Senate Banking Committee Chairman Christopher Dodd (D-Conn.) finally unveiled his financial reform legislation. It was not worth the wait.
It is indisputable that our financial regulatory system failed us miserably in the two decades following the severe banking and savings and loan crises of the 1980s. Neither the bill passed last year by the House nor the Dodd proposal offers serious reform of this badly broken system.
The government agencies many identify as playing leading roles in creating the crisis of 2008 include the Treasury, the Securities and Exchange Commission and the Federal Reserve. Inexplicably, the House bill and the Dodd proposal enlarge the roles of the Treasury and Fed, pretty much ignore the SEC and do almost nothing to change the structure of regulation.
For example, the Treasury, with the Fed at its right hand, is given responsibility to run a new Systemic Risk Council charged with identifying and dealing with developing threats to the financial system.
That would be the same Treasury that, just a few years ago, justified the now discredited Basel II capital rules on the basis that the major U.S. banks were at a competitive disadvantage in the international financial markets because they had too much capital.
The same Treasury, during the 1980s, argued that the S&L industry did not have a solvency problem but instead had an earnings problem and advocated forcefully for allowing S&Ls to expand their activities and grow out of their problems – a policy that ultimately cost taxpayers $150 billion.
The same Treasury stood by while accounting rules on securitizations allowed trillions of dollars of loans to be removed from the balance sheets of financial firms, thereby escaping capital requirements and creating enormous risk in the financial system.