Legislating Wall Street

We were sifting through the proposed “too big to fail” legislation that’s floating around the House and found this nugget: Under Barney Frank’s plan, the legislation would establish a “Financial Services Oversight Council.”

Essentially, it would be a group of bureaucrats who decide what companies are too big to fail and what new regulations/capital requirements they must subsequently observe. The proposed voting members:

  • The secretary of the Treasury, who shall serve as the chairman of the council
  • The chairman of the Board of Governors of the Federal Reserve System
  • The comptroller of the currency
  • The director of the Office of Thrift Supervision
  • The chairman of the Securities and Exchange Commission
  • The chairman of the Commodity Futures Trading Commission
  • The chairperson of the Federal Deposit Insurance Corp
  • The director of the Federal Housing Finance Agency
  • The chairman of the National Credit Union Administration.

In other words, all the people who never saw the crisis coming (and a few who enabled it) would sit on a council together and have to arbitrarily decide who gets to grow and who doesn’t … just when innovation in the financial markets is needed most. Brilliant.

“Mark Warner, the junior senator from Virginia and one of the architects of the Oversight Council idea spoke to a group of financial publishers gathered at the Motley Fool in Alexandria, Va., on Friday,” writes Addison Wiggin, who was at the meeting himself. “Warner said he and his colleagues were working on the most sweeping and comprehensive reform bill since the 1930s, when the SEC itself was created.”

“The reform effort is focused on four fronts:

a) The council on “Too Big To Fail” (named above)
b) Increased capital requirements and strident guidelines (for speculative gambling instruments)
c) Increased funding and authority for the Resolution trust (so at least the lawyers won’t go bust)
d) and consumer protection (for those dimwits who got in over their heads in the first place).

“The parentheses, of course, are all ours.”

“The most striking thing to me,” Addison continues, “ was not that Warner was basically describing a massive land grab on regulatory authority stemming from Washington… that’s a given, especially since so much taxpayer money is being thrown down the money hole created by Wall Street.

“What was really shocking was how candid Warner was. He’s a co-founder of Nextel, so he, unlike many politicians, has a basic understanding of business and entrepreneurship. When he joined the Senate Finance Committee, he immediately rose to a position of respect and leadership within the group. He said he ‘puffed up his chest’ and was proud they all thought he ‘had a handle on all this banking stuff.’ Then he realized, without much practical experience in banking, finance or crafting legislation, he found himself leading one of the most aggressive revamps of the financial system ever attempted in history.”

“‘Well,’ Warner concluded after a quick Q&A session, ‘That’s all I have for you today. I hope we don’t screw this legislation up too badly for you.’”


The Daily Reckoning