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Financial Regulatory Reform And You

What does financial regulatory reform mean to you, the retail financial advisor?

What does financial regulatory reform mean to you, the retail financial advisor? As you know, recently the Senate passed a bill to “correct” the United States' financial regulatory system. The bill, which will have to be reconciled with the House's version, is supposedly sweeping and “historic.” But I am not so sure exactly what it solves. And it may have little direct impact on how financial products and advice are dispensed to retail investors.

Heather Booth, director of the Americans for Financial Reform, called the Senate's passing of the bill “momentous,” predicting that the bill will “rein in big banks' reckless behavior and bring transparency to our financial system and protect consumers.” By the way, the Americans for Financial Reform is made up of unions, such as the AFL-CIO and SEIU, and dozens of other “consumer” groups. So, their take on the regulatory reform is not surprising. Here is more populist rhetoric from the AFR: “Wall Street used every weapon in their arsenal — $500 million to lobby against reform, millions in paid advertisements — to try to kill the bill, looking to opponents of reform in the Senate to block the bill. And when that didn't work, they sent their army of almost 2,000 lobbyists to the Hill to attempt to dilute reform.

“The Senate has resisted these forces, standing with the 8 million who lost their jobs and countless other Americans who lost their homes to foreclosure, savings and pensions because of the irresponsible actions on Wall Street. Today they said no more, holding Wall Street accountable and taking action to prevent another financial crisis.”

Booth further asserts the bill will “begin the process of reining in the unchecked speculation of the casino economy that caused the Great Recession and protecting consumers from fraud and abuse by financial institutions that siphoned billions of dollars from the pockets of middle class families into the hands of big Wall Street banks.”

But will it? To my mind, the bill doesn't do much of anything. Sure, it talks a big game. But it doesn't address the real causes of the recent financial crisis. For example, it doesn't even “rein in” the leverage that got us into this mess in the first place. Almost everyone agrees that the banks lacked sufficient capital — where one dollar controlled $40 worth of assets. The Dodd bill only proposes that a new “council of regulators” may recommend that the Federal Reserve impose more stringent capital standards.

As for consumer protection, according to Mark A. Calabria, of the libertarian Cato Institute, the bill only “makes it easier for lawyers to sue.” Other direct causes of the financial crisis — zero-down mortgages and other irresponsible lending practices — are not addressed either. Fannie Mae and Feddie Mac, which almost all agree helped fuel the credit crisis — are free to continue on as is, limping their way to insolvency. (For a detailed analysis, you might read, “The End of Wall Street,” by Roger Lowenstein. He is scathing in his criticism of those two “government sponsored enterprises.”)

The House bill would impose a fiduciary standard on brokers when they are providing retail financial advice. The Senate bill would have the SEC do a one-year study on the effects of a uniform fiduciary standard instead. Now the bills have to be reconciled. But I don't know how you could impose a fiduciary standard on b/ds, since many engage in activities that simply can't be held to a fiduciary standard (IPOs, proprietary trading, etc; the Senate bill also asks for a study of proprietary derivatives trading, by the way.)

To me, the bill doesn't change anything structural — it seems to have sidestepped the difficult issues that caused the 2008 financial implosion in the first place. The bill only seems to give more control to “the discretionary wisdom of the same regulators who were asleep at the wheel last time,” as Calabria puts it.

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