How to make fi­nan­cial re­forms work

Austin American-Statesman - - OPINION -

The fi­nan­cial reg­u­la­tory bill that Pres­i­dent Barack Obama signed Wed­nes­day re­calls the old joke about a camel be­ing a horse de­signed by a com­mit­tee — it’ll prob­a­bly move, but it’s a trick to ride, and it’s a lot uglier than it needed to be.

The com­mit­tee that de­signed this camel was heav­ily in­flu­enced by the camel in­dus­try. So the Restor­ing Amer­i­can Fi­nan­cial Sta­bil­ity Act of 2010 gen­er­ally leaves the bal­ance of power over Amer­i­can eco­nomic se­cu­rity in pri­vate hands.

Given the money spent — in the hun­dreds of mil­lions — by the fi­nan­cial ser­vices in­dus­try on lob­by­ing and cam­paign con­tri­bu­tions, the sur­prise is that the bill is as strong as it is.

It places author­ity for reg­u­la­tors to wind down fail­ing fi­nan­cial in­sti­tu­tions as well as other firms that pose a sys­temic risk to the econ­omy.

It gives reg­u­la­tors some con­trol over the trad­ing of com­plex fi­nan­cial in­stru­ments known as de­riv­a­tives.

It al­lows reg­u­la­tors to im­pose cap­i­tal re­quire­ments on fi­nan­cial in­sti­tu­tions that op­er­ate too far on the mar­gin.

It cre­ates a Fi­nan­cial Sta­bil­ity Over­sight Coun­cil, housed at the Fed­eral Re­serve, to over­see the en­tire fi­nan­cial sys­tem. In­sti­tu­tions that get “too big to fail” can be bro­ken up.

Two ma­jor fail­ures must be ad­dressed. The bill does not crack down on the credit rat­ings agen­cies that blithely signed off on many worth­less fi­nan­cial prod­ucts. And the obli­ga­tions of Fan­nie Mae and Fred­die Mac, the fed­er­ally char­tered mort­gage com­pa­nies that played a key role in the mort­gage cri­sis, must be re­solved.

In short, the bill may use­ful only in­so­far as strong reg­u­la­tors can sum­mon the guts to chal­lenge pow­er­ful fi­nan­cial in­ter­ests and their en­ablers in Congress.

Which brings us to the im­me­di­ate is­sue. One of the bill’s sig­nal suc­cesses is the cre­ation of the Bureau of Con­sumer Fi­nan­cial Pro­tec­tion. It will have reg­u­la­tory author­ity over credit cards, mort­gages, pay­day loans and other fi­nan­cial prod­ucts that many Amer­i­cans en­counter ev­ery day.

Given strong and ag­gres­sive lead­er­ship, the new bureau could give Amer­i­can con­sumers an ally against preda­tory len­ders, mort­gage fraud, opaque and mis­lead­ing loans — even bank fees. Nat­u­rally, the con­sumer fi­nan­cial in­dus­try doesn’t want some­one tough watch­ing over the sand­box.

Obama’s best choice to head that bureau would be the woman whose idea it was: Har­vard pro­fes­sor El­iz­a­beth War­ren. For the last 18 months, she has been head­ing the Con­gres­sional Over­sight Panel for the Trou­bled As­set Re­lief Pro­gram and speak­ing more eco­nomic sense than any­one else in Washington.

“If you don’t talk about fam­i­lies,” she told the Bos­ton Globe last year, “then it’s easy to dis­em­body sub­prime mort­gages and as­set se­cu­ri­ti­za­tion and un­em­ploy­ment rates with­out re­mem­ber­ing that ev­ery one of those num­bers is a mil­lion fam­i­lies.”

The in­dus­try has its knives out for Ms. War­ren, who speaks truth to power in ways that make Washington in­sid­ers cringe. Sen. Christo­pher Dodd, D-Conn., the Se­nate spon­sor of the fi­nan­cial reg­u­la­tory bill, on Mon­day raised doubts that War­ren could be con­firmed by the Se­nate if Obama ap­pointed her to the job.

The new law al­lows her to be ap­pointed un­til 2011 by re­cess ap­point­ment with­out Se­nate con­fir­ma­tion.

Obama should do so im­me­di­ately. If the strength of the fi­nan­cial reg­u­la­tory bill lies in the will­ing­ness of reg­u­la­tors to reg­u­late, her ap­point­ment would be a pow­er­ful sig­nal of hope and change.

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