Financial Reform Bill Going Back To the Shop for Tweaking

Adding to today’s market madness was talk in Washington that support for the financial reform bill was fading. Some senators indicated they would not vote for it, each for different reasons.

Senator Russ Feingold indicated he would not vote for the financial reform bill when it came to the final vote because it would not prevent another crisis. Russ Feingold knows the bill is a joke and it is good to know there is at least one lonely person in Washington that “gets it”.

Others who have stated they would withhold their vote is not because they are thinking of another crisis, they are more concerned that Wall Street would be damaged if the banks had to pay for part of the financial reform. So in order to muster up enough votes Representative Barney Frank and Senator Chris Dodd are trying to re-open the conference committee to remove the $19 Billion fees that would be levied on Wall Street in order to appease those ‘no’ votes and allow the bill to proceed.

But where will Frank and Dodd go for that money? They are floating the idea of using TARP money. Yep, instead of Wall Street paying for the mess, taxpayers will.

you know the old saying …

“you just can’t make this s**t up”




Financial Reform – The Good, The Bad, and the WTF

Well it has been more than two years since the financial disaster has hit the nation and the taxpayers have had to bail out banks, car companies, insurance companies, and even the largest Wall Street financial firms. It is important to remember that the economy fell apart because of Wall Street’s reckless behavior. This reckless behavior was blessed by the United States government over the past decade with various regulations and laws that were either relaxed, or eliminated. Most notably were the repeal of the Glass-Steagall act in 1999 and the effective removal of leverage limits for Wall Street financial institutions in 2004.

The Obama administration would like you to believe that all of the problems currently being experienced in the economy are the direct result of Wall Street and nobody else. It is true that Wall Street created the disaster, but it is the government who gave them the tools to do it with.

So after two years since the financial crisis has decimated the United States economy all the talk has been on financial reform. We have all heard of the term “too big to fail” which are simply institutions that have grown to the point where there mere existence is critical to the same economy they wrecked havoc with to begin with. These “too big to fail” firms have not only grown larger and more complex as a result of all of the taxpayer-funded bailouts, but they have become even more dangerous as a result of the arm-twisting that Congress gave the Financial Accounting Standards Board (FASB) to change mark to market accounting rules. Under the current guidelines of the FASB we no longer know the real health of any financial institution or bank simply because assets held on the books are marked to a mythical value.

Congress has spent well over the past year putting together a financial reform bill. It has gone from the House to the Senate, the Senate to the House, and back and forth over and over again to come up with a bill that is supposed to reign in Wall Street, and take away the very tools that enabled them to destroy the economy to begin with. So does the final compromise bill address any of the real problems? Will we prevent a financial crisis of the likes we have just lived through from ever happening again? And will it restore confidence in the very same financial system that destroyed the livelihood of millions of Americans?

The financial reform bill has some good points, bad points, and a lot of stuff that simply falls into a category of WTF!

WTF Category

I’m going to begin with the WTF stuff first simply because the sole purpose of the financial reform bill was to set new laws, limits, regulations, and guidelines for Wall Street firms and all other financial institutions. But instead the financial reform bill essentially mandates new councils to be established and new studies to be performed. A big part of the financial reform bill is the creation of what is now going to be called the Financial Stability Oversight Council (FSOC). That’s right, another government agency whose mission will be to study and evaluate certain financial regulations and make recommendations.

For example, in section 115 of the financial reform bill it states the following…

“in order to prevent or mitigate risk to the financial stability of the United States that could arise from the material financial distress, failure, or ongoing activities of large, interconnected financial institutions, the Council may make recommendations to the board of governors concerning the establishment and refinement of prudential standards and reporting and disclosure requirements applicable to non-bank financial companies supervised by the board of governors and large, interconnected bank holding companies.”

So let me get this straight, Congress spent well over the past year hammering out a financial reform bill that really doesn’t do anything at all except establish another government agency that will spend more time and money on how to fix the problem. In this regard I call this a WTF! What are some of the things that the Council is to evaluate and study? Here is the list as outlined in the financial reform bill:

  • Risk based capital requirements
  • Leverage limits
  • Liquidity requirements
  • Resolution plan and credit exposure reporting requirements
  • Concentration limits
  • Contingent capital requirements
  • Enhanced public disclosures
  • Short term debt limits
  • Overall risk management requirements

That’s a lot of stuff for the new Council to work on. But where it gets even better, the financial reform bill says that the Council must submit a report to Congress regarding the study no later than two years after the financial reform bill becomes law. Talk about kicking the can down the road, this essentially kicks the can into the next administration.

