Republicans Fight Banking Reform Designed to End "Too Big to Fail" Bailouts

When the House passed its version of banking reform in December 2009, no surprise Republicans down the line voted against the bill. We can take from their vote that Republicans are for Bush-TARP policies to use hundreds of billions of taxpayer dollars to bail out future big banking failures. Senate Republicans are also fighting the Senate version of financial reform. I've read through the major points of each bill (I doubt that many who oppose the bill have done the same), and here is essentially what they do:

(1) Wall Street firms and Larger Banking Institutions will have to increase capital requirements so that at all times they are adequately capitalized.

(2) Wall Street firms and Larger Banking Institutions will have to share in the cost of paying into an Emergency Fund totaling $150 billion that will be used to aid any one of them should they become financially troubled.

(3) Derivatives (mortgage backed securities, for example) and hedge funds will now be regulated just like any other stock, investment security, and investment house.

(4) The Federal Reserve will now face regularly scheduled audits designed to monitor its behavior.

(5) The Federal Reserve and other federal regulators will have increased powers to break up financial institutions that create a system risk.

(6) Shareholders of companies can now use their proxy voting powers on executive compensation packages; the vote, however, will be non-binding and board of directors will continue to have the power to pass compensation packages as they choose. (The provision is merely designed to make Board of Directors pay attention to the sentiment of their shareholders; if I had my way, I would make the shareholder vote binding.)

(7) The various financial regulatory bodies will now come under a single agency. (This proposal is designed to mimic what we saw with national security where the various law enforcement agencies were brought under a new "Homeland Security" agency.)

(8) Perhaps most important of all, if a Wall Street firm or large banking institution has taken on too much risk and begins to fail, it will either be bailed out by its competitors or it will simply fail -- it will now be unlawful to use public funds to bail them out.

(9) Consumers will see increased protections; namely, through the establishment of an independent consumer financial protection group, all of that fine-print legal language we see on credit card contracts and various other financial contracts, will now be required to be conveyed in a single one-page statement that summarizes the key points of each contract so that consumers know exactly what they are doing before signing.

In a nutshell, what these proposals do is end "too big to fail" bailout policy. Under these proposals, if a large banking institution fails -- then it will fail in an orderly fashion with the risk of that failure being shared by its competitors - not the taxpayer. Oddly, Republicans, who are touting "common-sense" conservatism (remember, it used to be "compassionate conservatism), are unwilling to pass the commonsense proposals listed above. On the wrong side of history, again.

My take on the proposals: I would prefer to see the consumer protection portions in a separate bill and not a part of the financial banking reforms. That said, if it came down to having both or nothing, then my vote would be for both. The banking proposals are critical to protect our national financial security. The one key proposal that you will find missing from these proposals is the new "Volcker Rule" that President Obama unveiled in January; recall, the "Volcker" Rule would now make it unlawful for commercial banking institutions (which now includes every bank -- there are no longer pure investment banks out there) to own and invest in hedge funds, and it limits the amount of leverage (debt) that can be used on derivatives and other proprietary trading practices. Wall Street is fighting the "Volcker Rule" like a mad dog -- a clear sign that this proposal has real meat to it. It will be interesting to see how House and Senate Dems attempt to incorporate the "Volcker Rule." The Volcker Rule is critical if we want to finally put an end to Wall Street firms making enormously risky bets that are impossible to pay off should they fail (again, some day I will write on the crisis stemming from the firm Long Term Capital Management in the late 1990s and the similarities to the investment risks taken just prior to the 2008-2009 financial crisis.)

Peace

Jeremy