Tuesday, April 27, 2010

Obama’s Financial Reform Package

Obama is pushing financial reform package to rein in Wall Street, while at the same time arguing the need for a “thriving economy.” Are these goals achievable through the means laid out in his reform push? The answer is… it depends. Depending on what kind of legislation that Congress agrees to move will determine a great deal. If the financial reform debate looks anything like the health reform debate, who knows what we’ll get. Health reform turned out to be a Frankenstein bill that should never have been passed or signed. The new law is a combination of awful ideas from the House and Senate mashed into one package. Even the New York Times is now running stories on the long term consequence of the health reform law by citing failures baked into a piece of legislation that was haphazardly crafted and obviously not read by the politicians responsible for it.

For a very brief overview, the financial reform bill currently in the Senate under the jurisdiction of Senator Chris Dodd would create a $50 billion slush fund for payments to failing banks; would create an independent regulator within the Federal Reserve that would guard consumers against abuse and deception in such instruments as mortgages, credit cards or loans; and would cement the Volcker Rule into statute.

The mere fact that this bill is under Dodd’s jurisdiction is problematic enough. Dodd has questionable ties to the financial community and has already apologized for trying to inappropriately influence bail out legislation for his AIG buddies.

The $50 billion dollar slush fund is, in my opinion, a bait and switch. The bait is that the slush fund is filled by Wall Street and that money is used to help failing institutions. Fair enough, but eventually every account runs dry and in Washington $50 billion is not that much. If the Wall Street slush fund is anything like the proposed asbestos slush fund that was defeated in 2007, then eventually tax payers will be on the hook for filling the Wall Street fund once the original $50 billion is expended. That is, and should be, a non-starter on both sides of the Capital.

Another regulator in the Fed to make sure people read their mortgages is just a sad statement. People who make major purchases need to ensure they are getting what they want. If you sign a legally binding agreement without knowing what’s in it, then you bear the responsibility. If words like hereinafter confuse you, hire a lawyer and spend a little extra to ensure your large investment is not a ticking time bomb. Markets cannot sustain the systematic cancellation of large contracts because consumers did not do their due diligence.

The Volcker Rule seems a little draconian to me. It makes banks little more than holding tanks by not allowing the bank to try and make money as well as storing it. But Mr. Volcker was on to something. The banks are using our money. I’m wondering if maybe there is a compromise position on this matter that can be reached. In Vegas, casinos cannot have more chips in circulation that money in the vault. Perhaps, banks should have a similar rule so they can make their customers whole if they are going to gamble.

At the end of the day, what bothers me about financial reform is Obama’s rhetoric. It strikes me as overly simplistic and empty. For example, Obama stated, "A free market was never meant to be a free license to take whatever you can get, however you can get it," This comment is a sadly disingenuous statement for a President who was a law professor at the University of Chicago, one of America’s best law schools. While the President is constitutional scholar, even constitutional scholars know that the whole law of contracts is summed up in his statement. The law of contracts exists to prevent one party from maneuvering at the expense of another. Or in simpler terms, contract law enforces legal promises. When parties do not play by the rules, the injured party can seek legal and equitable remedies, and in criminal cases, the state can seek to prosecute as well. What our markets do not need is another bombastic over reaction based on a sophomoric reasoning: All Wall Street employees are bad…all government regulators are good. What we really need is to start prosecuting white collar crimes, especially financial ones. How many people went to jail over ENRON? Not enough and therein lies the problem. We don’t need new laws; we need to enforce the ones we have.

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