And when it comes to “too big to fail” the financial reform bill does nothing more than pass the buck. In section 123 of the financial reform bill it states that a study is required. Beginning on line number eight of section 123 it states

“the chairman of the Council shall carry out a study of the economic impact of possible financial services regulatory limitations intended to reduce systemic risk. Such study shall estimate the benefits and cost on the efficiency of capital markets, on the financial sector, and on national economic growth.

So where does the financial reform bill address the too big to fail problem? It doesn’t, it lets the new Council study it. In total it appears there are more than 22 studies that the financial reform bill will require. I’ll say it again, it has been more than two years since the financial crisis began and this financial reform bill should contain actual hard numbers that go into effect upon the president’s signing of the bill. Instead all we really get is a lot a tough talk from Washington but it has no teeth, the financial reform bill is an embarrassment to the United States for it promises a great deal but accomplishes little.

One more thing to add to that WTF category here is that under the consumer protection part of this bill which is to safeguard consumers from being taken advantage of by lending companies it excludes automobile dealerships. Purchasing a car is usually the second largest purchase a person or family makes in their lifetime, and the exclusion of car dealers from consumer protection enhancements is simply ridiculous.

Whats good?

The best part is that the “Volker rule” has been included. This measure bars banks from trading with their own money, a practice that is known on Wall Street as proprietary trading. The provision also would ban firms from betting against securities they sell to their clients. The financial reform bill gives firms up to two years to scale back their proprietary trading.

The financial reform bill does address derivatives trading, but in my view it leaves too many loopholes that Wall Street firms will eventually find ways around. The bill says that routine derivatives are to be traded on exchanges and routed through clearinghouses. But who is going to determine what is considered routine and what is not a routine derivatives trade? We will have to see how this plays out to determine if the derivatives market really becomes transparent or not.

It gives regulators resolution authority to seize and/or break up troubled financial firms whose collapse might cause widespread financial damage. Well this is somewhat of a gray area because if regulators were doing their jobs in the first place firms would never get into that situation to begin with.

The financial reform bill makes permanent the $250,000 insurance for FDIC insured banks and credit unions which up until now was only temporary.

It establishes new national underwriting standards for home mortgage lenders which for the first time will be required for ALL mortgages to ensure a borrower can repay a home loan by verifying income, credit history, and job status. It also bans payments to mortgage brokers for steering borrowers into higher priced loans. No more “no income and no job” loans.

The bill also creates a new consumer financial protection Bureau, the bad part though is that it will be under the roof of the Federal Reserve. This new consumer financial protection Bureau will have powers to issue new rules over banks and other financial companies. But remember automobile dealers are exempted!

And finally this bill will require hedge funds and other private equity funds to register with the Securities and Exchange Commission as investment advisers and to provide information on their trades to help regulators monitor systemic risks.

Now for the bad stuff. This section deals with parts of the bill that are bad, but not as bad as WTF.

A new law will require banks that package mortgage loans must now keep 5% of the credit risk on their balance sheets. The thought here is that by mandating that banks keep part of the packaged loans on their balance sheet, even while they sell the majority of it to someone else it will force the banks to act less recklessly. What is bad here is that 5% amounts to very little. If a bank is going to have “skin in the game” then the requirement should be a minimum of 25%, this way banks will have much more skin in the game and will be more careful about the loans to begin with.

The bill also goes into shareholder rights. It will give shareholders of public corporations a nonbinding vote on executive pay and retirement packages. This is just a joke, the average investor can not stand up to the voting power of large holders of stock in the company such as corporate insiders, hedge funds, mutual funds and the like. This is one of those “make the average investor feel good” parts of the bill but has no meaningful impact.

Also contained within this financial reform bill is a provision that allows individual states to impose stricter consumer protection laws on national banks, compared with the federal standard. Well this is just stupid. John Doe could live in Missouri and have one set of rules and regulations that govern a large national bank and afford him greater protection than another John Doe who lives in Kentucky which may have less strict protections for the consumer. Consumer protection laws need to be standardized and made applicable nationwide. An American citizen should not be protected more or less simply by the state that they live in.

Another bad part of this bill is the creation of yet another government agency. It will create a new Federal Insurance Office (FIO) that will be contained within the Treasury Department. Its purpose will be to monitor the insurance industry and make recommendations about which companies should be treated as systemically important. Like I said above, after more than two years into this financial crisis there should be much more than just more agencies to do more studies. So in this regard I view the Federal Insurance Office as another waste of money.

