The plans include "stricter federal rules for hedge funds, credit rating agencies and mortgage brokers, and greater oversight of the complex financial instruments that contributed to the economic crisis."
All important issues, but one of the underlying issues that doesn't get much discussed is how to prevent the ongoing continual capture of regulatory bodies by the industries that they are supposed to regulate. Most community-based groups would say that making sure to give the public a practical way to monitor, and when needed, effectively intervene in the regulatory process is the best way to keep the regulators honest.
Every regulatory agency employee knows that if they make friends within the industry, and know their way around the Federal bureaucracy, they are prime candidates for a future job within the regulated industry that will pay them considerably more than they can earn doing government work. And particularly during industry-friendly Administrations, employees quickly learn that angering someone important in the regulated industry is a lot more risky for their career than it is to be a weak protector of consumers and small investors.
Strong prohibitions against regulators going to work within the industry until significant time has elapsed definitely helps limit that conflict, but it doesn't do much to prevent top political appointees from simply ignoring the law. For example, Bank of America has pretty much been bumping up against the current law which prevents banks from controlling more than 10% of domestic deposits since its purchase of LaSalle Bank. But an accommodating Federal Reserve has been amenable to loopholes.
The Federal Reserve order approving the Bank of America acquisition of Countrywide on June 5, 2008 is instructive. Very early in the order the Federal Reserve acknowledges that Bank of America is already above the 10% threshold:
"The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal Act"), Pub L/ 103-328 (1994), codified at 12 U.S.C. 1842(d), provides that the Board may not approve any application for the interstate acquisition of a bank if consummation of the acquisition would result in the applicant controlling more than 10 percent of the total amount of insured depository institutions in the United States."
Then later:
"Bank of America, with total consolidated assets of $1.7 trillion, is the largest depository organization in the United States measured by deposits, controlling deposits of approximately $711.7 billion, which represents approximately 10.04 percent of the total amount of deposits of insured depository institutions in the United States . . . .On consummation of the proposal, Bank of America would remain the largest depository organization in the United States, with total consolidated assets of approximately $1.9 trillion. Bank of America would control deposits of approximately $773.4 billion, representing approximately 10.91 percent of total amounts of deposits of insured depository institutions in the United States."
So how does the Federal Reserve justify approving the acquisition anyway?
"Countrywide Bank is chartered as a federal savings bank under the Home Owners Loan Act. 12 U. S. C. 1461 et. seq. Section 2(c)(2)(B) of the BHC Act exempts federally chartered savings associations and savings banks, as defined by section 2U) of the BHC Act, from the definition of "bank." As a result, Countrywide Bank is not a "bank" for purposes of the BHC Act and the nationwide deposit cap contained in the BHC Act. Therefore the provisions of the Riegle-Neal Act prohibiting the Board from approving an application to acquire a bank if consummation of the acquisition would result in the applicant exceeding the national deposit cap do not apply to the present notice to acquire Countywide Bank and the other nonblank [sic] subsidiaries of Countrywide."
Notice the neat lawyerly switch. The law prohibits the Fed from approving applications in which the acquiring bank will be above the deposit threshold; in this case the acquired depository institution doesn't meet the technical definition of a "bank," therefore that prohibition doesn't apply to this acquisition.
In more recent mergers Wells and Wachovia, Chase and Washington Mutual, the Federal Reserve has become even more lawless, simply using its emergency powers to avoid all public comment and Community Reinvestment Act review that the law requires during mergers.
With regulation one always has to ask, "Who will watch the watchers." For all of President Obama's reputation as a community organizer, so far it is very unclear that the Obama financial team has a clear plan for strengthening the hand of the grass roots, so that community-based non-profits and the public will have a strong role participating in the enforcement process to make sure that laws and regulations are actually enforced.
If they just leave it up to a "new and improved" Federal Reserve, we're in deep trouble.
Bankbane
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