Eighteen months after Wall Street provoked an economic meltdown, the Senate is finally taking up proposed reforms of the financial sector.
But the bill approved by the Senate Banking Committee is too soft on the banking industry and fails to provide enough protection for consumers and investors. The legislation must be strengthened before the full Senate votes on it.
One goal of the bill proposed by Banking Committee Chairman Chris Dodd (D., Conn.) is to prevent the “too big to fail” scenarios that burdened taxpayers with multibillion-dollar bailouts of banks in 2008. The public found itself propping up companies like AIG ($182 billion) with little or no say in the matter.
The bill does attempt to protect taxpayers by providing that any big bank facing insolvency could be taken over and liquidated under government supervision. That’s an improvement by bringing order to what can be, and was, a panic situation.
But Dodd’s proposed process for deciding which banks should be allowed to fail is so cumbersome, involving the approvals of at least four separate entities, that it’s difficult to envision a bank reaching that point of no return. The more complicated these regulations are, the less likely they will work.
The legislation fails to provide a strong, independent agency to protect consumers of financial products from industry abuses. A House bill approved late last year would create a stand-alone agency with powers to write new rules. Dodd acquiesced to Republican lawmakers by proposing to house this office in the Federal Reserve, which did a poor job of looking out for consumers in the subprime mortgage crisis.
The consumer protection agency would have a chief appointed by the president, but it should be a separate entity.
Further, the Senate legislation should include a provision supported by Sens. Arlen Specter (D., Pa.), Ted Kaufman (D., Del.), and others to restore the legal right of investors to hold accountable anyone who knowingly “aids and abets” investment fraud. An investigation has documented how representatives of Lehman Brothers deliberately created phony asset “repurchase agreements” that allowed Lehman to falsify its financial statements. The firm went under, but investors are barred by recent court rulings from holding private parties liable.
There’s no doubt investors need more tools to protect themselves. For example, the Securities and Exchange Commission recently joined 12 Wall Street firms in trying to overturn strict curbs on communications of stock analysts. Those restrictions were put in place in 2003, after it was revealed that analysts gave overly optimistic reports at the behest of their firms’ investment-banking departments to send stock prices soaring.
The Senate bill does improve on the House reform bill by adding the “Volcker rule,” which would ban banks from proprietary trading — the buying and selling of risky investments on their books unrelated to customers’ needs. It was proposed by former Federal Reserve Chairman Paul Volcker, now an adviser to President Obama.
Banking lobbyists are already trying to persuade the Senate to allow regulators to treat this rule as optional, not mandatory. If implemented, it would cost Goldman Sachs $2.3 billion alone. Senators should resist efforts to water down this requirement.