In case you haven't heard yet, the epic -- or, at least, epically long -- financial reform bill is now law.
During the debate over what the final bill might look like, I made it no secret that I didn't think the bill was heading in the right direction. I always saw "too big to fail" as a key issue in reforming the financial system, and Congress deftly sidestepped creating specific provisions to deal with that issue.
To me, creating a financial reform bill that doesn't tackle "too big to fail" is sort of like planning a road trip from Washington, D.C., to California and then buying a road map of Hong Kong.
But as this is now the law of the land, we're probably well-served trying to figure out what exactly it's going to do. Obviously, we can't tackle the entire multi-thousand-page bill in this article, but let's take a closer look at one of the key provisions.
The Financial Stability Oversight Council
The FSOC is one of the many new councils and bureaus created by the financial overhaul bill, and it's definitely one of the most important. Why? Well, as the name suggests, the council is responsible for overseeing the entire U.S. financial system and trying to head off major threats to the system.
Or, as the bill puts it, the three primary purposes of the council are:
(A) to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace;
(B) to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure; and
(C) to respond to emerging threats to the stability of the United States financial system.
If the word that pops into your head is "herculean," then we're on the same page. In my mind at least, putting those responsibilities on the shoulders of the 10 voting members of the council -- which includes the Treasury secretary, the Fed Reserve chairman, the comptroller of the currency, the director of the Consumer Financial Protection Bureau, the chairman of the Securities and Exchange Commission, and the chairperson of the Federal Deposit Insurance Corp. -- makes this crew the superheroes of our financial system.
But can these newly anointed regulatory superheroes really prevent the next financial meltdown?
What could go wrong
If we're going to consider the Tremendous Ten (Have a better name? Share it in the comments section) of the FSOC the superheroes of the financial system, then it would probably follow that the supervillains would be the private-sector participants at firms such as Goldman Sachs
This sets up much the same problem that financial regulators have always had. While I don't doubt that there are some very capable people on the government's side, they're up against armies of highly educated, well-staffed, highly technologically equipped, and extremely well-paid bankers and traders. With billions of dollars in profits potentially at stake, the private-sector combatants will be willing to use considerable firepower to override, circumvent, or otherwise avoid the regulators' watchful eyes.
Meanwhile, the council will have limited ability to slap the hands of major foreign banking institutions such as Deutsche Bank
Finally, there's no clear standard for which non-bank financial firms should be regulated by the FSOC. Looking back, it was actually the non-bank financial firms that caused the most trouble during the meltdown -- AIG
What could go right
I do think that specific rules would have gone further than more regulators in preventing a repeat financial collapse -- after all, we did have regulators in place before.
However, a lot will depend on the who and how of the execution. The structure of the entire bill, which includes the FSOC, leaves a lot open to regulatory discretion. That means that success rides primarily on whether the right people are on the case.
Bright, hard-headed regulators who have no interest in kowtowing to Wall Street would have the best chance of making sure the FSOC earns the superhero label. Current Treasury Secretary Tim Geithner doesn't inspire a whole lot of confidence in me, but if we could find folks in the mold of Sheila Bair and Elizabeth Warren, then we might have a fighting chance.
The council's role as a sort of top-level coordinator could also be a big help for all of the agencies already in place. The bill specifically tasks the FSOC with facilitating information sharing between federal and state agencies, which, if done right, could make sure that all regulators are on the same page. At the same time, the FSOC is supposed to identify dangerous regulatory gaps, which could -- again, if done right -- give us a more seamless regulatory blanket across the system.
The proof of the pudding ...
I was recently alerted to the fact that the proof is not, in fact, in the pudding, but rather, the proof of the pudding is in the eating.
For better or worse, the same will be true of the Financial Stability Oversight Council. Creating a regulator that's tasked with identifying and short-circuiting major financial system risks is ambitious, to say the least. But whether the council will make us safer or just create more government expense and red tape, well, we'll have to wait for a taste of the final product to know.
Do you think that the FSOC will be able to keep our financial system safe and sound? Head down to the comments section and share your thoughts.
Hopefully financial reform will protect the system so that ordinary folks can continue to get rich from stocks like these.
