20
Jun
09

Redundant Robust Regulation

Because I have nothing to do on a Friday night, I hurried home from work today so I could begin reading Obama’s White Paper “outlining” his financial system overhaul. I made it all the way to page 21. I will finish, but needed to stop and breathe. The buzz is that Obama wrote this all by himself. I have not substantiated that, but if he did, he needs an editor. The first 16 pages are so redundant, I actually had to use the table of contents as a map and still I thought it was a test to prove that nobody reads these documents. There are full paragraphs repeated in the document.

I need to read the rest of it, then I need to read it again, but this should be broken down. I wondered how something so momentous was released with barely a hiccup on Wall Street and now I understand. It is innocuous. Really the first 16 pages simply state and re-state that there will be increased supervision over financial agencies of all sorts. I actually don’t disagree. The financial industry is behaving horribly right now and Obama, or whoever the author is, makes a valid point when he mentions how banks are circumventing regulation.

But there are a couple of troublesome tidbits tucked away in this document. First, it calls for increased supervision of “Tier 1” financial institutions by the Federal Reserve. This is odd. This is not a Federal Reserve responsibility. It is a little known fact that the Federal Reserve is not a government entity. The increased supervision may not be the worst idea ever, but the definition of “Tier 1” is dangerously undefined. It includes any institution that is involved with an institution deemed too big to fail. This can include smaller correspondent banks, third party payment processors, small insurance agencies and investment firms. It expands the reach of the Fed beyond where it was ever intended to be.

Speaking of the Federal Reserve, buried between all the talk about supervision, a real change is casually mentioned. The discount window is to be subject to Congressional approval. I can’t even imagine what that might mean since later in the document, it mentions relaxing emergency lending by the Fed. There are no details on either item in the first 21 pages, so possibly I have misinterpreted, but I find this confusing. It makes me wonder if anyone involved with this truly understands the Fed Funds and discount window process, because this does not seem workable.

Of course, I am not overly concerned with the Fed’s new role. I am reading the document because I want to find a real benefit to consumers. Rest easy. The Community Reinvestment Act is going to be protected and possibly expanded under this plan. Last I heard, that very piece of legislation was a great contributor to the current situation. It’s a nice idea, but it is unrealistic. There is a reason that lending standards were as high as they had been.

Another hidden dagger for consumers, the Gramm, Leach Bliley Act is going to be compromised, dissolving the stringent distinction between entities under examination. Right now, Gramm. Leach, Bliley allows banks to offer investment and insurance services, but each offering is very separate. Very simply, if you hold a small investment account with ABC bank, it cannot be considered when processing standard banking requests, such as overdraft payments or charge offs. Perhaps under the new standards, the bank will still not consider a $50,000.00 investment account when decisioning an overdraft. But the Fed, in a regulatory role, may consider you a high risk customer because of an overdrawn checking account regardless of your investment account. Such perceived risk could be detrimental to a financial institution’s rating.

Additional “benefits” to the consumer include fair and balanced disclosures. Bank disclosures are pretty much just factual regurgitation, so this seems like a red-tape-laden token. It also calls for simplified “plain-vanilla” to quote our president, product offerings and disclosure of such offerings.

A quarter of the way in, it’s hard to stand behind this. There is so much regulation, but there are very few specifics regarding the regulatory standards. There are agencies, expanded oversight, and more, but all of this intervention is not qualified. There are no defined goals. Personally, I would like to see a plan that empowers financial institutions and consumers. Too big to fail? Break it up. We have anti-trust laws on the books. CRA as consumer advocacy? Let’s get rid of unfair overdraft practices that essentially trap customers into paying an additional $30-$40 per transaction. Clarified disclosures? Why don’t we strive for financial literacy? The financial world is riddled with pitfalls and is automated to the extent that consumer need not monitor their own finances. This has led to complacency in an area most crucial to our survival. Complacency breeds exploitation.

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