x Abu Dhabi, UAETuesday 23 January 2018

Obama plan will keep snake oil salesmen in jobs

If a Wall Street lobbyist likes the look of his reforms, that is bad news for the rest of us.

The verdict on the plan by Barack Obama, the US president, to fix America's broken financial system was rendered conclusively - and unwittingly - by one Scott Talbott, the vice president of the Financial Services Forum based in Washington. The government, Mr Talbott decreed, "consulted very widely and has produced a careful and balanced proposal". That is just the worst possible endorsement you could hope for. If a Wall Street lobbyist likes the look of his reforms, that is bad news for the rest of us.

Mr Obama's attempt to protect the nation from predatory lenders, mortgage sharks and incendiary derivatives looks insipid. If the plan's supporters are, like Mr Talbott, in the tank with the very brigands who dragged the economy to its knees, you can be sure that "business as usual" is just around the corner. In unveiling the 88-page draft legislation, Mr Obama and his team of finance wizards condemned the "culture of irresponsibility" that poisoned Wall Street and precipitated its demise. Speaking to a room full of banking heavyweights, the president affirmed his faith in the free market "as a force for prosperity", but warned "it is not a free licence to ignore the consequences of our actions".

Fair enough. But now what? A cursory read of the reform package revealed that Mr Obama, who assured us after his election that "change has come", peered down the chasm that divides a regulatory code investors deserve and the one they are stuck with and took a pass. If the White House gets its way, the same bureaucracy that failed to identify the perils of highly geared, asset-backed securities, the toxicity of custom-built derivatives, and the Bernie Madoff scandal, will remain largely intact.

Faced with the greatest opportunity since the Great Depression to raze and rebuild the nation's regulatory agencies, a squalid ghetto that mushroomed around eight decades of sundry economic crises, the Obama team flinched at the prospect of bureaucratic pushback and upsetting the power brokers on Wall Street. The plan would, among other things, greatly expand the regulatory powers of the Federal Reserve, most significantly its authority over the capital reserves requirements of large financial companies; establish an agency to protect consumers of new financial products; empower the government to take over large bank holding companies and troubled investment banks; and make the pricing of standard derivatives more transparent.

In a welcome gesture of prudential restraint, the proposals would also raise the regulatory bar for large companies, namely General Electric and Wal-Mart, with ambitions to provide their clients with inhouse banking services. Yet absent from Mr Obama's package was any attempt to consolidate the country's five financial regulators and their sometimes overlapping and contradictory statutes (though in a minor concession, the office of the comptroller of the currency and the office of thrift supervision were melded into a new banking supervisor).

Analysts were hoping the White House would at the very least merge the Securities and Exchange Commission with the Commodity Futures Trading Commission. Instead, it called for the two agencies to "harmonise" regulation efforts and share oversight of such complex sectors as derivatives trading. Given the failure by either body to anticipate the 2007 banking collapse, this is akin to a chicken farmer rewarding - as opposed to shooting - his watchdogs after they licked the hands of vagabonds raiding the chicken coop. Mr Obama also disappointed those who were expecting a restoration of the Glass-Steagall Act of 1933, which imposed a barrier between investment banks and commercial banking.

Calls for such a revival by Paul Volker, the former Federal Reserve chairman, raised hopes that the president would revive the law, which was disposed of a decade ago. Many economists believe dropping the law set up the financial sector's collapse by allowing banks to profit from high-risk proprietary trades and commercial banking. Safe in the knowledge that they were "too big to fail", these institutions increased their gearing ratios to as much as 30 to one, then sat back and awaited federal bailouts when the markets turned sour.

The White House plan would mean standard derivatives would have to be traded publicly on an exchange rather than quietly between two brokers over a telephone. But it says nothing about the more exotic, custom-made instruments such as those developed by the insurance giant AIG that did so much to subvert the financial system, including credit default swaps; the derivatives that allow investors to buy insurance against corporate insolvency, thus making some companies worth more dead than alive.

Writing in the Financial Times last week, George Soros, the billionaire hedge fund manager, called for the outlawing of credit default swaps, which he described as "instruments of destruction". Another recommendation by Mr Soros and other financial experts for margin and capital reserve thresholds that adjust with market conditions to pre-empt asset bubbles was ignored by the Obama plan. In many ways, Mr Obama's reputation as a bold thinker is well deserved. He has waded into the Arab-Israeli conflict, a graveyard for presidential ambition, with forceful resolve. He has dared Congress to write him a bill that would transform a national healthcare system that is as inefficient as it is costly.

But the financial reform plan he announced last week was distinguished only by its poverty of courage and imagination. sglain@thenational.ae