Smarter regulation can make it harder for predators, swindlers to succeed
Tribune Media ServicesThe following editorial appeared in the Miami Herald on Sunday, June 28:
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Twenty years ago this summer, Congress passed a law with the fine-sounding title of Financial Institutions Reform, Recovery and Enforcement Act of 1989. This was the federal government's answer to the savings and loan debacle, a law that would protect Americans from ever again having to suffer a sudden, devastating loss of assets because of regulatory failure.
Oh, well, back to the drawing board.
Amid today's Great Recession, President Barack Obama and his economic advisors have come up with yet another overhaul of the financial system. Like the 1989 law, it promises to protect future savers, investors and homeowners from being ripped off by greedy financial manipulators.
Let's get real. No law can offer an iron-clad guarantee against economic collapse. But clearly, better regulation might have saved millions of American households a lot of pain. Smarter regulation can make it harder for financial predators to succeed. That's why it's vitally important for Congress and Obama to get this right.
_The best part of the plan is the creation of a Consumer Financial Protection Agency that would limit or forbid many of the worst bank practices still allowed under law. That includes excessive and surprise overdraft fees and outrageous credit card interest rates. In retrospect, it's amazing that while there are a host of agencies to regulate Wall Street, investment banks, etc., no single agency has the primary task of looking out for the little guy. No reform will be complete if it does not create an agency tasked with protecting consumers from fraud and predatory lending practices.
_The reform proposes to make the Federal Reserve the overall supervisor of the financial system, filling a void that contributed to the collapse. Today, each agency cares for its own narrow part of the regulatory terrain, but no one looks at the big picture. That's a recipe for disaster. Is the Fed the best agency for this job? We're not sure, but there's little doubt that a regulator is needed to deal with a large threat to the financial system as a whole.
_The bill creates a new National Bank Supervisor that would govern all federally chartered lenders, whether banks or savings and loans. In the process, the Office of Thrift Supervision (OTS) _ which was supposed to regulate the insurance behemoth AIG _ would disappear. The provision would make it harder for financial institutions to shop around for the most lax or incompetent regulators. That's how AIG and OTS wound up with each other, and how taxpayers wound up having to bail out AIG.
_One part of the bill proposes to put institutions that are "too big to fail" under stronger limitations on growth by demanding they keep higher ratios of reserves than smaller banks. This would, in theory at least, serve as a disincentive for any institution to become so big that its collapse would threaten the entire system.
All these provisions and others _ the bill is hundreds of pages long _ offer a host of distinct improvements over the present, outdated regulatory system. Some critics believe it is not so much an overhaul but rather tinkering on the margins of change. Whatever you call it, however, it's overdue. The first big sign of the impending meltdown came in March of last year when the Wall Street firm Bear Stearns collapsed and was forced into a distress sale. Then the other dominoes fell.
Ultimately, no regulatory law, no matter how well structured, can work as designed if regulators don't do their jobs with discipline and dedication. In the case of Bernie Madoff, one prominent skeptic who believed the Wall Street operator was a swindler took his concerns to the Securities and Exchange Commission _ and was repeatedly ignored.
Lesson: Regulators have to regulate, and supervisors have to supervise with an eye toward protecting the public interest, not just the folks on Wall Street. Otherwise, we'll be saying "back to the drawing" board once again in a few years.
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(c) 2009, The Miami Herald.
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