By Paul Barton for Capitol News Connection
WASHINGTON — The final financial regulatory reform legislation produced by a Congressional conference committee qualifies as more charade than real change, says William Isaac, former head of the Federal Deposit Insurance Corporation and a frequent consultant to Congress on banking matters.
“How many times do we have to go through a banking crisis of that magnitude before we scratch our heads and say, ‘Is there something wrong with the way we regulate banks?’” Isaac said in an interview with Capitol News Connection.
Final conference committee bill
The House and Senate financial regulatory reform bills recently melded in a conference committee are “more political documents than real reform and fulfill a need to be perceived as beating up on Wall Street,” added Isaac, author of the just-released book “Senseless Panic,” which deals with the 2008 financial meltdown.
Attempted passage in the Senate will be one of the top items on the congressional agenda when lawmakers return from their July 4th recess. The House passed the conference report late last month 237-192.
“The current bill [conference report] wouldn’t have done anything to prevent the last crisis, and it’s not going to do anything to prevent the next one,” Isaac said.
And consumer groups, he said, should stop patting themselves on the back for the shape of the bill so far.
Consumers haven’t won
“Consumer groups haven’t won anything,” he said, saying the new consumer protection agency established under the Senate legislation will fail to have “the moral suasion” with banks that agencies like FDIC have.
A major problem with the bill, Isaac said, is its failure to establish an adequate structure for monitoring “systemic risks,” developments such as the Lehman Brothers bankruptcy of September 2008 that have widespread impact. Instead of establishing an independent financial risk council, he said, the conference report calls for a systemic risk council headed by the Treasury Department and populated by representatives of the very federal agencies that should be monitored — instead of doing the monitoring.
‘Foxes in the henhouse’
“The systemic risk council is a very sad joke. The foxes are in the henhouse and that’s simply not reform,” Isaac said. “They are not reforming the regulatory system at all.”
Further, the bills don’t address the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, popularly called Fannie Mae and Freddie Mac, the government-chartered corporations that promote home financing.
Many critics feel a lowering of underwriting standards at Fannie Mae and Freddie Mac played a major role in generating the subprime crisis.
If Isaac had his say, he would also start by “cleaning house” at some federal regulatory agencies, especially the Securities and Exchange Commission.
Years of SEC mistakes
“I would give it a new mission,” he said. As it works now, Isaac said, the SEC is too much of a “rely-on-the-market” agency that worries about public disclosures more than real regulation. Isaac said the agency is “dominated by lawyers” and needs more “examiner types, regulator types.”
The SEC’s mistakes over the past decade are legion, he said, including allowing investment banks to “triple and quadruple their leverage” just as the housing bubble was reaching full steam. Critics also charge the agency of ignoring repeated warnings about Bernard Madoff’s hedge fund that amounted to a ponzi scheme.
“Make it a real life regulator,” Isaac said. “The SEC had authority over the investment banks that failed or almost failed and didn’t use it effectively.”
Looking back on 2008, Isaac still fills the $700 billion bank bailout known as the Troubled Asset Relief Program was a mistake of the highest order.
Isaac came to Washington in September of that year to argue against it, saying the subprime crisis and economic slowdown could be dealt with through other means, such as ending short-selling abuses on the stock market, revamping mark-to-market accounting rules that “needlessly destroyed $500 billion of capital in the financial system” and allowing “the FDIC and the Fed [Federal Reserve] to use their extraordinary powers to contain the crisis.”
What he describes as the “panic” of September 2008 caused politicians to scream “financial Armageddon” and virtually talk the country into a recession that was worse than it had to be. “They really scared everybody and the economy shut down,” Isaac said.
TARP’s political impact
And politicians who argued for TARP soon lost credibility with voters, he said, adding that’s why many are seeing the issue used against them in elections this year.
Said Isaac: “I’m glad it’s coming up as a political issue. I believe those who rushed the TARP through behaved irresponsibly. The irony is that the Treasury itself decided about two weeks after TARP became law that it was a bad idea and never used it for its intended purpose — purchasing toxic assets from the banks.”
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