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I don't know about the rest of you, but I've been waiting with bated breath for a broad, meaningful financial-reform package. And we didn't get it yesterday, when what we got from Sen. Chris Dodd, chairman of the Senate Banking Committee, fell far short.
Right from the get-go, the senator's 11-page summary of the massive 1,336-page bill gives us a pretty good idea why the reform package will badly miss the mark. In an explanation of why new consumer financial protections are needed, the bill summary asserts: "The economic crisis was driven by an across-the-board failure to protect consumers."
While that may be a heart-warming sound bite, it shows either an acute misunderstanding of the true causes of the financial crisis, or an unabashed willingness to pander to populist views.
(Supposedly) cracking down
In his press conference, Dodd made the reform package sound as though it was going to go on the attack from all fronts. He highlighted four specific components of the bill: ending too-big-to-fail bailouts, creating a consumer-protection watchdog, introducing an early warning system for systemic risk, and requiring more transparency for hedge funds and derivatives.
On the surface, that would mean U.S. taxpayers won't be left with the bill for another AIG (NYSE: AIG ) or Citigroup (NYSE: C ) -- or, hopefully, Fannie Mae (NYSE: FNM ) or Freddie Mac. It would also protect consumers from the wiles of major credit card issuers such as Capital One Financial (NYSE: COF ) or unscrupulous mortgage lenders. And it would supposedly shine a bright light on the dark corners of the financial world, where companies such as Goldman Sachs (NYSE: GS ) and Morgan Stanley (NYSE: MS ) seem to mint money.
But don't be too quick to judge this book by its cover, because this is hardly the meaningful reform that we've all been waiting for.
How to fail at reform in three easy steps
Why isn't Dodd's package going to be a financial panacea? Let me count the ways.
- Bet on bureaucracy. As I read through the summary and browsed the text of the bill itself, it became painfully obvious that Dodd's bill is long on new bureaucracy and short on actual new rules.
Get ready for the Bureau of Consumer Financial Protection, the Financial Stability Oversight Council, the Office of Financial Research, the Orderly Liquidation Authority Panel, the Office of National Insurance, und so weiter. The bill creates heaps of new bureaucratic organizations all queuing up to slather red tape on the system while they inevitably trip all over themselves and don't really solve the underlying problems.
Banks and financial institutions were being watched before the crisis unfolded. It was a lack of effective rules and regulations that allowed the system to go haywire, not a dearth of acronymed government organizations in the already thick regulatory soup.
- Stifle with studies. The government's definition of "study" generally seems to be something along the lines of "bury a difficult issue until someone else eventually deals with it." And that's why it's so concerning to me that the financial-reform bill is riddled with studies -- from short-selling and the obligations of brokers, dealers, and investment advisors, to the actual implementation of any new regulations, including the so-called "Volcker Rule."
By burying key issues of financial reform in governmental studies, I envision that our end result will be heaps of toothless reports that will be beaten down with extreme prejudice by well-funded banking lobbyists. Maybe we can take small comfort in knowing that we'll have existing studies to tell us why everything went wrong again when it does, eventually, all go wrong again.
- Miss the point entirely. When it comes to financial products, are enhanced consumer protections a bad idea? No. But let's get real here: The crisis wasn't simply about big, bad banks that preyed on the entire country. It was about the same thing that panics, meltdowns, and crashes are always made up of: greed run wild.
This wasn't a greed that started or ended with the financial institutions. It ran the gamut from the average Joe on the street all the way up to Dick Fuld at Lehman Brothers. And amid the greed-induced euphoria, the folks who were supposed to be regulating bought into it, including rating agencies such as Moody's (NYSE: MCO ) , financial risk managers, and even former Federal Reserve Chairman Alan Greenspan.
Unfortunately, there's nothing we can do to eliminate greed entirely. However, in the sober light of day following this most recent meltdown, we had the opportunity to set down new, explicit rules to prevent some of the abuses that nearly bankrupted the system. If Dodd's plan is really the best that we can do, it looks like we may be completely missing our opportunity for real change.
What do you think about the proposed financial overhaul? Will it do anything significant to help prevent another crisis? Or is it just more empty Washington legislation? Head down to the comments section and share your thoughts.
Is this the only place the government is blundering? Check out why my fellow Fool Morgan Housel thinks Social Security is messed up.