Politicians who vote for it aren’t serious about fixing the U.S. banking system.

William M. Isaac at

Senate leaders and the Obama administration patted themselves on the back after cramming through financial reform legislation. They claim the bill will end “too big to fail” and will prevent future financial crises.

Let’s examine these claims, beginning with too big to fail. The five largest companies (JP Morgan Chase ( JPM news people ), Bank of America ( BAC news people ), Citigroup ( C news people ), Goldman Sachs ( GS news people ) and Wells Fargo ( WFC news people )) control over half of our banking system’s assets.

No government of any developed country will ever allow its largest banks to collapse, as that would lead to worldwide economic chaos. Any politician who claims otherwise is dangerously ill-informed or worse.

There were a number of major causes of the financial crisis and panic of 2008. Here’s how the Senate bill addresses the most important ones.

1. Reckless Growth of Fannie & Freddie. These giant government-sponsored entities (GSEs) pursued two decades of reckless growth with strong encouragement from the Clinton administration and congressional leaders. The Senate bill does not deal with Freddie and Fannie. In fact, even a simple amendment offered by Sen. Corker, R-Tenn., to impose bare minimum credit underwriting standards on Freddie and Fannie was rejected.

2. Weak and Ineffective Regulation. The U.S. suffered through three major financial crises during the past 40 years (1972-74, the 1980s and 2007-09). The regulatory system that brought us these crises is politicized and badly broken, as Sen. Dodd, D-Conn., recognized when he proposed last November to consolidate regulation into a new, independent Financial Institutions Regulatory Authority. The Senate bill does not address the issue.

The Securities and Exchange Commission (SEC) is one of the principal culprits in the financial panic of 2008. It conspired with the Financial Accounting Standards Board (FASB) to implement mark to market accounting despite objections from the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the Treasury, which said it was wrongheaded and would lead to severe credit contractions.


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