Nothing generates 20/20 hindsight like a good global crisis. And just as predictably, that hindsight quickly segues into calls for reform.
A year removed from the collapse of venerable investment bank Lehman Brothers, an event that shook the world’s economy unlike any in decades, calls for reform of our financial markets remain strong.
Earlier this month, President Barack Obama, in an address delivered in the heart of the U.S. financial district in Lower Manhattan, said, “We are proposing the most ambitious overhaul of the financial regulatory system since the Great Depression.”
Not prone toward gradual shifts, the President is calling for the creation of, among other things, a whole new regulatory body, the Consumer Financial Protection Agency.
Such an agency would protect consumers from unscrupulous lenders who take advantage of borrowers’ ignorance and naivete to gouge them with hidden fees and penalties, usually buried in the complex fine print attached to most loans.
Congressional hearings are scheduled this week to discuss the new agency.
The Obama Administration also wants to give existing regulators, primarily the Federal Reserve, more power to clamp down on what he has described as the “reckless behavior and unchecked excess at the heart of this crisis.”
The President believes big banks, in particular -- the JPMorgans (JPM), Bank of Americas (BAC) and Citigroups (C) -- need more oversight to prevent them from taking on more risk than they can safely handle, and from becoming so big that their failure poses a threat to the nation’s economy.
President Obama has acknowledged that he will need international cooperation for meaningful reform at that level because of the global interconnectedness of the world’s banks.
Meanwhile, Bernard Madoff’s epic decades-long Ponzi scheme, which bilked investors of tens of billions of dollars, has brought heightened scrutiny on the Securities and Exchange Commission.
New SEC Chairman Mary Schapiro has already made changes aimed at preventing the SEC from ever again missing the kinds of warnings that for years poured into the agency alleging that Madoff was running a fraud.
Even before the Madoff affair, as the scope of the financial crisis became clear, there were calls for the SEC to be merged with the Commodities Futures Trading Commission as part of a large-scale reform aimed at consolidating regulatory responsibilities.
Naturally, there are those who are skeptical of broad reform efforts, doubtful that it can be pulled off efficiently, or that it’s even necessary.
Randall Filer, professor of economics at Hunter College in New York and a member of the doctoral faculty at City University of New York’s Graduate Center, believes the reform momentum now in place will likely target smaller efforts, such as providing the SEC with more resources.
With more resources -- specifically, more competitively-paid, well-qualified staff -- the agency will be better able to enforce regulations already on the books.
And Filer believes the existing regulations “are clear and adamant” and “perfectly adequate for insider trading and Ponzi schemes.”
“The problem is to find things like insider trading you’re looking for needles in a haystack, sifting through billions of pieces of information trying to find suspicious patterns. That’s very labor intensive. More resources mean you can sift though more data and you’re likely to see more things,” he said.
But more staff means more money. As it stands, the SEC must compete for employees -- notably the computer programmers who attempt to track criminal patterns -- against the likes of videogame makers, for example, a job that is not only more fun but likely pays more money.
Sen. Charles E. Schumer (D-N.Y.) earlier this month proposed legislation that would allow the SEC to keep all of the fees it collects and use the money to recruit and retain better-trained personnel.
Schumer has said his proposal would, on average, boost the SEC’s budget by hundreds of millions of dollars each year, enabling the agency to attract professionals with the expertise required to uncover complex financial fraud.
In a statement announcing the proposal, the senator said while financial markets have been rapidly growing in both size and complexity, the SEC’s budget has remained essentially flat.
Schumer’s funding plan would treat the SEC the same as the Federal Reserve and the Federal Deposit Insurance Corp., both of which are funded through fees collected from institutions overseen by those agencies.
“The SEC’s failure to catch Bernie Madoff shows a level of incompetence unseen since FEMA’s handling of Hurricane Katrina. It is clear the SEC needs a bigger, more reliable funding stream so it can retain and recruit the top talent that has fled the agency of late,” Schumer said in a statement. “Under the current system, the agency’s rank-and-file personnel are struggling to keep up with the more sophisticated actors in the market. We cannot keep starving the SEC’s budget or the agency will remain a shadow of its former self.”
Schumer’s proposal was a direct response to an embarrassing report issued by the SEC’s Inspector General. According to the report, the SEC had enough evidence against Madoff to merit an investigation into the dealings of his investment firm, but the agency repeatedly failed to act effectively.
The report repeatedly cited the lack of experience and expertise of SEC personnel assigned to investigate Madoff, finding that they “failed to appreciate the significance of the analysis” in the complaints about Madoff and “failed to follow up on inconsistencies.”
Filer said Madoff might have been stopped sooner if the SEC had had more qualified people.
“The pattern might have jumped out at somebody earlier,” he said.
Filer said he’s skeptical that big-picture reform -- such as preventing banks from getting too big or from taking on ‘too much risk’ -- is possible without international cooperation, if it’s possible at all.
“The broad failures that led to the financial crisis will be more difficult to tackle. I’m not sure anyone knows how to do that. If it were easy we’d have done it in the first place. Crises are always easy to explain in hindsight,” he said.
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