In summary, the financial reform bill has lots of big words and big promises which I am sure the Obama administration will attempt to pass off as the greatest bill since the health care reform bill. The bill does not really protect taxpayers from any future Wall Street crises, in many aspects it enshrines the bail out architecture that we have become accustomed to.  The financial reform bill currently stands at 2,315 pages. As I have opined many times in the past all of this could have been easily handled, and much cheaper mind you, by simply reinstating the Glass-Steagall act and immediately imposing strict capital requirements and leverage ratios. But we knew that something like that would never happen because it would immediately impact profits of the large Wall Street firms and banks. And you know that Wall Street financial firms have some of the most powerful lobbyist in Washington that has ever been seen.

The financial reform bill is likely to be approved by the House and Senate as it stands currently and President Obama has signaled that he will sign it into law before July 4. But what President Obama will be signing is a bill that is full of compromises, continues to allow the “too big to fail” firms to remain as they are, and does nothing right now to address the real causes of the financial crisis. Maybe after all the studies are completed there will be some meaningful changes. But, don’t hold your breath.




Matt Taibbi on the Financial Reform War

[…] The companies with the most at stake are particularly well-connected. The lobbying campaign for Goldman Sachs, for instance, is being headed up by a former top staffer for Rep. Barney Frank, Michael Paese, who is coordinating some 14 different lobbying firms to fight on Goldman’s behalf. The bank is also represented by Capitol Hill heavyweights like former House majority leader Dick Gephardt and former Reagan chief of staff Ken Duberstein. All told, there are at least 40 ex-staffers of the Senate Banking Committee – and even one former senator, Trent Lott – lobbying on behalf of Wall Street. Until the final weeks of the reform debate, however, it seemed that all these insiders were facing the prospect of a rare defeat – and they weren’t pleased. One lobbyist even complained to The Washington Post that the bill was being debated out in the open, on the Senate floor, instead of in a smoky backroom. “They’ve got to get this thing off the floor and into a reasonable, behind-the-scenes” discussion, he groused. “Let’s have a few wise fathers sit around the table in some quiet room” to work it out.

As it neared the finish line, the Restoring American Financial Stability Act was almost unprecedentedly broad in scope, in some ways surpassing even the health care bill in size and societal impact. It would rein in $600 trillion in derivatives, create a giant new federal agency to protect financial consumers, open up the books of the Federal Reserve for the first time in history and perhaps even break up the so-called “Too Big to Fail” giants on Wall Street. The recent history of the U.S. Congress suggests that it was almost a given that they would fuck up this one real shot at slaying the dragon of corruption that has been slowly devouring not just our economy but our whole way of life over the past 20 years. Yet with just weeks left in the nearly year-long process at hammering out this huge new law, the bad guys were still on the run. Even the senators themselves seemed surprised at what assholes they weren’t being. This new baby of theirs, finance reform, was going to be that one rare kid who made it out of the filth and the crime of the hood for everybody to be proud of.

Then reality set in. […]

The full ‘must read’ article can be found on Rollingstone

Financial Reform – Another Shell Game Leaves Tax Payers on the Hook

The financial reform bill has a backdoor bailout clause that would have utilized $50 Billion of funds set aside to be used when another big bank needed a bailout or winding down. This backdoor bailout is a fact, even with some politicians, and the President, saying it was no such thing.

Well now it gets worse. Tonight senate leaders agreed to scrap the $50 Billion fund and instead use a system by which the FDIC would provide the necessary funding to handle the failed institution. The source of this new funding would be accomplished by setting up a new line of credit with the treasury department, and it would be backed by the failed company’s assets.

Ok, so let us walk through this one. The first idea in the bill was to set aside $50 Billion, which Geithner claimed would have been funded by the big institutions themselves. The reason it has been referred to as a backdoor taxpayer bailout is that the increased levies on the big banks would simply be passed along to the tax payer.

So then if in the future a Citigroup, or Bank of America for example needed another bailout or needed to be ring fenced if the firm goes into core meltdown then the funds would be drawn from the $50 Billion reserve.

Now, the newest idea is even worse than the first one. Under this agreement the $50 Billion is scrapped altogether. In its place will be a new credit line established between the treasury department taxpayer and the FDIC. So if a Citigroup for example goes into a meltdown then the firm would be wound down and costs to perform the bailout / wind down would be provided by the FDIC / Treasury credit line. And when the nuclear dust settles the assets of the firm will be sold to reimburse the Treasury.

[…] Aides to the committee chairman, Christopher J. Dodd, Democrat of Connecticut, and the panel’s senior Republican, Richard C. Shelby of Alabama, said the two senators had agreed to scuttle a $50 billion fund proposed by Democrats.

