And now, fresh from the White House, the new and improved regulatory structure:
FOSC = NBS + FDIC + NCUA + SEC + CFTC + FHFA + FOMC + CFPA + Treasury.
That’s shorthand for, hey, honey, we fed the bureaucrats too much. Rather than streamlining oversight, the White House is proposing a more complicated system. But the fragmented nature of regulation is an essential part of the problem.
All of the components in the system, including a new consumer financial protection watchdog, will report into the Financial Services Oversight Council. In theory, the oversight presidium will fill in the holes in oversight. In addition, the Federal Reserve will get new powers to manage the too-big-to-fail financial institutions.
There was a time — just a few short months ago — when it seemed Obama and friends would have the political will to streamline oversight, for example, by merging the Securities and Exchange Commission with the Commodities Futures Trading Commission. That merger would greatly improve the ability of the cop on the beat to supervise all manner of investment product.
In the end, only the Office of Thrift Supervision, infamous for missing the shenanigans at AIG gets folded into the Office of the Comptroller of the Currency. The merged entity will now be known as the National Bank Supervisor.
Obama told the Wall Street Journal he longed for a light touch in restructuring regulation. But the bureaucracy seems pretty top heavy as the White House failed to fight back warring regulatory fiefdoms. It looks as if he added light layers to what already was.
Further, it’s not clear that the White House went far enough in excising incentives in the system that led to the market crack-up. For example, the new white paper proposes that originators of derivative securities keep 5% of the paper. In theory, that keeps their “skin in the game.” But as Barry Ritholtz notes in his blog, that’s pretty weak stuff. Originators should offer warranties as long as 10 years on products backed by 30-year mortgages. Now that’s skin in the game.
On the plus side, the White House is calling for greater transparency in the murky world of over-the-counter derivatives (read: credit default swaps) and more protections for the consumer.
The 85-page working paper leaves many details unexplained (and unfortunately, the public version is scanned in so you can’t search for specific terms in the pdf). It suggests strengthening oversight of the credit rating agencies, big facilitators in the meltdown. It urges better firewalls between banks and their affiliates so that off-balance sheet transactions don’t threaten the solvency of too-big-to-fail entities. The implementation of these and other goals will be critically important to the success of the overhaul.
Over time, unfortunately, the will to make change will ebb. It is important for the financial sector that taxpayers stay on top of these issues and thwart any further watering down of needed change.