Speculating Banks Still Rule -- Ten Ways Dems and Dodd Are Failing on Financial Reform
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7) It won't contain systemic risk. The Dodd bill's primary attempt to limit systemic risk is the creation of a new Financial Stability Oversight Council led by the Treasury Secretary to help the Fed develop more better standards regarding the biggest banks it oversees, based on recommendations, not rules. Another effort is to suggest an (undefined) increase in capital requirements that will be deferred to the Fed for the biggest banks. And, as mentioned above, banks are already hoarding capital at the Fed, and increasing their trading operations and decreasing lending, so that doesn't really help better the system. Let's not forget—if the Fed wanted to raise capital requirements on big banks it could do so right now, with no Congressional action whatsoever. What are the odds that this suggestion from Congress will result in meaningful action?
8) It won't wrest control of our economic future from the banks the Fed couldn't regulate over the past decade. It states that the Fed, as consolidated supervisor for the largest banks, "can see risks whether they lie in the bank holding company or its subsidiaries," as "they will be responsible for finding risk throughout the system." This was true over the past decade, and it was meaningless.
9) It won't constrain the Fed's future bailout operations. It appears to limit the Fed's ability to lend money freely to firms in trouble by "allowing" its system-wide support only for healthy institutions or systemically important market utilities. But what's to stop the Fed from designating any company a "systemically important market utility"? That was basically the rationale behind the AIG bailout.
If the Fed does funnel money to these entities, the Fed must report the details of this assistance to Congress within seven days, unless the Fed believes it would "compromise the program or financial stability." It then can delay disclosure of the recipients as well as the size of the loan and collateral pledged under the facility for a full year. If, after one year, the Fed still feels disclosing this information would be "counterproductive," then the Fed "must" provide a report to Congress explaining why within 30 days, and report on a yearly basis until the "disclosure is complete." There is no time limit for this ridiculous process. It could literally go on for decades. Should the Fed decide not to make the required disclosures-- drum roll please--the Comptroller General should issue a report to "evaluate whether that determination is reasonable." And, there we are, back to square one, with big, secret bailouts.
10) It won't prevent bank failures by separating speculative banking from deposit-insured commercial banking a la Glass Steagall, but instead contains plans for resolving them, after the fact. The funeral plans include asking large companies to submit "living wills," and to be penalized with higher capital requirements and growth restrictions if they don’t submit acceptable plans. The scary reasoning for this funeral blueprint is that, "Plans will help regulators understand the structure of the companies they oversee and serve as a roadmap for shutting them down if the company fails."
Ostensibly, this confirms that regulators don't understand how these banks operate now. But these living wills won't help shut down big banks. They conduct millions of dollars worth of trading operations, including complex derivatives trades, every single day. The living will would be out of date hours after it was authored.
None of this is reform. We're actually better off with no legislation than we are with this vapid 1,336-page opus—the false sense of security it creates will only encourage greater risk-taking. If the Dodd bill passes in its current version, we absolutely, unequivocally will see another system-wide crash that will invoke greater hardships on the country than the last collapse.