The government has finally begun to dribble out some of its ideas for financial system reform. For some time now, federal regulators have been behind the curve in policing the investment industry. With the near-catastrophic events of the past year, the environment is ripe for a major overhaul of the financial regulatory structure.
In recent years, the Securities and Exchange Commission has not been the most effective regulator. Others—such as the New York Attorney General’s Office—have led the charge in punishing financial misdeeds. More recently, U.S. District Judge Jed Rakoff of Manhattan, in a court decision, sent a stern message to both regulators and Wall Street.
Rakoff refused to approve a $33 million fine the SEC levied on Bank of America for failing to adequately disclose the $3.6 billion in bonuses that were paid to Merrill Lynch executives before the merger of the two companies. Rakoff accused the SEC of going too easy on B of A and accused B of A executives of actions that blindsided their shareholders and the taxpayers who bailed out the bank.
Understandably, the public’s frustration is growing with a perceived lack of action from the government, particularly since Main Street continues to struggle while Wall Street appears to have quickly regained its money-minting practices. In spite of the uproar, reasonable time should be taken to adopt the kinds of targeted reforms that will be necessary to prevent the accumulation of system risks allowed to build up over the past couple of decades.
And yet, the early signs point to meek efforts by the Obama administration to address gaping regulatory issues. For example, the remedies undertaken by the “pay czar” are decidedly underwhelming and don’t begin to attack the root of the problem.
This is not to specifically indict our current leaders, since lax financial regulation can be traced back through both the Bush and Clinton administrations. For example, efforts to rein in stock option mega-grants were quashed in the mid-1990s by a strong corporate lobby and an impotent Congress.
Later that decade, a valiant pitch to regulate the derivative markets by Brooksley Born, then head of the Commodities and Futures Trading Commission, was nullified by Clintonites Robert Rubin and Larry Summers.
So why should we expect anything different this time than the usual political muddle? Couldn’t the Obama administration sidestep the rich and powerful financial lobby just for once? They could instead draw on a deep bench of industry veterans whose wisdom and experience would develop well-reasoned guidelines to regulate the complex financial industry of today.
To lead such a group there is former Fed Chairman Paul Volcker, who would come in a nonpartisan manner and bang some heads together. Why not step outside the network of Wall Street insiders and use the talents of brilliant investment thinkers like Jeremy Grantham (see gmo.com.)?
The road to rational re-regulation should start with breaking apart the big, complex investment banks, and separating their commercial banking function from their riskier hedge-fund-like trading operations. In essence, a move toward a modern-day modification of the Glass-Steagall Act, where institutions are not too big to fail.•
Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or firstname.lastname@example.org.