How does one prevent credit institutions from engaging in risky transactions? The U.S. government devised a reform that was supposed to prevent future financial crises. But banks have already have found lots of loopholes, even before the regulatory framework goes into effect.
Immediately before the enactment of the U.S. financial reform bill, Wall Street had already discovered multiple loopholes. According to media reports, Citigroup and other leading banks want to move some of their traders into client services to circumvent restrictions on trading on behalf of their firms.
To avoid the new law altogether, they could also buy out industrial firms or start hedge funds and carry out risky trades via such companies. “I would call something like that a pseudo-bank,” said Heather McGhee of the consumer protection agency Demos.
Thus the regulatory framework, over 2000 pages strong, falls short of its goals before it has even been passed. It was originally supposed to prevent large institutions from taking inordinate risks, so they would not have to be rescued by the government again if problems arose.
The incapacity of Washington and U.S. President Barack Obama’s administration is reflected in the global political failure to end negative developments in the financial markets. The effect of banking taxes or the stress tests of 91 European institutions is in dispute. The reform of European Union financial oversight isn’t moving forward. The German prohibition on short-selling turned out to be virtually ineffective.
The American reform package is being brought to the Senate for a second time on Monday. The ultimate details are still unclear, but a final compromise seems probable this week. During their long negotiations, Republicans and Democrats already have made large concessions to the financial industry. According to economists, the law has now been watered down to such an extent that it can’t prevent the outbreak of a new financial crisis.
A clause excluding all firms that realize at least 15 percent of their revenue outside of the financial sector figures heavily in the criticism. Banks could also avail themselves of this rule. It’s actually aimed at industrial firms engaged in the capital markets. During the crisis, however, firms like General Electric have themselves obtained government assistance because their financial divisions had come into difficulties in the capital markets.
Next to this clause, William Black, a professor of Economics and Law at the University of Missouri – Kansas City, considers the relaxation of the originally planned prohibition on firms trading their own accounts fatal. In the future, American financial institutions are supposed to be allowed to invest up to three percent of their capital in such transactions. But it’s unclear what counts as core capital.
“The provision would be difficult to apply to traders in client services, because it isn’t clear how long they are allowed to hold an asset, in order to conduct business on behalf of their clients,” said Black. According to him, supervision by the authorities would hardly be possible. The danger also exists that traders could take advantage of their knowledge of their clients to influence market prices for their benefit.
Critics like Black also consider the new restrictions on derivatives trading largely ineffective. Sales of securitized U.S. subprime mortgage loans are supposed to become more transparent in that they will be carried out more often via the stock exchanges. These so-called Collateralized Debt Obligations helped to initiate the financial crisis. But even “if CDOs had been processed even earlier by clearinghouses, one would have rated them as secure. That’s how these products were structured,” said Black.
Editor’s note: Quotations, accurately translated, cannot be verified.
Don’t be fooled…this “reform” was never meant to do anything at all…it is a red-herring, just misdirection to attempt to get Obama’s core supporters to think he really cares about financial regulation, when he seems to be working for the same people the Republicans work for.
Effective banking regulation would have been as simple as reinstating the Glass-Steagall act, here in the U.S. But no one in our government is proposing it.