Financial Reform Watch : Financial Services News & Information : Blank Rome Government Relations Lobbying Firm : Government Relations, Corporate Governance : Financial Reform Watch Law Blog

President Obama today released the long-awaited proposal for reform of the regulatory structure overseeing the financial services industry. It is a sweeping proposal with broad implications for the entire industry. It reshuffles regulatory powers, combines some agencies, creates a new one and extends federal regulatory powers to products and firms which are currently not federally regulated or regulated at all. Congress, the industry,the media and other stakeholders are poring over the 85-page "white paper" describing the proposal. Click here to go to the document.
 

Brief Summary

1.      Avoid Future Systemic Risk/Promote Robust Supervision and Regulation – Raise capital and liquidity requirements for banks and systemically significant financial firms; establish a Financial Services Oversight Council of regulators to coordinate and prevent systemic risk; establish a new National Bank Supervisor in Treasury to oversee federally chartered banks; bring hedge funds and other private pools of capital into the regulatory framework; require public companies to hold non-binding say-on-pay shareholder votes and have independent compensation committees; review accounting standards; establish the Office of National Insurance within Treasury to enhance oversight of the sector.

2.      Reform the Structure of the Financial System – impose “robust” reporting requirements on issuers of asset-backed securities; reduce reliance on credit rating agencies; require the originator, sponsor or broker of a securitization to retain a financial interest in its performance; harmonize the regulation of futures and securities; safeguard payment and settlement systems; subject all derivatives trading to regulation; strengthen oversight of systemically important payment, clearing and settlements systems.

3.      Protect Consumers and Investors – improve the SEC’s ability to protect investors and establish a new Consumer Financial Protection Agency to identify gaps in supervision and enforcement; ensure the enforcement of consumer protection regulations; improve state coordination; and promote consistent regulation of similar products.

4.      Enable the Government to Manage Financial Crises -- establish a resolution mechanism, similar to the FDIC’s,  for non-bank financial firms and subject those whose failure could harm the financial system (Tier I Financial Holding Companies) to Fed supervision; require the Fed to get Treasury sign off when the Fed invokes its emergency lending authority for “unusual and exigent circumstances.”

5.      Improve International Supervision and Coordination – improve oversight of global financial markets; strengthen the capital framework; coordinate supervision of international firms; enhance crisis management tools.

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It has been a good week for opponents of mark-to-market (M2M) accounting. The markets have rallied around comments made throughout the week by Warren Buffet, Fed Chairman Ben Bernanke, and SEC Chairman Mary Schapiro that M2M needs rethinking.

House Financial Services Subcommittee Chairman Paul Kanjorski (D-PA) topped it all off today with an exhaustive hearing on M2M accounting. Kanjorski opened the hearing with comments that appear to be the emerging view:

“We can, however, no longer deny the reality of the pro-cyclical nature of mark-to-market accounting. It has produced numerous unintended consequences. And it has exacerbated the ongoing economic crisis. If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself.”

Momentum is clearly building in Washington for M2M relief. The question is who will make the fix—Congress or the regulators ("inspired" by Congress)?

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The New Democrat Coalition is not especially new, but the recent changes resulting from the 2008 elections and the financial crisis have given it new prominence and increased importance in the House of Representatives. The New Dems may be the moderating force behind financial regulatory reform in Congress. Already, several of its centrist members helped stall the mortgage cramdown legislation that was scheduled for a House vote yesterday and is now pushed out to next week to allow for changes that can attract additional votes from moderates.

Founded in 1997, the New Democrat Coalition is “committed to enacting policies that encourage economic growth, maintain U.S. competitiveness, meet the new challenges posed by globalization in the 21st century, and strengthen our standing in the world.” With 67 Democratic House members, sixteen of whom are on the House Financial Services Committee, the coalition is taking on “regulatory reform of the financial services industry” through its Financial Services Task Force. It is chaired by Reps. Melissa Bean (D-IL) and Jim Himes (D-CT), who both have business backgrounds, and Himes is an alumnus of Goldman Sachs. The New Dems Chairwoman, Rep. Ellen Tauscher (D-CA), is a former investment banker who was one of the first women ever to hold a seat on the New York Stock Exchange.

The group just released its 21 principles for financial regulatory reform organized around the goals of efficient and effective regulation; market stability and transparency; and robust consumer and investor protection. One principle shows a willingness to reform the way in which mark-to-market accounting rules are applied, something that House Republicans have wanted to do for months. Perhaps the New Dems can help revive the bipartisanship that has been lacking in the House thus far this year.

New Democrat Coalition's 21 Principles for Reforming the Financial System (PDF)

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In spite of the holidays and new year celebrations, financial sector events have continued to unfold unremittingly, forcing EU policy makers to consider policy readjustments, yet again.

The scandal surrounding Bernard L. Madoff Investment Securities LLC, the financial implications of which are global and yet to be fully discovered, is one of the most recent examples. No doubt, Madoff will give those supporting new financial regulation and oversight the upper hand in reform discussions just as Enron provided carte blanche for those promoting the Sarbanes-Oxley legislation, and its EU siblings, a few years ago.

One of the calls for new, drastic, financial reform—more difficult to argue against in a post-Madoff environment—comes from the distinguished Financial Times columnist Willem Buiter. In a recent speech, Buiter provided a damning analysis of the shortcomings of the financial system and also provided his recommendations for the appropriate policy responses. It would have been less surprising if these radical proposals had emanated from outraged elected officials, rather than from a professor of political economy at the London School of Economics.
 

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Testimony from academics and industry during today’s House Financial Services Committee hearing produced broad bipartisan consensus that the current regulatory structure is outdated. Testifying on behalf of industry were leaders from the Independent Community Bankers Association (ICBA), the Financial Services Roundtable, the American Bankers Association (ABA), and the Securities Industry and Financial Markets Association. As the committee’s first major hearing following the federal financial rescue efforts, it covered a wide swath of issues outlined below. 

• Creation of a Select Committee on Financial Reform—Chairman Barney Frank and several members supported this idea. In addition to Financial Services Committee members, a select committee would include members from the House Committees on Oversight and Government Reform, Agriculture, and Ways and Means. One of the academic witnesses, University of Rochester President Joel Seligman, suggested a commission modeled after the 9-11 Commission. 
• Derivatives—What role did credit default swaps play in the financial crisis? Should there be increased capitalization requirements for derivatives’ issuers? The questions remain, but most agreed on the need for increased oversight of complex financial derivatives. 

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