Financial Reform: 2010

http://online.wsj.com/article_email/SB10001424052748704133804575197852294753766-lMyQjAxMTAwMDIwMjEyNDIyWj.html

According to Alan S. Blinder (former Fed Vice Chairman and professor of economics and public affairs at Princeton University), the prospects of getting a good financial reform bill thru Congress have brightened considerably since health reform passed.

Blinder thinks that, while both the House bill (@ 1279 pages and passed in December) and the Senate bill (@ 1336 pages and about to be debated) are lengthy, complicated and substantive, the good news is that the similarities far exceed the differences. The key point here is, should the Dodd bill pass the Senate, it would not be difficult to get the two houses to agree. That perspective represents both a political and a regulatory perspective on Blinder's part.

The enemies of keeping this pending legislation effective are the "lobbyists." Keeping it simple, Blinder suggests that there are only two things we need to watch: the fate of the proposed Consumer Financial Protection Agency (CFPA) and the regulation of "derivatives."

On the CFPA, we recall Elizabeth Warren's (Chairwoman of the Congressional TARP Oversight Panel and professor of law at Harvard) WSJ article in February where she staked out her position on the importance of creating that agency and keeping it independent: "The same Wall Street CEOs who brought the economy to its knees have spent more than a year and hundreds of millions of dollars furiously lobbying Washington to kill the President's proposal for a Consumer Financial Protection Agency ... The consumer agency is a watchdog that would root out gimmicks and traps and slim down paperwork, giving families a fighting chance to hang on to some of their money."

Blinder's perspective is to watch what happens to the CFPA when the final legislation is passed. It appears that Barney Frank, the chairman of the House Financial Services Committee, and a supporter of creating the new agency, has had to water it down somewhat to get it thru the House. But, Frank kept the agency "independent" with rule-making and enforcement powers. The Senate version creates a "Bureau of Consumer Protection" in the Federal Reserve System but headed by an independent presidential appointee who does not report to the chairman of the Fed. To quote Blinder: "Try figuring out how that would work."

Keeping it simple: if the Senate version of the CFPA is passed, the lobbyists win.

The second thing to watch is the regulation of "derivatives." Since the status quo here is no regulation at all, pushing derivatives onto organized exchanges is an approach that Blinder feels could work. Both the House and Senate bills include this idea: except for the "exceptions." The "traders" feel that such an approach will eliminate "customization" which allows for exotic trades (such as airlines hedging on jet fuel, etc.). Blinder suggests that we "flag" the traders with a 10 yard penalty and tell them that "cash" can still be used to buy and sell "Euros" and jet fuel. We agree.

So, 2,615 pages of House and Senate bills can be reduced to watching what happens with two key elements of reform: the CFPA and derivatives.

Dr. Blinder is optimistic. So are we.

Watching Elizabeth Warren might also be a good idea. The CFPA is her idea. Many feel she should run it. She has appeared on "60 Minutes" and other media advocating the creation of the agency. To defeat it or dilute it is a loss for her.

To further add to the intrigue, professor Warren has been looked upon as a very credible nominee for the Supreme Court. Both her supporters and detractors would see some advantage to her appointment. Her supporters think she deserves it (on top of what we have described here, she is considered an expert on bankruptcy law and middle class demographics - Google her and watch her U.C. Berkeley speech). Her detractors would like to have her out of the way.

If the ultimate legislation is anything less than what we need, we can count on hearing from professor Warren. Most members of Congress know that - some are up for re-election.