- More Regulation Ahead
The bill was signed into law July 21, 2010 largely in response to the Great Recession which began in late 2007. Although we’re still scratching our heads and wondering how this could happen, economists have come to the conclusion that the recession resulted from easy credit (both industry and government) and securitization of mortgages which led to widespread speculation eventually hurting global trade, consumer confidence, and employment. Deregulation of financial services is seen by many to have helped fuel the financial crisis.
In order to right the ship, so to speak, the government has responded mainly by relaxing fiscal and monetary policies neither of which has helped the economy much.
Financial Re-Reform
The next move is to address the financial services oversight policies. An overhaul of the financial services industry of this magnitude has not been seen since the Securities Exchange Acts and Glass-Steagall Act of the 1930s. The bill covers virtually every facet of the financial services industry. Some of the key provision of the law:
- A new Financial Stability Oversight Council responsible for monitoring the entire financial industry in the U.S. It reports to Congress and may place certain non-banking financial companies under the Federal Reserve due to risk and stability. This addresses the too big to fail taxpayer bailout that occurred with AIG. Large banks will have to issue detailed financial reports to the council including assessments of the companies’ impact on the economy and must meet stricter capital and risk management standards.
- Tighter regulation and additional reporting of investment advisors, specifically aimed at large hedge funds.
- A new Federal Insurance Office which will require additional reporting by insurance companies. Health insurers are notably exempt.
- The Volcker Rule is back which prohibits banks from a wide range speculative trading and investing activities, issues at the heart of some bank failures.
- Over-the-counter derivatives are no longer exempt from SEC regulation. These securities (credit default swaps in particular) were key to many bank failures early in the recession because of over-speculation resulting buy prescription drugs online in too big to fail Wall Street taxpayer bailouts.
- Investor protection measures include additional disclosures to investors and greater fiduciary responsibility from brokers.
- Executive compensation of public corporations will be subject to shareholder vote every 3 years, and compensation committees for public companies must be independent.
- A new Bureau of Consumer Financial Protection will regulate lending practices to prevent fraud and predatory lending. Residential mortgages will be subject to stricter standards to prevent careless and risky lending.
- The SEC is given oversight of the major statistical rating agencies in response to failed methodologies and ethical concerns throughout the industry. Investors can now sue for gross negligence.
Unanswered Questions
Certainly, these measures will further protect financial consumers in the long-run, but at what cost? Two major regulatory issues were the repeal of the Glass-Steagall act in 1999 and relaxing of the Volcker Rule, both of which directly addressed stability of the financial services industry.
Now we have several new large bureaucracies, a massive amount of new paperwork requirements and reviews, and reports to Congress. Is it too much, too late? Should the government have this much oversight given the failure of Wall Street to regulate itself?
The government still has the option to bailout companies and Fannie Mae and Freddie Mac are missing from this piece of legislation. Much of the oversight is discretionary, meaning inconsistencies will occur depending on political agendas.
Unresolved issues are determining which financial companies the government can and will take over and how far will oversight of financial stability extend to non-financial companies. So, now we all get to “wait and see”.