The fund, which was opposed by the Obama administration, drew criticism from Republicans who had warned that it would promote rather than prevent taxpayer bailouts of failed financial companies.

Under the deal, the Federal Deposit Insurance Corporation would finance the liquidation of failed financial companies, using a new credit line with the Treasury Department backed by the failed company’s assets. The money would be recouped later through the sale of assets, with shareholders and creditors forced to take losses.[…] emphasis added (NYT)

The problem with this ridiculous plan is that the taxpayers only get reimbursed if the assets of the failed firm are enough to cover the original outlay of funds that were needed to wind them down. It puts the taxpayers on the hook yet again for Wall Street screw ups. Only this time it is disguised even better with the FDIC being front and center, and behind the FDIC is the treasury and taxpayers.

I don’t see things as optimistically as the NYT does. Take for example the bank failures of the past 18 months. When the FDIC moves in a seizes the bank they establish an estimate of what the costs will be to the insurance fund. In later months, the FDIC issues additional reports on the failed bank, and in many instances the true cost ends up being much higher than first estimated when it is discovered that the assets the institution was holding was worth much less than what was being reported. We have mark to myth accounting rules to thank for that.

So if the treasury taxpayer is going to be reimbursed by the assets held from the failed institution then I say this is just one more shell game being played on the American people.

Financial Reform – A Thesis on Do Nothing Constructive

Today President Obama travelled to New York City to talk about financial reform at Cooper Union’s Great Hall, founded in 1859 by Peter Cooper, one of America’s richest businessmen of the time.

It has been nearly 2 years since the financial crisis began. And in that 2 years not one corrective action has taken place, not one.

You can’t say that the credit card reform act was a good thing. It simply allowed every bank and other credit card issuer to raise interest rates to levels that even a loan shark would be envious of before the law went into effect, essentially trapping credit card users at the new higher rates.

Health Care Reform? With many of the provisions not even becoming law until 2014 this too will serve as a license for insurance companies to raise premiums and create other havoc over the next 4 years. Again, another law that will enable Wall Street firms and insurance companies to bilk the American people for whatever they can get before the law becomes active.

Now in the case of financial reform the government has accomplished nothing in the past 2 years. Lots of talk, but nothing done. So today the President spoke once again about the need to reform the financial system. Unfortunately, his statements were just as weak as the rhetoric spoken 2 years ago.

Wall Street lobbyists have twisted the arm of Washington throughout this entire time to keep a blind eye facing Wall Street. It is only because of public outrage over the destruction of the economy, at the hands of Wall Street, does the administration even talk about reform at all.

In all of it’s lack of anything meaningful glory… I present the President of the United States.

Be sure to check out my comments throughout the following transcript.

—–

The White House

Office of the Press Secretary

For Immediate Release

April 22, 2010

Remarks by the President on Wall Street Reform

Cooper Union, New York, New York

11:50 A.M. EDT

THE PRESIDENT:  Thank you very much.  Everybody, please have a seat.  Thank you very much.  Well, thank you.  It is good to be back.  (Applause.)  It is good to be back in New York, it is good to be back in the Great Hall at Cooper Union.  (Applause.)

We’ve got some special guests here that I want to acknowledge.  Congresswoman Carolyn Maloney is here in the house.  (Applause.)  Governor David Paterson is here.  (Applause.)  Attorney General Andrew Cuomo.  (Applause.)  State Comptroller Thomas DiNapoli is here.  (Applause.)  The Mayor of New York City, Michael Bloomberg.  (Applause.)  Dr. George Campbell, Jr., president of Cooper Union.  (Applause.)  And all the citywide elected officials who are here.  Thank you very much for your attendance.

RT: Mayor Bloomberg, the guy who has been moving funds to foreign tax havens. See Bloomberg’s Offshore Millions

It is wonderful to be back in Cooper Union, where generations of leaders and citizens have come to defend their ideas and contest their differences.  It’s also good to be back in Lower Manhattan, a few blocks from Wall Street.  (Laughter.)  It really is good to be back, because Wall Street is the heart of our nation’s financial sector.

Now, since I last spoke here two years ago, our country has been through a terrible trial.  More than 8 million people have lost their jobs.  Countless small businesses have had to shut their doors.  Trillions of dollars in savings have been lost — forcing seniors to put off retirement, young people to postpone college, entrepreneurs to give up on the dream of starting a company.  And as a nation we were forced to take unprecedented steps to rescue the financial system and the broader economy.

