Some of the good points: It creates a transparent derivatives exchange, it requires banks to create "living wills" that spell out how they be dismantled if need be and to set aside funds to pay for such an unwinding, and it would bolster protections for consumer finance. The negatives: It doesn't do enough to solve the problems that caused the financial crisis, and it proposes some changes that won't help much (and probably won't hurt much, either).
Taken together, and given the huge political headwinds President Obama faces here, his efforts earn a B.
Obama's speech to Wall Street at Cooper Union on Thursday serves as a good summary of what's in his financial reform reform. He discussed five key points:
- A too-big-to-fail (TBTF) circuit breaker. This would make sure that the financial system and the economy are protected if a TBTF firm begins to fail.
- The "Volcker Rule," which would limit how big banks can get and how much risk they can take.
- Transparency reforms that would "bring derivatives and other complicated financial instruments out of the dark."
- Consumer protection that would give American consumers more safeguards and power in the financial system.
- "Say-on-pay" that would give investors a nonbinding vote on how much public company executives get paid.
Grading the Five Point Plan
So, how does the proposed financial reform package stack up? In my view, bringing light to the derivatives market is a good move. Of course, unless that's done in a very rigorous way, Wall Street will find a way to cloak it in invisibility again.
Unfortunately, the plan preserves TBTF institutions rather than breaking them into smaller pieces. And the package doesn't fundamentally change compensation plans that drove Wall Street to make bad bets. It fails to end the securitization process that pretty much set the world on course to the financial meltdown. It doesn't demand outside, independent third-party accounting scrutiny of Wall Street firms' books. And it doesn't create sufficiently strong limits on leverage.
Many aspects of the plan are OK but not great. For example, the Volcker Rule might help with some of the concerns regarding leverage and TBTF. Consumer protection could help by making it easier for people to analyze the risks of a financial product. Say-on-pay might help limit problems with pay packages, but since it lacks teeth, it'll probably be more of a way for frustrated investors to blow off steam.
Of course, since I don't have to raise money to get elected, I don't care how much Wall Street might dislike my criticisms that this set of reforms doesn't do enough to prevent the next financial crisis.
"A Lost Opportunity"?
I give Obama a B because he needs to raise money from the very people he's trying to regulate -- and he's clearly trying to move things in the right direction within that serious constraint.
A colleague wrote that he would give Obama a C at best. His reasoning: "Obama had an opportunity to do something that would really make a difference, and he chose not to. He'll be drawing some heat anyway, so why didn't he put forward some really meaningful changes that are badly needed? A lost opportunity."
I just wish we could really solve the problem for future generations. This plan helps, but it doesn't get us there.