Obama to Wall Street: Regulation Is Coming

Posted by Steven Rosenfeld, AlterNet at 9:38 AM on March 27, 2008.

Barack Obama's speech on regulating financial markets today will not get the applause of his recent speech on race relations, but it was a not a standard stump speech and squarely pointed the blame for the nation's economic woes on Wall Street's ethic of greed.

"Our free market was never meant to be a free license to take whatever you can get, however you can get it," Obama said, speaking in downtown Manhattan. "Unfortunately, instead of establishing a 21st century regulatory framework, we simply dismantled the old one - aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered down oversight. In doing so, we encouraged a winner take all, anything goes environment that helped foster devastating dislocations in our economy."

The speech was labeled by the Obama campaign as a call to regulate financial markets, but most of the underpinnings were a serious critique of the culture of campaign contributions and big-money lobbying in Congress, where big business in America - particularly the financial services sector - have convinced lawmakers to dismantle the system of checks and balances put in place after the Depression of the 1930s. The result, Obama said, was excessive greed is now hurting Wall Street as much as Main Street.

"The core of our economic success is the fundamental truth that each American does better when all Americans do better; that the well being of American business, its capital markets, and the American people are aligned," Obama said. "I think all of us here today would acknowledge that we've lost that sense of shared prosperity."

"This loss has not happened by accident," he said, continuing. "It's because of decisions made in boardrooms, on trading floors and in Washington. Under Republican and Democratic Administrations, we failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practices. We let the special interests put their thumbs on the economic scales. The result has been a distorted market that creates bubbles instead of steady, sustainable growth; a market that favors Wall Street over Main Street, but ends up hurting both."

Obama proposed a series of remedies, which he said would face stiff opposition in Congress by members beholden to big money. After summarizing his prior proposals to deal with the mortgage crisis, he outlined his reforms for Wall Street.

Reacting to the speech, the Clinton campaign policy director, Neera Tanden, said, "Presidents have to do more than announce principles. They have to solve problems. At a time of crisis in our financial markets, Senator Obama announced a series of broad, vague principles, while offering no new concrete solutions... today, Senator Obama offered just words."

Tanden also said Obama was a hypocrit because after his speech, he was attending a fundraiser at one of the firms that have issued subprime loans. "Today, Senator Obama gives an economy speech followed by a fundraiser at - you guessed it - one of the top 10 issuers of subprime loans in America, Credit Suisse," she said. "In fact, Senator Obama has taken more money from the top 10 issuers of subprime loans than BOTH Senator Clinton and Senator McCain [cq.com]."

At Obama’s speech, he said it was time for the federal government to revamp the regulatory framework dealing with our financial markets. He began with the government-backed sale of Bear Stearns to J.P. Morgan. Here are the remarks from his prepared text:

"First, if you can borrow from the government, you should be subject to government oversight and supervision. Secretary Paulson admitted this in his remarks yesterday. The Federal Reserve should have basic supervisory authority over any institution to which it may make credit available as a lender of last resort. When the Fed steps in, it is providing lenders an insurance policy underwritten by the American taxpayer. In return, taxpayers have every right to expect that these institutions are not taking excessive risks. The nature of regulation should depend on the degree and extent of the Fed's exposure. But at the very least, these new regulations should include liquidity and capital requirements.

"Second, there needs to be general reform of the requirements to which all regulated financial institutions are subjected. Capital requirements should be strengthened, particularly for complex financial instruments like some of the mortgage securities that led to our current crisis. We must develop and rigorously manage liquidity risk. We must investigate rating agencies and potential conflicts of interest with the people they are rating. And transparency requirements must demand full disclosure by financial institutions to shareholders and counterparties.

"As we reform our regulatory system at home, we must work with international arrangements like the Basel Committee on Banking Supervision, the International Accounting Standards Board, and the Financial Stability Forum to address the same problems abroad. The goal must be ensuring that financial institutions around the world are subject to similar rules of the road - both to make the system stable, and to keep our financial institutions competitive.

"Third, we need to streamline a framework of overlapping and competing regulatory agencies. Reshuffling bureaucracies should not be an end in itself. But the large, complex institutions that dominate the financial landscape do not fit into categories created decades ago. Different institutions compete in multiple markets - our regulatory system should not pretend otherwise. A streamlined system will provide better oversight, and be less costly for regulated institutions.

"Fourth, we need to regulate institutions for what they do, not what they are. Over the last few years, commercial banks and thrift institutions were subject to guidelines on subprime mortgages that did not apply to mortgage brokers and companies. It makes no sense for the Fed to tighten mortgage guidelines for banks when two-thirds of subprime mortgages don't originate from banks. This regulatory framework has failed to protect homeowners, and it is now clear that it made no sense for our financial system. When it comes to protecting the American people, it should make no difference what kind of institution they are dealing with.

"Fifth, we must remain vigilant and crack down on trading activity that crosses the line to market manipulation. Reports have circulated in recent days that some traders may have intentionally spread rumors that Bear Stearns was in financial distress while making market bets against the company. The SEC should investigate and punish this kind of market manipulation, and report its conclusions to Congress.

"Sixth, we need a process that identifies systemic risks to the financial system. Too often, we deal with threats to the financial system that weren't anticipated by regulators. That's why we should create a financial market oversight commission, which would meet regularly and provide advice to the President, Congress, and regulators on the state of our financial markets and the risks that face them. These expert views could help anticipate risks before they erupt into a crisis.

"These six principles should guide the legal reforms needed to establish a 21st century regulatory system. But the change we need goes beyond laws and regulation - we need a shift in the cultures of our financial institutions and our regulatory agencies."

AlterNet is a nonprofit organization and does not make political endorsements. The opinions expressed by its writers are their own.

Steven Rosenfeld is a senior fellow at Alternet.org and co-author of What Happened in Ohio: A Documentary Record of Theft and Fraud in the 2004 Election, with Bob Fitrakis and Harvey Wasserman (The New Press, 2006).