The Pluses and Minuses of the New Financial Reform Bill

June 25, 2010, saw the passage of the most sweeping financial reform in decades. Now is the time to weigh its benefits and deficits. Pennypinchinghints.com has sorted out the reform into three categories and has tried to point out where the legislation hits its mark or falls short.

What’s new?

• There will be a one-time audit of the Fed’s lending during the financial melt-down.
  Plus: The Federal Reserve will have some oversight even if it is only for one time.
• A new Consumer Protection Bureau has been created to oversee and regulate both non-bank and bank loans in the areas of mortgages, credits cards, and other loans. Such protections will include disclosure rules and blocks to predatory lending.

Problems: The auto dealers have been omitted from the Bureau’s oversight, and the Bureau is funded by Congress which could vote to strangle it by not providing enough funds. Also this Bureau has limited enforcement authority.

• A new Federal Insurance Office will be created in the Treasury Department to monitor the insurance industry.
• A new 10-member Financial Stability oversight Council will be formed to follow any system risks in order to assure financial stability.

Overall: More oversight and people to do it will help avoid a crisis. However, such oversight will cost money, the bulk of which should come from the financial industry, but which may result in higher financial consumer fees.

New Standards

• Federal Deposit Insurance has been increased, retroactive to January 1, 2008, to $250,000.
• New national minimum standards will be set for underwriting home mortgage loans. Brokers will not be able to collect fees for steering consumers to high-priced loans, and loaners must now verify the consumers’ ability to pay the loan.
  Plus: Consumers may have more difficulty finding loans but will be less vulnerable to predatory practices.
• Banks must now keep 5% of the riskier loan packages on their own books.
  Problem: This could be higher so their risks are with more of their own money, not ours.
• New standards for brokers will be set by the Security and Exchange Commission (SEC) after it has time to study present practices.
  Problem: When the SEC studies its own, it may find less to reform; and brokers are not required to comply with fiduciary duty, that is, putting the consumers’ interests ahead of their own.
• The Volcker Rules will curb the larger financial firms from proprietary trading.
  Problem: Many firms are excluded.

Overall: Many of the new standards have been compromised. Although there are some improvements, there are some gaps.

New Regulations

• There will be first-time regulation of the over-the-counter derivative market.
• Banks are required to spin off their riskiest derivatives into separate affiliates.
  Problem: Banks can still have stakes in hedge funds and private equity funds and can keep their swaps in foreign exchange and gold and silver. Although this is a step toward separation between banking and investment, it is not a replacement for the Glass-Steagall Act.
• Hedge funds and private equity funds must now register with the SEC so regulators can monitor them.
  Plus: These areas need to be overseen and now are.
• Federal regulators now have the authority to seize and break up too-large-to-fail financial entities to avoid tax-payer bail outs.
  Problem: Break-up regulation would be better if it would be done before there is a financial problem.

Overall: More regulation will provide stability for both consumers and financial firms, but regulation could go further, especially in the area of investment banking.

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