It is finally done. The US has now moved to the next stage of the financial crisis—this is where the brooms, antiseptic and hot water come out to clean out the goop left behind by the unadulterated greed of a handful of suits on Wall Street. Even as the news of the US Senate passing the Restoring American Financial Stability Act of 2010 comes in, I am at that part in the two-brick-sized tome, Too Big to Fail by Andrew Ross Sorkin, where the obnoxious Dick Fuld of Lehman Brothers Holdings Inc. is screaming about shareholder value, even as he scrabbles to hoodwink other sharp Wall Street types with his good-bank-bad-bank plan. The plan was to take the toxic real estate assets of Lehman and shove them into another company while keeping the “good assets” in one company. Of course, it was totally irrelevant to the bonus-grabbing Lehman top team that there weren’t that many “good assets” left in the firm and that they were not in the money any more.
The US Wall Street clean-up Bill puts in place more controls on Wall Street firms, decreases the money creating capacity of the players (at the height of the bull run, each dollar of borrowing was creating $30 of fresh money in the form of “assets”), puts in place a consumer financial protection agency (which will prevent toxic retail credit products from coming into the market and will encourage plain vanilla products that are best suited to retail consumers) and prepares a cushion for future bailouts.
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Wall Street responded with its usual threat: markets will fall. But this time around it seems that the political bosses are not over-concerned with this old arm-twister. Markets are shaky worldwide and the fact that Europe is in a possibly bigger mess frees them from the threat of having the money move overseas to a less regulated financial centre. And with emerging markets yet to acquire the breadth and depth to absorb all the money floating around the globe due to a near-zero interest rate regime, the time is right for the government to clip the leash on.
In fact, the Bill survived the over $600 (Rs28,440) “Kill Bill” chest opened up by Wall Street firms and the sharp lobbyists that descended in the corridors of power to dilute (if not kill) the Bill. The money and the lobbying were actually getting somewhere when the Goldman Sachs controversy blew the whole story back onto the front pages. It was when the US capital market regulator, the Securities and Exchange Commission (SEC), sued Goldman Sachs for fraud in connection with how it marketed certain complex securities during the last days of the boom that the banks’ questionable practices made voters and politicians angry enough to allow the Bill to sail through. In fact, cynics in the US attribute the timing of the SEC lawsuit to turning the tide of public opinion back in favour of a tighter Wall Street leash.
What lies ahead now is a period of negotiation as both chambers of the US Congress have passed different versions of the Bill and a compromise needs to be worked out. But what is clear is that Wall Street will get a new leash, even though it is still kicking and screaming. Now the key question remains: will the average person be safer while she crosses Wall Street? Says Eric Schurenberg, editor-in-chief of BNET.com and editorial director of CBS MoneyWatch.com: “I would say she definitely is—safer both from a recurrence of a financial crisis like the one we’re now recovering from, and safer from abuses that preyed on innocent families. Regulators will be extremely vigilant for a while—in the same way that the safest time to fly on a commercial airline was the day after flight service resumed after 9/11. However, the extra regulation will come at a cost. Loans will be less available to businesses and consumers, even honest loans. And while regulators will be vigilant, they will have no better ability to see into the future than they have now, and they will be equally vulnerable to the kinds of rationalizations that always accompany a bubble. But all in all, it’s a far-reaching renovation of the existing regulatory structure. And while one can never know the real outcome of such an extensive Bill, I’m convinced that it was politically impossible not to have a major overhaul of the industry that led the world nearly to the brink of financial collapse. I hope that this legislation is less Sarbanes-Oxley—the ineffectual, but burdensome financial reform law passed after the dot-com crisis—and more of the sweeping financial regulations that were written in the 1930s. They kept investors and users reasonably safe for 70 years. Let’s hope this one does half as well.”
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is consulting editor with Mint and can be reached at firstname.lastname@example.org