Wall Street reforms - damned if you do, damned if you don’t
July 21st, 2010 by Anton Joseph
After a marathon run through Congress the much-awaited Wall Street reform Bill has reached final stages in the United States, ready to be signed into law by President Obama.
Will this step, although belated, be the good fight that had to be fought, or is it a descent from the sublime to the ridiculous (in that the final Act was much watered down from the original)?
Financial institutions engaging in proprietary trading have been constantly blamed for the crisis that started to unfold in 2008.
It is reported that Lehman Brothers had about $700 billion on derivative contracts at the time of its collapse and AIG’s derivative losses were $53 billion.
In his inaugural address President Reagan said that “the government is not the solution to our problems but government is the problem”.
Contrary to that libertarian view, it took more than two decades to realise that government participation is not a bad thing after all.
So when the government took leave of its role as regulator of financial institutions the rot was not far away.
Ironically, it took a Democrat President Clinton to sign the repeal of the law now famously known as the Glass-Steagall Act (officially the Banking Act of 1933).
The repealing law was aptly named the Financial Services Modernisation Act of 1999.
The repeal is claimed to have encouraged the merger of commercial banking, investment banking and insurances businesses.
The result was the collapse of the wall between traditional banking and investment activities.
Some hefty investments made by now - famous financial institutions turned stale, sour and downright toxic.
Now we have the Dodd-Frank Wall Street Reform and Consumer Protection Act (after the two men behind it, Chris Dodd and Barney Frank).
Will the spirit of the new law be faithful, at least, to its name or is it just more hot air into a cold status quo ?
Some of the significant features of the new Act are worth noting:
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Newly created Financial Stability Oversight Council may order downsizing of financial institutions if it is determined that there is a serious threat to domestic financial stability
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Certain financial institutions may be subjected to a leverage limit of 15 to 1
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Large hedge and private equity funds will be required to register with the Securities and Exchange Commission
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Proprietary trading by banking entities is prohibited: these entities are also not allowed to acquire or retain any equity, partnership or other ownership interest in or sponsor a hedge or private equity fund - however, after intense negotiation, the Act permits an investment of up to 3 percent of the Tier 1 Capital of the banks, subject to a limit of 3 percent of the assets of the fund
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The Act provides for shareholder vote on executive compensation disclosures and provides safeguards for compensation committee independence
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Provisions have been introduced allowing the SEC to issue rules requiring listed companies to implement ‘Clawback’ policies applicable to erroneously awarded compensation, including incentive-based compensation
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The Act has introduced responsibilities applicable to mortgage originators, such as qualifications, registration and obligation to disclose information on loan documents.
Already there is growing criticism of the reform Act, some claiming that the measures will dampen economic activity and force capital and managers to flee the country.
Doesn’t that scenario make it imperative that similar reform measures should be undertaken on a global scale and not piecemeal?
