Sweeping regulatory reform of the financial sector is about to get rolling in Washington, beginning Tuesday with the influential report of the Committee on Capital Markets Regulation, a non-partisan research group co-chaired by R. Glenn Hubbard, dean of Columbia Business School, who chaired Pres. George W. Bush council of economic advisors. (Watch video)
“There’s so many different players and everyone is jumping into the debate,” says Ariella Herman, an associate at Turner GPA, who follows legislative affairs for corporate clients. “There's a lot of pressure to get something done before the end of the year.”
And it may take that long, say more than a few analysts and players, because the legislation will be forged amid historic circumstances with the unequivocal support of the President. The legislation will also have enormous ramifications for the country and the global economy.
“It’s extremely complicated," says William Isaac, former chairman of the FDIC. “We have been trying to reform structure in the US since the 1930s. There are some very powerful vested interests [both in and out of government] and they don’t want change they can’t control.”
Reform of some sort has been in the making since 2007 when then-Treasury Secretary Henry Paulson went to work on a regulatory blueprint, including the central idea of a systemic regulator, but powerful events—starting with the collapse of Bear Stearns—and interests, such as business groups, put it on ice.
However, there’s no stopping change this time, not after the near lock up of the global credit market last fall, a long and nasty recession and trillions of dollars of government spending to avert global catastrophe.
Herman calls financial regulatory reform one of the Obama administrations “five key agenda items, issues they have to go after,” partly because it will help restore “confidence in the economy” after almost two years of crisis management,
Yet, for all the urgency and the momentum, there are also those who warn against haste and are calling for prudence and delay.
"We have to move away from this crisis; banks have to be perceived to be stable,” says Sen. Bob Corker (R-Tenn.) "Maybe a year from now. In the middle of a crisis you tend to do it in the wrong way. You overdo things.”
Corker and others cite the emotionally charged passage of Sarbanes-Oxley in the wake of the corporate corruption scandals of a decade ago and the subsequent second-guessing, which now includes a challenge before the Supreme Court.
What's It All About
Sweeping may actually be something of an understatement in describing the reform legislation that’s under discussion. It’s expected to cover such diverse areas as consumer protection, executive compensation, new or revised supervision of hedge funds, private equity firms and insurance companies; derivatives and the creation of a so-called systemic — or super —regulator, which would set capital requirements and supervise frontline supervisory agency.
The breadth alone is bound to stir turf battles between powerful Congressional committees and yield a mini-series worth of public hearings featuring the testimony of a bevy of high-ranking government officials, most of whose agencies will be greatly affected, as well as a long line of industry groups and academics.
“Absolutely,” says David A. Skeel Jr. of the University Of Pennsylvania Law School. “I haven’t seen real committee jockeying yet. But the agency jockeying is underway.”
Though many of the areas will spark flames of contention and controversy, it is the super-regular aspect that is likely to burn the brightest and the longest.
For some, it cuts to the heart of the regulatory failuresthat contributed to — and perhaps prolonged—the financial crisis.
What’s more, one of the new powers that may be bestowed upon this super regulator is such a potential game changer that is likely to trigger controversy and turf wars of its own.
Called wind-down or resolution authority, it would empower the federal government to take over large institutions—deemed "too-big-to-fail"—whose failure would have widespread negative consequences for the US economy as well as the global one. (Currently the government can only do that with commercial banks.)
Supporters say such authority would have given the government a better tool in dealing with the crises at such financial behemoths as Bear Stearns, Lehman Brothers, Wachovia and AIG --as well as Freddie Mac and Fannie Mae--which otherwise resulted in shot-gun corporate marriages and/or expensive government bailouts.
Such authority would also apply to big firms such as Goldman Sachs Citgroup and Bank of America .
Just what government entity gets that power is the subject of considerable debate. The Federal Reserve and FDIC have their own supporters. There’s also talk of creating a new agency or a council.
"The big issue is that you can't have one organization take on another mission," says Mark Sunshine, President of First Capital. "It's a second job to be the systemic regulator.
Congress is thought to be reluctantto make that decision and would like the administration to include its preference in a broader set of recommendations, which are now being formulated.
Such an approach, says analysts, will also expedite the legislative process. Public hearings on some aspects are planned for early June.
“The administration has to be full-square behind this thing, otherwise it gets chops into little bits, and turf wars break out,” says Robert Glauber, a board member of the capital markets committee, who was a top Treasury Department official two decades ago during the savings-and-loan industry bailout and the expansive regulatory reform package it generated.
“We got things done that people didn't think were possible,” adds Glauber. “We did because it was a full-scale crisis. It really may be possible once again to fix some of these things. The record is terrible, though. It’s very hard.”