And as a result of the decisions we made — some of which, let’s face it, were very unpopular — we are seeing hopeful signs.  A little more than one year ago we were losing an average of 750,000 jobs each month.  Today, America is adding jobs again.  One year ago the economy was shrinking rapidly.  Today the economy is growing.  In fact, we’ve seen the fastest turnaround in growth in nearly three decades.

RT: With enough taxpayer money one can buy anything, even economic data. How will it look once the pot runs dry?

But you’re here and I’m here because we’ve got more work to do.  Until this progress is felt not just on Wall Street but on Main Street we cannot be satisfied.  Until the millions of our neighbors who are looking for work can find a job, and wages are growing at a meaningful pace, we may be able to claim a technical recovery — but we will not have truly recovered.  And even as we seek to revive this economy, it’s also incumbent on us to rebuild it stronger than before.  We don’t want an economy that has the same weaknesses that led to this crisis.  And that means addressing some of the underlying problems that led to this turmoil and devastation in the first place.
Now, one of the most significant contributors to this recession was a financial crisis as dire as any we’ve known in generations — at least since the ’30s.  And that crisis was born of a failure of responsibility — from Wall Street all the way to Washington — that brought down many of the world’s largest financial firms and nearly dragged our economy into a second Great Depression.

It was that failure of responsibility that I spoke about when I came to New York more than two years ago — before the worst of the crisis had unfolded.  It was back in 2007.  And I take no satisfaction in noting that my comments then have largely been borne out by the events that followed.  But I repeat what I said then because it is essential that we learn the lessons from this crisis so we don’t doom ourselves to repeat it.  And make no mistake, that is exactly what will happen if we allow this moment to pass — and that’s an outcome that is unacceptable to me and it’s unacceptable to you, the American people.  (Applause.)

[Read more...]

We Will Look Back in 10 Years And Say “We Should Not Have Done This”

That is what Senator Bryon Dorgan said on this very day 10 years ago. It was on this day, November 12, 1999 that then President Clinton signed into law the Financial Modernization Act. Contained within that act was the dismantling of the Glass-Steagall Act. The very law that kept “Too Big To Fail” in check was signed away and exactly 10 years later our Government is trying to finds ways to regulate the financial industry after it unleashed a monster just 10 years ago today.

This video from November 1999:

I have written several times in the past about that day in 1999 when Glass-Steagall was wiped off the books. That law prevented banks and investment companies from crossing the line into each others business. But with the destruction of Glass-Steagall came the seeds and fertilizer for what we have on Wall Street today, financial institutions the size of Godzilla and it has taken over Manhattan.

Now that our Government created this monster; which has wiped out trillions of dollars in savings accounts, pension funds, sovereign wealth funds, and the life savings of numerous retired individuals all over this nation the monster is doing everything in its power to keep ‘business as usual’.

The financial regulatory reform draft recently introduced by Senator Chris Dodd is a massive document (1,100 pages) that discusses everything from creating new regulatory departments, increasing accountability, new bank division regulators for the small banks, and lots of mumbo jumbo about how the financial system can be fixed with this draft bill and the problems will never happen again.

<pull my finger>

As Senator Bryon Dorgan so eloquently said on this day ten years ago; “we will look back and say we should have not done this“. He was so right, Washington forgot the lessons of the Great Depression and with the destruction of Glass-Steagall we can clearly and without hesitation say that “they should have never done it”.

When the bill passed the Congress and subsequently signed into law by the President it was not the people of the nation that they were saying how good it would be for, it was how great it would be for the Wall Street firms who would go on to create the biggest financial institutions on the planet who then had the power, the capability, the will, and the desire to suck every dollar from as many people as they can. All the while never worrying about the risks associated with it because the same people they stole from will be the very same ones who will rescue them for they are the tax payers.

Chris Dodd’s financial reform draft is all words with no meat. It was probably written in part by Wall Street themselves and Chris Dodd is simply carrying the torch to show the world that he will reform the system. In actuality nothing significant is in the draft that I can find. The 1,110 page document could easily be reduced to about 20 or 30 pages by simply creating an executive order to reverse the 1999 Financial Modernization Act. But we know that can never happen because you and I don’t have a voice in Washington, D.C. any longer. The only voice they hear is their bosses on Wall Street and they run and control the financial laws of the land.

Just today the Federal Reserve announced new rules on ATM overdraft fees without your knowledge.

The Federal Reserve Board on Thursday announced final rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.

