Feature

Issue of the week: A regulatory revolution

The regulatory reform outlined by Treasury Secretary Timothy Geithner would be the biggest overhaul of market rules since the New Deal.

The Obama administration has mapped out a bold “new era of regulation,” said Damian Paletta and Jenny Strasburg in The Wall Street Journal. The regulatory reform, outlined last week by Treasury Secretary Timothy Geithner, would be the biggest overhaul of market rules since the New Deal. If approved by Congress, the rules would empower an independent super-regulator to monitor risks to the financial system and dramatically tighten oversight of hedge funds and private equity firms. The government would also oversee trading in credit default swaps and other risky derivatives. Most controversially, Geithner asked for the power to seize nonbank financial firms such as insurer AIG. Many Wall Street insiders “were quick to announce their opposition.” But facing popular outrage over bonus payments to AIG executives and other abuses, opponents of the muscular new approach will be lucky if they can even manage to limit a few provisions that they consider too intrusive, “such as making their trading records public.”

Obama is operating on the high ground here, said Clive Crook in TheAtlantic.com. House Minority Leader John Boehner was quick to call Geithner’s proposal for seizing financial firms “an unprecedented grab for power.” But there’s nothing unprecedented about it. The FDIC already has the power to take over failing banks and put them into a “pre-packaged bankruptcy.” It then restores the banks to financial health or merges them with more stable banks. Can anyone “intelligently oppose an FDIC-like resolution regime for AIG and other systemically important nonbanks?” The firm is the beneficiary of $173 billion in federal loans and guarantees. With that kind of money at stake, the feds have the right and the obligation to protect the taxpayers’ interest.

Unfortunately, there’s little reason to believe that government bureaucrats are up to this task, said Francis Diebold and David Skeel in The Wall Street Journal. Consider the saga of IndyMac, the troubled California mortgage lender. “It was not taken over by the FDIC until long after it was obvious it should be closed.” The delay cost taxpayers some $10 billion. Shortly after the IndyMac takeover last year, the FDIC brokered the sale of Wachovia Bancorp to Citigroup “at a lowball price.” When Wells Fargo snatched Wachovia away from Citi with “a vastly superior offer,” the FDIC “wound up with egg on its face.” The point is, the government is just not equipped to micromanage the financial world.

Ultimately, the tools we give regulators matter less than their willingness to use them, said The New York Times in an editorial. The financial crisis, “including what went wrong at AIG,” came about not because of some missing rule or regulatory agency. It happened because regulators, lawmakers, and executive-branch officials failed “to heed warnings about risks in the system and to use their powers to head them off.” Intoxicated by then-fashionable free-market rhetoric, they lost “the will to regulate.” Still, “tighter rules” would help, said USA Today. The current, creaky regulatory framework is a “patchwork of rules and agencies,” some of which date back to the Civil War. It’s way past time for a new system suited to “an era of computerized global trading and exotic financial instruments.”

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