Sunday, August 1, 2010

Landmark Financial Reform Legislation

The president penned his name to the Dodd-Frank Wall Street Reform and Consumer Protection Act Wednesday – legislation that’s been crowned the strongest financial and regulatory reform measure since Franklin Roosevelt’s response to the Great Depression

Harvard Law School Professor Elizabeth Warren, a candidate to head the new Consumer Financial Protection Bureau created by the bill, had a front-row seat for the ceremony

Henry Paulson
Former Treasury secretary
Grade: Incomplete The systemic-risk council, tougher Fed regulation over top financial institutions and new authority to wind down failing institutions are essential steps forward. Improving derivatives rules is a real positive. But the bill doesn't tackle Fannie and Freddie, and there are too many unknowns as to how the regulations will be applied.
Will it help prevent another crisis? The new tools in this legislation will help mitigate and manage the next financial crisis, which is inevitable, probably within the next six to 10 years. Some argue higher capital and liquidity cushion requirements will slow economic growth. That's short-sighted. Our financial system fostered rapid growth for a period, then in the fall of 2008, the excesses in the system brought us to the brink of collapse. Higher capital and liquidity requirements will give us more stable long-term growth. But even with better regulation, regulators can't have perfect foresight. It is essential that we preserve market discipline that can only come from knowing that no institution is too big to fail. New resolution authority alone won't solve this. Uncertainty about too-big-to-fail will persist until key people, facing a crisis, decide when and how to use these powers.

William Issac
Former chairman of the FDIC
Grade: D It doesn't address the material issues or any of the major issues that led to the crisis. It would not have prevented the last crisis and it won't prevent the next one.
What's the biggest likely change? Because the bill does so little, it is hard for me to see it having a major change.
Will it help prevent another crisis? This bill would not have prevented the last crisis and will not prevent the next one. And the next one could be more serious. They have formally anointed the Treasury as the manager of the next crisis. And if you really liked what they did the last time, you are going to love the next one. They do not have the institutional experience. They do not have the personnel. And they do not have the political independence to handle a crisis properly.

Harvey Pitt
Former SEC chairman
Grade: "F" for failure or, at best, "I" for incomplete It's likely to take a badly broken regulatory system and make it markedly worse. This legislation fixes nothing, accomplishes nothing yet promises everything.
What's the biggest likely change? Legal and consulting fees will skyrocket. This bill is truly the "Lawyers' and Consultants' Full Employment Act of 2010." Most of the attempted reforms are poorly drafted, or contain loopholes so large that a fleet of trucks could get past the supposed barriers. Where the bill accomplishes something it is largely likely to harm competition, force a "brain drain" of talent away from Wall Street, and boost the performance of commercial and investment banks located outside the US.

Will it help prevent another crisis? That's easy—not at all. We couldn't respond to the crisis because of a lack of transparency in newly-created markets, products and services; a lack of economic monitoring and assessment by regulators; and a lack of government nimbleness and tools to deal with new products, services and economic trends without simply prohibiting progress. This bill does not solve any of these problems. Instead, we have the classic legislative monstrosity which Congress and the Administration will claim "solves" the problem, but in reality solves nothing. In brief, Congress and the Administration have "labored mightily, and brought forth a mouse!"