A big problem however is that the banks would not be required to comply until July 1, 2010. This gives them plenty of time to come up with new ways to add fees to make up for the overdraft fees they will lose. Why wait until July 1, 2010 instead of making effective within a matter of weeks? Because the lobbyists from Wall Street and  K street in Washington hammered the Feds to ‘give them time’. The banks claim that the new rule will take many months of re-programming the systems to adjust for the overdraft fee rules.

<pull my finger>

The only reason is to allow the banks enough time to create new debit fees that will offset the loss in overdraft fees. Similar to the current credit card fiasco that has customers now unable to pay their credit card bills because the banks jacked their interest rates up to 29.99% in many cases. The banks are front running the rules to gauge as many people as they can and in the fastest amount of time possible.

Do you really think Washington listens to the people anymore? Unless your name is Ken Lewis, Vikram Pandit, Lyodd (Lord aka God) Blankfein, or Jamie (the weasel) Dimon then you have not a chance in hell to have your elected officials listen to you. If you want to offer $1,000,000 to his next campaign fund well then he or she will make time for you, but only enough time to verify the check is good and then you will be out the door.

The only financial reform that will work is the breaking up of the banks and financial institutions again. Build a fence between the two and go back to the days when a bank was a bank, nothing more. And investment firms only handled investments and never dabbled into banking. But these institutions are so big now that just the threat of breaking them up will bring a reaction from them that if they go down then the nation will go down. Remember Lloyd Blankfein (Goldman Sachs CEO) said just this past weekend in an interview that Goldman Sachs “was doing Gods work“. I guess no one would dare interfere with God, now would they.

Lloyd Blankfein…. come closer, closer still…  PULL MY FINGER

Financial Reform – President Obama’s Speech

In case you missed President Obama’s speech today when he announced his plans for new financial regulations and reform then don’t fret, you can read it all right here:

Since taking office, my administration has mounted an extraordinary response to an historic economic crisis. But even as we take decisive action to repair the damage to our economy, we are working hard to build a new foundation for sustained and lasting growth. This will not be easy. We know that this recession is not the result of one failure, but many. And many of the toughest challenges we face are the product of a cascade of mistakes and missed opportunities which took place over the course of decades. That is why, as part of this new foundation, we are seeking to build an energy economy that creates new jobs and new businesses to free us from our dependence on foreign oil; to foster an education system that instills in each generation the capacity to turn ideas into innovations, and innovations into industries; and, as I discussed on Monday at the American Medical Association, to reform our health care system so that we can remain healthy and competitive. This new foundation also requires strong, vibrant financial markets, operating under transparent, fairly-administered rules of the road that protect America’s consumers and our economy from the devastating breakdown we’ve witnessed in recent years. It is an indisputable fact that one of the most significant contributors to our economic downturn was an unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess. A culture of irresponsibility took root from Wall Street to Washington to Main Street. And a regulatory regime basically crafted in the wake of a 20th century economic crisis – the Great Depression – was overwhelmed by the speed, scope, and sophistication of a 21st century global economy. In recent years, financial innovators, seeking an edge in the marketplace, produced a variety of new and complex financial instruments. These products, such as asset backed securities, were designed to spread risk but ended up concentrating it. Loans were sold to banks, banks packaged these loans into securities, and investors bought these securities often with little insight into the risks to which they were exposed. It was easy money. But these schemes were built on a pile of sand. And as the appetite for these products grew, lenders lowered standards to attract new borrowers. Many Americans bought homes and borrowed money without being adequately informed of the terms, and often without accepting their responsibilities. Meanwhile, excessive executive compensation – unmoored from long-term performance or even reality – rewarded recklessness rather than responsibility. This wasn’t just a failure of individuals. This was a failure of the entire system. The actions of many firms escaped scrutiny. In some cases, the dealings of these institutions were so complex and opaque that few inside or outside these companies understood what was happening. Where there were gaps in the rules, regulators lacked the authority to take action. Where there were overlaps, regulators lacked accountability for inaction. An absence of oversight engendered systematic, and systemic, abuse. Instead of reducing risk, the markets actually magnified risks being taken by ordinary families and large firms alike. There was far too much debt and not nearly enough capital in the system. And a growing economy bred complacency. We all know the result: the bursting of a debt-based bubble; the failure of several of the world’s largest financial institutions; the sudden decline in available credit; the deterioration of the economy; the unprecedented intervention of the federal government to stabilize the financial markets and prevent a wider collapse; and most importantly, the terrible pain in the lives of ordinary Americans. There are retirees who have lost much of their life savings, families devastated by job losses, small businesses forced to shut their doors. Millions of Americans who have worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and the failure of their government to provide adequate oversight. Our entire economy has been undermined by that failure. The question is, what do we do now? We did not choose how this crisis began. But we do have a choice in the legacy this crisis leaves behind. So today, my administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression. These proposals reflect intensive consultation with leaders in Congress, including those here today: leaders like Chairmen Dodd and Frank, who along with Senator Shelby and Representative Bachus met with me earlier this year to jumpstart the discussion of reform. They also draw on conversations with regulators, including those I met with this morning; consumer advocates; business leaders; academic experts; and the broader public. In these efforts, we seek a careful balance. I have always been a strong believer in the power of the free market. It has been and will remain the engine of America’s progress – the source of prosperity unrivaled in history. I believe that jobs are best created not by government, but by businesses and entrepreneurs who are willing to take a risk on a good idea. I believe that our role is not to disparage wealth, but to expand its reach; not to stifle the market, but to strengthen its ability to unleash the creativity and innovation that still make this nation the envy of the world. That’s our goal. To restore markets in which we reward hard work and responsibility, not recklessness and greed – in which honest, vigorous competition in the system is prized, and those who game the system are thwarted. With the reforms we are proposing today, we seek to put in place rules that will allow our markets to promote innovation while discouraging abuse. We seek to create a framework in which markets can function freely and fairly, without the fragility in which normal business cycles bring the risk of financial collapse; a system that works for businesses and consumers. There are those who will say we do not go far enough, that we should have scrapped the system altogether and started again. I think that would be a mistake. Instead, we have crafted reforms to pinpoint the structural weaknesses that allowed for this crisis and to make sure that these problems are dealt with so as to prevent crises in the future. There are also those who will say we are going too far. But the events of the past few years offer ample testimony for the need to make significant changes. The absence of a working regulatory regime over many parts of the financial system – and over the system as a whole – led us to near catastrophe. We do not want to stifle innovation. But I’m convinced that by setting out clear rules of the road and ensuring transparency and fair dealings, we will actually promote a more vibrant market. This principle is at the heart of the changes we are proposing. First, we are proposing a set of reforms to require regulators to look not only at the safety and soundness of individual institutions, but also – for the first time – at the stability of the system as a whole. One of the reasons this crisis could take place is that while many agencies and regulators were responsible for overseeing individual financial firms and their subsidiaries, no one was responsible for protecting the whole system from the kinds of risks that tied these firms to one another. Regulators were charged with seeing the trees, not the forest. Even then, some firms that posed a so-called “systemic risk” were not regulated as strongly as others; they behaved like banks but chose to be regulated as insurance companies, or investment firms, or other entities under less scrutiny. As a result, the failure of one large firm threatened the viability of many others. The effect multiplied. There was no system in place that was prepared for this kind of outcome. And more importantly, no one has been charged with preventing it. We were facing one of the largest financial crises in history – and those responsible for oversight were mostly caught off-guard and without the authority needed to address the problem. It’s time for that to change. I am proposing that the Federal Reserve be granted new authority and accountability – for regulating bank holding companies and other large firms that pose a risk to the entire economy in the event of failure. We will also raise the standards to which these kinds of firms are held. If you can pose a great