No Fear

For those who were worried about a draconian new environment for financial regulation, "no fear," nothing of any value has been proposed, no risks were taken and there's nothing substantive for a loyal opposition to sink their teeth into. Professor John Coffee of Columbia University Law School has characterized our system of financial regulation as "fragmented and almost Balkanized." All that happened with the Obama program is that additional Balkan republics were created. Lines of responsibility between Treasury and the Federal Reserve continue to be blurred.

The plan proposes "giving the Federal Reserve broad new powers to oversee large firms, such as insurance companies, that it does not regulate directly." It would have been a bold stroke to propose national regulation of insurance companies, taking them out of the patchwork quilt of state charters, but this was probably politically unpalatable. However, to think of the Fed having the resources and staff to regulate or oversee in the current setup is just unrealistic.

The Fed failed in its primary charter to monitor, oversee and regulate bank lending within the twelve districts. Its army of bank examiners failed to note anything about the rising lending portfolio risks of any member banks as the systemic risk mounted and accelerated after 2006. More attention should have been paid to making sure that it fulfills its primary charter before giving it busy work, in which it will surely be ineffective. There should have been a Sarbanes-Oxley review of the Fed's own policies and procedures that led to this massive breakdown in its core function.

Instead, the current program of proposed regulatory reform fits neither the "super regulator" model favored by the Europeans, nor the "Twin Peaks" model (banking and securities markets) favored by some observers. Very disappointing indeed, but there is a great sigh of relief in the board rooms of large bank holding companies.