Here Comes FinReg

Via Ezra Klein’s Wonkbook (definitely one of my favorite morning emails), a variety of takes on what’s in the financial reform bill:

1. From Deloitte’s 12-page summary:

Because the new U.S. law is complex, it can be helpful to remind ourselves that its underlying purpose is relatively simple and has two powerful strands: 1. ‘De-risk’ the financial system by constraining individual organizations’ risk-taking activities and capturing a broader set of organizations’, including the so-called “shadow” banking system, in the regulatory net 2. Enhance consumer protections. . . .For example, the need for “arm’s-length” swap desk affiliates combined with the move from over- the-counter to exchange trading for derivatives, tighter constraints on leverage and risk-taking, and higher liquidity requirements imply lower profit margins in future from those activities.

Some estimates I’ve seen have estimated the profit margins might be around 15% lower.

2. Simon Johnson on the Kanjorski Amendment as a “new kind of antitrust:”

Effective size caps on banks were imposed by the banking reforms of the 1930’s, and there was an effort to maintain such restrictions in the Riegle-Neal Act of 1994. But all of these limitations fell by the wayside during the wholesale deregulation of the past 15 years. Now, however, a new form of antitrust arrives – in the form of the Kanjorski Amendment, whose language was embedded in the Dodd-Frank bill. Once the bill becomes law, federal regulators will have the right and the responsibility to limit the scope of big banks and, as necessary, break them up when they pose a “grave risk” to financial stability.

I wish I could say I was as optimistic as Johnson about the prospects for effective enforcement here, but he certainly knows the lay of the land far better than I do. As Barry Lynn shows, in a variety of industries, we need a new form of antitrust, or at least better competition advocacy.

3. The Roosevelt Institute publishes a variety of takes; William K. Black is the most pessimistic:

The fundamental problem with the financial reform bill is that it would not have prevented the current crisis and it will not prevent future crises because it does not address the reason the world is suffering recurrent, intensifying crises. A witches’ brew of deregulation, desupervision, regulatory black holes and perverse executive and professional compensation has created an intensely criminogenic environment that produces epidemics of accounting control fraud that hyper-inflate financial bubbles and cause economic crises. . . .

The financial industry, with Bernanke’s support, already got Congress to extort FASB to gimmick the accounting rules so that insolvent banks could hide their losses and continue to pay the executives (already made rich by destroying “their” firms — that’s the meaning of Akerlof & Romer’s classic article: “Looting: Bankruptcy for Profit”) massive bonuses. All of this is made possible by huge, off budget subsidies to [systemically dangerous institutions] via the Fed and Fannie and Freddie.

4. Daniel Indiviglio on the uncertainty at the heart of the legislation (does it end or encourage TBTF?):

The prevailing debate between Republicans and Democrats on financial reform is whether the new bill institutionalizes the too big to fail problem. Democrats swear it doesn’t, since the legislation also includes a new non-bank resolution authority which will make quite certain that all firms can, and will, fail if they run into trouble. Republicans haven’t developed a very sensible criticism to this, but they could. While the resolution authority ensures that big firms fail, it would also almost certainly provide them some advantage.

A lot will depend on regulators’ interpretation and enforcement here.

5. James K. Galbraith provides some background:

The financial crisis in America isn’t over. It’s ongoing, it remains unresolved, and it stands in the way of full economic recovery. The cause, at the deepest level, was a breakdown in the rule of law. And it follows that the first step toward prosperity is to restore the rule of law in the financial sector.

[What went wrong?] First, there was a stand-down of the financial police. The legal framework for this was laid with the repeal of Glass-Steagall in 1999 and the Commodities Futures Modernization Act of 2000. Meanwhile the Basel II process relaxed international bank supervision, especially permitting the use of proprietary models to value complex assets—an open invitation to biased valuations and accounting frauds.

Key acts of de-supervision came under Bush. After 9/11 500 FBI agents assigned to financial fraud were reassigned to counter–terrorism and (what is not understandable) they were never replaced. The Director of the Office of Thrift Supervision appeared at a press conference with a stack of copies of the Code of Federal Regulations and a chainsaw—the message was not subtle. The SEC relaxed limits on leverage for investment banks and abolished the uptick rule limiting short sales to moments following a rise in price. The new order was clear: anything goes.

