January 22, 2010
I once again applaud President Obama and his economic advisors in their decision to take a common-sense approach to protecting the American people from risks taken by banks and large financial institutions that not only imperil their hard-earned funds, but continue to put America’s economy in jeopardy. Last summer, I commended the Administration’s release of its proposal for a “New Foundation” of sweeping financial reform. I predicted that 2009 would be a “year that answers,” a year during which the President would take decisive action to address the critical problems our economy and the financial industry as a whole are facing. It is now 2010, and the Administration continues to develop a substantive plan that not only pushes us forward as we innovatively deal with our rapidly evolving, albeit plagued economy, but rationally and sensibly addresses the fundamental issues that besieged our country before the Great Depression and more recently (after certain deregulation) led to our current situation.
Specifically, the President is proposing two additional reforms aimed at strengthening the financial system and averting future crisis. First, is his self-dubbed “Volcker Rule” which would prevent banks from owning, investing or sponsoring, among other things, hedge funds or proprietary trading operations for their own profit. Essentially, the banks will return to being banks—their primary activities being those that provide financial services and enrichment opportunities to their customers. The key to all of this is removing incentives for banks to act contrary to the interests of their customers and closing the loopholes that currently permit banks to engage in trading activities that are not only extremely risky, but are off the regulatory radar.
Second, the President proposes a policy initiative to prevent the further consolidation of our financial system to deal with the problem of the “too big to fails.” Our financial system’s health requires that risk be disseminated among many. Massive firms simply cannot distribute the risk to an acceptable degree no matter how many times their organizational charts contort.
Yesterday the President told Congress that, “[w]e have to get this done.” I agree. These new components of the Administration’s overarching reform package, which already calls for regulation into the area of over-the-counter (OTC) derivatives, requiring exchange trading for standardized OTC products, requiring mandatory clearing in opaque markets such as credit default swaps (CDSs) and OTC transactions, increasing capital requirements, increasing cooperation and coordination between financial market regulators, and increasing consumer protection from deceptive practices are equally critical for market participants and the American public.
Protecting traders through a clearinghouse to ensure they get paid is one thing, and it is important, but Congress needs to─ above all ─ensure that consumers are protected, and that means bringing transparency to currently dark OTC markets where hundreds of trillions of dollars are traded totally unregulated. That should change, and soon. We need financial regulatory reform, like yesterday.
Again, I echo the President and my prior statements regarding our “New Foundation” in repeating that it is my hope that the various constituencies can see beyond their individual narrow agendas, and work toward the greater good to get legislation passed on these important issues, as the President intends in an expeditious manner.
Last Updated: June 14, 2010