Wednesday, January 19, 2011

DEPT. OF COMPLETELY POINTLESS: Financial Stability Oversight Council Announces Rules and Recommendations

Is a rule a rule if no one is willing to enforce it?

The New York Times and everyone else is reporting that the Financial Stability Oversight Committee:
took its first big steps on Tuesday to set out tentative guidelines to limit trading by banks for their own accounts and to restrict the growth of the biggest financial companies.
[“First big steps to set out tentative guidelines”—the decisiveness of a Gen. Patton, but whatever.]
The Financial Stability Oversight Council, the grand council of financial regulators created by the Dodd-Frank Act, also proposed rules as to which large financial companies that were not banks would be regulated by the Federal Reserve because they constituted a potential threat to the nation’s financial system’s stability based on their size.
The “large financial companies that were not banks” are basically hedge funds and private equity firms, which made up the so-called “shadow banking” world—but the shadow banks essentially died with the Global Financial Crisis of 2008. So there’s not much left to regulate. 

What is left—the Too Big To Fail banks—are supposed to be regulated by the Federal Reserve: It’s part of their mandate. They don’t need additional rules and regs to do their job. 

Then, the kicker of the piece:
The recommendations made public on Tuesday are subject to revision based on public comments and the recommendations of various other state and federal regulatory agencies. But the proposals are among the most concrete steps yet aimed at preventing financial institutions from becoming “too big to fail” and at keeping tabs on insurance companies and other companies whose activities could endanger the American economy.
Two obvious points: One, banks became “too big to fail” when regulators began trying to prop them up—as happened in 2008. And two, Too Big To Fail banks exist now—which proves that this whole exercise of the Financial Stability Oversight Committee is totally cosmetic. 

If they were serious, they would have delivered recommendations as to how to break up the Too Big To Fail Banks. 

Now, the reason the banks got into trouble in 2008, and the whole concept of the TBTF came into existence, was because of the repeal of Glass-Steagal during the Clinton administration, egged on by the Republican Congress and then-Treasury Secretary Robert Rudin, late of Goldman Sachs and Citigroup. 

The removal of the rules barring commercial banking from acting as investment banks set the stage for the Global Financial Crisis—but a big part of it was the failure of the Federal Reserve to apply the rules on the books and actually oversee the banks that it was supposed to oversee. 

This Financial Stability Oversight Committee’s recommendations? Way too little, way too late—totally pointless.

1 comment:

  1. I don't buy that the repeal of Glass-Steagal is what caused the banks to get into trouble. As property prices kept rising the banks viewed mortgage loans as less risky. It is only human nature to get greedy and I think the banks would have continued to lend into the peak of the real estate bubble just as recklessly. It may not have happened as quickly because without Glass-Steagal they had easier access to their own investment bank, but I think the end result eventually would have been the same.


Knock yourself out!

The cult of stability is a culture of death.