Tuesday, March 13, 2012

A Short Update on Financial System Reform on the Third Anniversary of the Depth of the Financial Crisis

"Wall Street may prove to be not unlike that land, of which it has been said that no country is easier to overrun or harder to subdue."  -- Ferdinand Pecora, Chief Counsel in the 1930s to the U.S. Senate Committee investigating Wall Street practices 

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As Senator Dick Durbin said famously, Big Finance "owns the place" -- referring to government.  On the third anniversary of the March 2009 rock bottom of the ongoing financial crisis, let's take a quick look around "the place."  What one sees is that meaningful reform has been stymied in most venues.


I once attended a investment firm's reception at which one of the principal speakers was a former member of a Federal Reserve bank board.  The reception occurred during the weeks of heated legislative negotiations over the Dodd-Frank bill.  Editorials and op-ed columns about the pros and cons of the bill, and how the bill should be improved upon, were topics du jour.  During the Q&A following the speaker's prepared remarks I asked the speaker what, in his view, a sensible financial regulatory reform bill should contain.

His answer:  "nothing," which caused approving muffled laughter from the well-heeled audience.

Really, nothing?  Unprecedented bailouts and millions of jobs and homes lost in the financial crisis -- to say nothing of the suicides -- and there's no need for any legislative financial system reform?

The speaker's perspective prevailed to an extent because the effectiveness of the Dodd-Frank act's reforms was reduced substantially before enactment. The act had teeth extracted before enactment through providing that most reforms would occur via post-enactment studies and rule-making rather than in the law itself. (I can't say I've read the entire Dodd-Frank act -- life is too short -- but I can say that in many years as a lawyer I've read a lot of legislation. And I haven't seen anything like the extent to which Dodd-Frank is a "blueprint" statute rather than substantive law.) Dodd-Frank's sponsors' reluctant acceptance of the teeth extraction allowed passage through stiff opposition, of course.   But now the public -- then outraged and now, not so much, OWS notwithstanding -- has its eyes off the ball. And so Big Finance continues to use its considerable resources to oppose proposed rules under Dodd-Frank. And Big Finance is doing so with more than moderate success.

The Courts       

To date, the courts have not been an effective, practical venue for redress of Big Finance's transgressions.  Judge Rakoff's refusal to rubber-stamp inadequate settlement agreements is a breath-of-fresh-air exception.   Although the D.C. Circuit Court's invalidation of the SEC's "proxy access" rule, which would have allowed shareholders greater opportunity to elect directors, is off-topic because that lawsuit was about corporate governance rather than financial reform, the lawsuit's result illustrates the point.

The Consumer Financial Protection Bureau

There is hope at this new venue.  Big Finance derailed former University of Texas Law School professor Elizabeth Warren's candidacy for director of this new bureau.  A prediction:  Richard Cordray will prove to be an effective, practical leader.  However, and as The Washington Post observed earlier this year, "[i]t remains to be seen, however, exactly what path the CFPB will take under Cordray’s leadership."  And Big Finance will challenge the bureau at every opportunity.


It's a fair statement that the SEC in recent years has been an agency captured to a degree -- in the classic sense of regulatory capture -- by Big Finance.  There are exceptions, of course, and they're important.  But the SEC's rule-making process tends to complexity.  The complexity leads to exploitation.  And Wall Street is at the top of the list of the origin of ideas for creative exploitation.

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Here's the super-short version of the present state of reform:  government will provide some protection against Big Finance's value extractions that clearly aren't justifiable.  But the best protection is self-help.  The self-help can be individual action or -- in Bank of America's decision to rescind its five dollar ATM fee in response to intense pressure from customers -- collective action.  Caveat emptor.

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