SO there you are: President Obama has finally got his Wall Street reform bill, a gargantuan, 2,315-page piece of legislation over which politicians and lawyers will argue for years. As we explain on page 1 and below, there is a huge amount of detail in the final version, with rules governing everything from investment banks to rating agencies to credit cards. Some of the changes are sweeping; others less so, with the whole package the result of endless deal-making and compromises. Global finance will change as a result – but it won’t be completely transformed. There can be no comparison between yesterday’s reforms and those passed as part of Franklin D Roosevelt’s New Deal in the aftermath of the Great Depression, contrary to what many people will claim.
The Fed, Securities and Exchange Commission, Federal Deposit Insurance Corporation (FDIC) and others will now have to write hundreds of new regulations to implement the legislation. This process could spiral out of control and inject massive uncertainty into decision-making, forcing subsequent legislation to clarify matters. Nearly two-thirds of the law’s provisions are subject to the sway of rule-writing, and many key terms, such as proprietary trading, a tricky concept at the best of times, lack a clear definition in yesterday’s bill.
There are glaring omissions in the legislation: most of the real drivers of the crisis escape completely unscathed, not least the Fed’s interest rate policies, global imbalances, the state-created Fannie Mae and Freddie Mac’s massive power over the mortgage market and the US government’s pro-sub prime housing policies. However, one cause of the crisis is being tackled: institutions will no longer be deemed too big to fail. Procedures will be introduced to dismantle and wind down in a controlled manner even the biggest firms that run into trouble.
These rules, while imperfect, will reduce moral hazard; they would also have allowed Lehman Brothers to go bust without triggering the panic and contagion we saw in September 2008. The procedure will operate in three stages: first, a crisis at an institution that is thought to pose systemic risk will be identified by the Fed and the appropriate regulator, with the Treasury Secretary eventually determining whether action needs to be taken; then the FDIC would be appointed as a receiver to resolve the failing firm; no general taxpayer funds would be spent, with any money lent by the Treasury eventually repaid via a levy on firms with assets of more than $50bn. Crucially, creditors would bear losses; there would be no bail-out.
Some of the other ideas also make sense, such as giving shareholders greater powers or pushing more derivatives onto exchanges. But most of the other rules will either be useless or downright damaging. Banks will be barred from proprietary trading and their involvement in private equity and hedge funds will be curtailed. Yet given the welcome introduction of the wind-down procedures, none of this ought to be necessary.
It will take months, if not years, before we fully understand what the legislation will mean for Wall Street, the economy and of course London. It is a shame that this bill, which is not all bad, contains so many mistaken policies and is shrouded in so much uncertainty. It remains to be seen whether its populist elements are enough to save Obama’s floundering presidency. firstname.lastname@example.org