Today Treasury Secretary Geithner laid out a proposed new regulatory framework for the financial services sector. Key elements of the framework are both necessary and welcome responses to the systemic flaws in the current regulatory regime that have been revealed over the last year. But will they work?
We’re now in the midst of the third major crisis in the U.S. financial system to have hit in the last 20 years. The Savings and Loan crisis resulted in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which established the Office of Thrift Supervision and the Resolution Trust Corporation. The ENRON scandal gave us the Sarbanes-Oxley Act, which established a new set of management and accounting standards for publicly – but not privately – held companies.
In each case, however, new standards and regulatory regimes were set up only after the horse had left the barn and the toothpaste was out of the tube. While they addressed issues that were uncovered in the scandals that gave rise to them, they did not prevent the next round of catastrophes.
So while at first glance I’m encouraged by the proposed reforms, I also suspect that even as the new rules are being written the banks, hedge funds, etc. are already figuring out how to work around them – and lobbying the House and Senate committees to make sure whatever legislation is drafted will accommodate their new strategies. As Wall Street Watch put it in releasing a recent report:
The financial sector invested more than $5 billion in political influence purchasing in Washington over the past decade, with as many as 3,000 lobbyists winning deregulation and other policy decisions that led directly to the current financial collapse.
That’s a level of influence that’s not likely to stop.
Am I being overly cynical? One way to begin breaking the connections between the Wall Street money and DC policymakers is to support the Federal bill establishing a system of public financing for Congressional elections – the Fair Elections Now Act being introduced in the Senate next week by Sens. Dick Durbin (D-Ill.) and Arlen Specter (R-Pa.). It would make a perfect complement to the reforms Geithner laid out this morning.