Bank CEOs Continue to Fight Reform

"The big lesson of the past year is that mistakes made on Wall Street can have real bad side effects on the rest of the economy," says Robert Johnson, a senior fellow at the Roosevelt Institute and a former chief economist of the Senate Banking Committee. "And that's adequate grounds to put in restraints before we have to have the next bailout."

No more regulations, please. That was the message from top executives at four of the nation's largest financial firms on Wednesday, spoken to a commission set up by an act of Congress to investigate the causes of last year's credit crunch. But more than a year after poor lending standards, unregulated products and bonus bonanzas helped spark the worst recession since the Great Depression, many say that reining in Wall Street is the only way to prevent another financial crisis.(Read "Hearings to Begin on Causes of Financial Crisis.")

 

"The big lesson of the past year is that mistakes made on Wall Street can have real bad side effects on the rest of the economy," says Robert Johnson, a senior fellow at the Roosevelt Institute and a former chief economist of the Senate Banking Committee. "And that's adequate grounds to put in restraints before we have to have the next bailout."

(See award-winning pictures of the fallout from the financial crisis.)

 

Nonetheless, on Wednesday, in front of the Financial Crisis Inquiry Commission (FCIC), the bank executives tried to paint a picture that the failures that caused the crisis were missteps by management, sometimes even themselves, but not the result of faulty regulation. Lloyd Blankfein, CEO of Goldman Sachs, told the panel, "After the shocks of recent months and the associated economic pain, there is a natural and appropriate desire for wholesale reform. We should resist a response, however, that is solely designed around protecting us from the 100-year storm."(See the top 10 crooked CEOs.)

 

Even Jamie Dimon, CEO of JPMorgan Chase, who has seemed to be more open to new regulations, sought to deflect attention away from lax regulation as the sole cause of the crisis. "I want to be clear that I do not blame the regulators," Dimon testified. "The responsibility for the company's actions rest with the company's management."

At times, the top executives did contend that regulation might have been too loose leading up to the crisis, but they stressed that that was no longer the case. All thought that the government needed the power to resolve large troubled institutions. Brian Moynihan, CEO of Bank of America, said the resolution authority could be based on the way the Federal Deposit Insurance Corp. closes down smaller banks, which involves auctioning off troubled institutions to stronger competitors, often with a government guarantee for risky assets. Also questioned by the panel was Morgan Stanley's chairman, John Mack.(See 25 people to blame for the financial crisis.)

 

Blankfein even seemed to show some support for a consumer financial-product regulator, saying he thought there should be more attention paid to how financial markets interact with the retail market. But when it comes to more restrictions on the way large Wall Street firms like Goldman do business, Blankfein said there were already too many constraints. He said that since his firm began to be regulated by the Federal Reserve and not the Securities and Exchange Commission — a switch that happened when Goldman became a bank-holding company in late 2008 — the oversight of his firm had increased to a level that, given all that had happened, seemed right. "Perhaps there should have been more [regulation] than there was before September 2008," he said in response to a question about whether regulators had done their job leading up to the crisis. "But now it feels like a lot, and appropriately so."

 

Some of the members of the FCIC seemed to agree that more regulation was not the answer to avoiding another financial crisis. John Thompson, chairman of security company Symantec and a former adviser to President George W. Bush, said to the executives, "Some of this oversight is management's responsibility, and not regulation."

 

One of the more interesting exchanges came when FCIC members asked the CEOs if they thought that Wall Streeters should get a portion of their compensation in the products they were selling to customers, like mortgage bonds or stocks. In late 2008, investment bank UBS instituted such a plan. The executives, however, said forcing banks and other employees to hold on to products they were selling would cause conflicts of interest and limit their ability to do business. Instead, the executives said they instituted so-called clawback provisions, which allow banks to reclaim compensation from bankers who sell products that cause the firm losses down the road. Because of time constraints, the executives were asked to respond to the panel in writing whether clawback provisions have ever been used.

 

Still, many believe the government needs to do more to rein in risky behavior on Wall Street. Among the proposals that have been promoted by President Barack Obama and Congress are a systemic regulator that would be on guard for markets and participants that were creating unseen risks in the financial system. Last month, the House of Representatives passed a bill that would create a new agency to protect consumers and regulate products like mortgages and credit cards. Even the Independent Community Bankers Association, which has fought new regulations of the financial sector, says the government needs to do more to rein in the nation's largest banks.

Johnson, of the Roosevelt Institute, says the single most important reform would be to force unregulated financial products, such as credit-default swaps (CDSs) and collateralized-debt obligations (CDOs), onto government-watched public exchanges. CDS contracts are widely blamed for the demise of insurer AIG. Johnson says that making the CDS, CDO and other markets like them more transparent would limit the ability of financial executives to take the extreme risks that can cause their firms to fail when markets go awry.

 

"We need more supervision, more examination and much more enforcement of regulations that are already on the books," says Johnson. "But most of all, we need a system that punishes stock holders and managers before taxpayers."

Read more: http://www.time.com/time/business/article/0,8599,1953532,00.html#ixzz0cc9QIqL1 

Comments (7)Add a comment

Part of my job requires me to stay on top of this subject. The article you have written has been beneficial in my research. Thanks a lot
Silver Water

I have been teaching a class and we are looking at this subject in the next week. I will be directing my student to look at your post for good information.
Online Shopping Deals

Very nicely written post it contains useful information for me. I am happy to find your distinguished way of writing the post. