Robert Reich: Does the Obama Plan for Reforming Wall Street Measure Up? In a word, no.

[flpoljunkie]

THURSDAY, JUNE 18, 2009

Does the Obama Plan for Reforming Wall Street Measure Up?
In a word: No.

The plan doesn't stop stop bankers from making huge, risky bets with other peoples’ money. It does increase capital requirements and oversight, but it doesn't require bankers to take their pay in long-term stock options or warrants, and it doesn't even hint that banks should go back to being partnerships instead of publicly-held corporations.

All this means traders still have every incentive to place big and often wildly risky bets as long as the potential winnings are big enough, and top executives have very little incentive to monitor what traders are up to as long as the traders are collecting large commissions on the bets.

Nor does the plan do anything to prevent banks from becoming too big to fail. It doesn't hint at a return to the days before the late 1990s when commercial banks were separate entities from investment banks -- before mammoth bank supermarkets like Citigroup came to be so tied up with so many other commercial and investment vehicles that they couldn't be allowed to go under. And there's not the slightest mention of antitrust, to break up the largest banks.

The plan does focus on a few conflicts of interest, such as how credit rating agencies are paid. And it does establish a new agency to oversee all forms of consumer loans -- thereby helping make sure borrowers know what they're getting into, and can comparison shop. But these are small potatoes relative to the size of the overall problem. The Fed is given new oversight powers, but there's no suggestion that regional Fed bank presidents, who already have a substantial oversight role, should be recruited from the ranks of people who are not bankers and don't have a big financial stake in keeping oversight to a minimum.

In short: It's a mere filigree of reform, a sheer gossamer of government. Wall Street must be toasting its good fortune. Unless Congress shows some spine, the great Wall Street meltdown of 2007 and 2008 -- which lead to the biggest taxpayer bailout in history, very likely the largest taxpayer losses on record, and the largest investor losses since 1929 -- will repeat itself within a decade, if not sooner.

In fact, the banks that have repaid their TARP money are already planning to resume supersize bonuses, even though many of them are still awash in toxic assets and their non-performing loans are up. Bad credit-card and commercial property debts are mounting. Foreclosures are soaring. Yet several of the big banks are showing profits. How are they pulling this off? First, they strong-armed the Financial Accounting Standards Board into allowing them to assign whatever value they wanted to all the junk on their balance sheets. Then they played hardball with the Treasury staffers whose so-called "stress tests" lapsed into little more than negotiations over numbers and probabilities. (The national unemployment rate is already approaching the highest unemployment rate in the stress tests.) Then they convinced investors that financials have hit bottom and were now good bets. Presto!

Watch your wallets. The Street is up to its old tricks. And the White House's so-called reform is little more than a whitewash.

http://robertreich.blogspot.com/2009/06/does-obama-plan-for-reforming-wall.html

[Kdillard]

1. So basically what he is saying is that while there is good stuff there is more that he would like to

see in regards to Obama's plan? Also does he really think bankers will agree to take pay in long term stock options? Also isn't there other stuff coming from Congress? Honestly i think it is a good start and will watch and see what else comes up.

[flpoljunkie]

2. A lot more.

[Kdillard]

3. Quick question I thought Geithner had been working on giving the Feds

more power in the case of the banks and other institutions that are too big to fail. I seem to remember him testifying about that and saying just like with the FDIC there needs to be a way to wind down the big institutions but right now there was no mechanism for that. I remember it being called a power grab or whatever. I am surprised Obama's plans don't formalize that or is it that Robert Reich has not seen the total plan that there is more to the plan that will be forthcoming or being dealt with via bills from Congress? So many questions. Another article i read said the plan was solid and even with Reich's criticism there are things to like about his proposals.

[flpoljunkie]

4. We will have to see if Congress makes Obama's recommendations stronger or weaker.

Since they are owned by the banks,' I am skeptical.'

[dgibby]

6. Congress AND the Fed owned by the banks.n/t

[Kdillard]

7. There is so much stuff going on. I am not sure how anyone can keep up.

So I gather that this is not the final product and we will have to see what happens when congress gets a hold of it and whether they deal with the issue Reich raises or that there is more stuff introduced going forward. If that is the case I am not sure why there is even a discussion until somehting is brought on the President's desk to sign. I honestly like the directions Obama's proposals have taken and as you said we will see if there will be more done in the Senate.

[vaberella]

5. No. In a latest article he's removing power from the Fed.

http://crooksandliars.com/susie-madrak/obama-strip-fed-power-regulate-mortga

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x3926488

http://www.huffingtonpost.com/2009/06/14/obama-to-roll-out-vast-ov_n_215319.html

[Kdillard]

8. Yes I knew that but I thought he was also giving them some new power

or perhaps i misunderstood. I do know that T. Geithner was calling for some power or structure to be hammered out so that the Feds can wind down big institutions and that there should be a kind of early warning system to trigger a response. In any case I am going to wait for the final bill and other discussions to make it's way through congress before I say whether it is not enough or just right. I think Obama's proposals are taking us in the right direction though.

[bvar22]

11. Not exactly.

http://www.economicpopulist.org/content/obama-regulatory-reform-plan

FDR took on Wall Street full-force in 1933. His New Deal included the Glass Steagall Act, which separated banks into consumer (or commercial bank) and speculator (or investment bank) entities. Only the commercial banks, relegated to conventional, ‘boring’ activities, got federal backing. His reforms also allowed for independent audits of the banking system to ensure financial soundness (as opposed to taking just their word for it, which is what Geithner’s stress tests did) and established the Home Owners’ Loan Corporation to provide mortgage money to people at risk of foreclosure.

Obama’s plans didn’t even come close. They accepted the banking landscape, with its giant, complex firms, as a given, and went from there. To be fair, certain items like enhanced issuer accountability for loans and securitized products, greater capital requirements for banks, and relegating certain derivatives to exchanges, are useful tune-ups of the system. But, giving the Fed more power, creating an additional layer of bureaucracy through the 'Financial Services Oversight Council,' and allowing the biggest Wall Street players to maintain their status and size, is not reform. It’s more of the risky same.

<snip>

With that kind of track record, the Fed shouldn’t be crowned the systemic risk regulator, in the supreme position of supervising the largest most interconnected firms. This is plain wrong. Rewarding an entity that didn’t perform its regulatory obligations to begin with, paid historically unprecedented sums to correct its mistakes, didn’t exercise its ability to contain the size of banks - blessing rather than questioning ones that would become 'too big' (to fail or to regulate), and shunned transparency, with a bigger seat at the regulatory table is not the way to stabilize and provide necessary responsibility to the system.

http://firedoglake.com/2009/06/17/obamas-financial-overhaul-more-like-a-tune-up/

[vaberella]

13. How is the Fed getting more power through the FSOC?

The FSOC is actually the watchdog of the FED, SEC, and a few others.

[depakid]

9. That pretty well matches my assessment

Going along to get along with a few cosmetic changes and regs- but nothing that comes close to addressing the root problems.

[Political Heretic]

10. Everyone knows what needs to be done and could be done. It's not confusing.

The problem is not that its so complicated. The problem is that establishment politicians play ball for Team establishment, and no one has the political will to do things that would create a marked improvement for consumers and the working class, as well as stabilizing the long term trajectory of the overall economy.

[BrklynLiberal]

12. Elliot Spitzer seems to agree with Reich.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x5878995


He refers to what is happening as "moving the deck chairs...."