Second, the response to desupervision was a criminal takeover of the home mortgage industry. Millions of subprime mortgages were made to borrowers with undocumented incomes and bad or non-existent credit records. Appraisers were selected who were willing to inflate the value of the home being sold. This last element was not incidental: surveys showed that practically all appraisers came under pressure to inflate valuations in order to make deals happen. There is no honest reason why a lender would deliberately seek to make an inflated loan. . . . Third, the counterfeit mortgages were laundered so they would look to investors like the real thing. . . .Fourth, the laundered goods were taken to market. . . . Upon taking office, President Obama had a chance to change course and didn’t take it.

The question now is whether FinReg will provide a “second chance” for an Administration that so far has not distinguished itself on the financial reform front.

Image Credit: 1901 image of J.P. Morgan.

Frank Pasquale

Frank is Professor of Law at the University of Maryland. His research agenda focuses on challenges posed to information law by rapidly changing technology, particularly in the health care, internet, and finance industries.

Frank accepts comments via email, at All comments emailed to may be posted here (in whole or in part), with or without attribution, either as "Dissents of the Day" or as parts of follow-up post(s). Please indicate in your comment whether or not you would like attribution, or would prefer your comment (if it is selected for posting) to be anonymous.

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2 Responses

  1. Donna says:

    We received letter from our Representative Barbara Lee on the day FinReg passed through the Senate, stating that there is nothing her office will be able to help us. Clearly, FinReg means nothing to her. What a joke about rebuilding the integrity of our financial system and protect American general public!

    We filed complaints against Wells Fargo ‘s appraisal and mortgage loan fraud with Office of Comptroller of Currency, Barbara Lee, Dianne Feinstein, Barbara Boxer and Harry Reid in 2006. In 2006, with overwhelming evidence, we were told that Wells Fargo did not commit appraisal and mortgage fraud against us.

    We spent 10 months from June, 2006 to March, 2007, trying to convince everyone that Wells Fargo made the mortgage loan to us based on hugely inflated appraisal. No one cared or bother to listen.

    In March, 2007, after clearly indifference from Wells Fargo and our regulatory agencies, we filed the lawsuit against Wells Fargo and continued to follow up with OCC and senators. After we filed the lawsuit, OCC and all senators told us that they can’t make any comments on our complaints since it is in litigation.

    The irony is that should Senators made sure OCC do its regulatory job, we don’t even need to file lawsuit. On top of it, should OCC take action upon our alerts two years before the housing crisis, how many homes could have been saved. How many wrongful foreclosure could have been prevented?

    All our senators voted for FinReg, but none of them cared about homeowners beig defrauded by Wells Fargo and have no intention to protect homeowners like us or future victims or hold Wells Fargo accountable for defrauding homeowners.

    Wells Fargo committed prosecutable crime against us. We lost our home. Something is wrong with this picture. Here are the facts.

    1. it is illegal for Wells Fargo to make mortgage loan to us based on hugely inflated appraisal.

    Fact: – Wells Fargo’s fraudulent appraisal valued our home at $718,000
    – Wells Fargo’s own review appraisal valued our home at $475,000
    – Nevada Attorney General’s office suspended the appraiser’s license for committing appraisal fraud on our home.
    – Nevada Appraiser Licensing Board mandated the appraiser to complete appraisal fraud course before regaining his real estate appraiser license.
    – Nevada Revised Statue NRS 205.372 states that it’s category C felony to make mortgage loans based on fraudulent appraisal.
    – Cases of Attorney General’s indictments against attorneys, loan brokers for teaming up make fraudulent loans to defraud homeowners.

    2. it is illegal for Wells Fargo to wrongfully foreclose our home based on fraudulent appraisal and mortgage loan.

    You can find all the facts on our website.

  2. Rod says:

    so Donna how much money did you take out in your cash out refinance?