risk, that means you have a great responsibility. We will require these firms to meet stronger capital and liquidity requirements so that they are more resilient and less likely to fail. And even as we place the authority to regulate these large firms in the hands of the Federal Reserve – so that lines of responsibility and accountability are clear – we will also create an oversight council to bring together regulators from across markets to coordinate and share information; to identify gaps in regulation; and to tackle issues that don’t fit neatly in an organizational chart. We’re going to bring everyone together to take a broader view – and a longer view – to solve problems in oversight before they can become crises. As part of this effort, we are proposing the creation of what is called “resolution authority” for large and interconnected financial firms so that we are not only putting in place safeguards to prevent the failure of these firms, but also a set of orderly procedures that will allow us to protect the economy if such a firm does in fact go under. Think about this: if a bank fails, we have a process through the FDIC that protects depositors and maintains confidence in the banking system. This process was created during Great Depression when the failure of one bank led to runs on other banks, which in turn threatened wider turmoil. And it works. Yet we do not have any effective system in place to contain the failure of an AIG and the largest and most interconnected financial firms in our country. That is why, when this crisis began, crucial decisions about what would happen to some of the world’s biggest companies – companies employing tens of thousands of people and holding trillions of dollars in assets – took place in emergency meetings in the middle of the night. And that is why we’ve had to rely on taxpayer dollars. We should not be forced to choose between allowing a company to fall into a rapid and chaotic dissolution or to support the company with taxpayer money. That is unacceptable. There is too much at stake. Second, we are proposing a new and powerful agency charged with just one job: looking out for ordinary consumers. This is essential, for this crisis was not just the result of decisions made by the mightiest of financial firms; it was also the result of decisions made by ordinary Americans to open credit cards, take out home loans, and take on other financial obligations. We know that there were many who took out loans they knew they could not afford, but there are also millions of Americans who signed contracts they did not always understand offered by lenders who did not always tell the truth. Even today, folks signing up for a mortgage, student loan, or credit card face a bewildering array of incomprehensible options. Companies compete not by offering better products, but more complicated ones, with more fine print and hidden terms. This new agency will change that, building on credit card reforms I signed into law a few weeks ago. This agency will have the power to set standards so that companies compete by offering innovative products that consumers actually want – and actually understand. Consumers will be provided information that is simple, transparent, and accurate. You’ll be able to compare products and see what is best for you. The most unfair practices will be banned. Those ridiculous contracts – pages of fine print that no one can figure out – will be a thing of the past. And enforcement will be the rule, not the exception. For example, this agency will be empowered to set new rules for home mortgage lending, so that the bad practices that led to the home mortgage crisis will be stamped out. Mortgage brokers will be held to higher standards; exotic mortgages that hide exploding costs will no longer be the norm; home mortgage disclosures will be reasonable, clearly written, and concise. And we’re going to level the playing field so that non-banks that offer home loans are held to the same standards as banks that offer similar services, so that lenders aren’t competing to lower standards – but to meet a higher bar on behalf of consumers. The mission of this new agency must also be reflected in the work we do throughout the government. There are other agencies, like the Federal Trade Commission, charged with protecting consumers, and we must ensure that those agencies have the resources, and the stateof-the-art tools, to stop unfair and deceptive practices as well. Third, we are proposing a series of changes designed to promote free and fair markets by closing gaps and overlaps in our regulatory system – including gaps that exist not just within but between nations. We’ve seen that structural deficiencies allow some companies to shop for the regulator of their choice – and others, like hedge funds, to operate outside the regulatory system altogether. We’ve seen the development of financial instruments, like many derivatives, so complex as to defy efforts to assess their actual value. And we’ve seen a system that allowed lenders to profit by providing loans to borrowers who would never repay – because the lender offloaded the loan, and the consequences, to someone else. That is why, as part of these reforms, we will dismantle the Office of Thrift Supervision and close loopholes that have allowed important institutions to cherry-pick among banking rules. We will offer only one federal banking charter, regulated by a strengthened federal supervisor. We’ll raise capital requirements for all depository institutions. And hedge fund advisers will be required to register with the SEC. We are also proposing comprehensive regulation of credit default swaps and other derivatives that have threatened the entire financial system. And we will require the originator of a loan to retain an economic interest in that loan, so that the lender – and not just the holder of a security, for example – has an interest in ensuring that a loan is paid back. By setting common-sense rules, these kinds of financial instruments can play a constructive – not destructive – role. Over the past two decades, we have seen – time and again – cycles of precipitous booms and busts. In each case, millions of people have had their lives profoundly disrupted by developments in the financial system, most severely in our recent crisis. These aren’t just numbers on a ledger. This is a child’s chance to get an education. This is a family’s ability to pay their bills or stay in their home. This is the right of our seniors to retire with dignity and security. These are American dreams, and we should not accept a system that consistently puts them in danger. Financial institutions have an obligation to themselves and to the public to manage risks carefully. And as President, I have a responsibility to ensure that our financial system works for the economy as a whole. There has always been a tension between those who place their faith in the invisible hand of the marketplace – and those who place more trust in the guiding hand of the government. That tension isn’t a bad thing. It gives rise to the debates and dynamism that make it possible for us to adapt and grow. For we know that markets are not an unalloyed force for good or for ill. In many ways, our financial system reflects us. In the aggregate of countless independent decisions, we see the potential for creativity – and the potential for abuse. We see the capacity for innovations that make our economy stronger – and for innovations that exploit our economy’s weaknesses. We are called upon to put in place those reforms that allow our best qualities to flourish – while keeping those worst traits in check. We are called upon to recognize that the free market is the most powerful generative force for our prosperity – but it is not a free license to ignore the consequences of our actions. This is a difficult time for our nation. But from this period of challenge, we can once again tap those values and ideals that have allowed us to lead the global economy, and will allow us to lead once again. That is how we will help more Americans live their own dreams. That is why these reforms are so important. And I look to working with leaders in Congress and all of you to see these proposals put to work so that we can overcome this crisis and build a foundation for lasting prosperity.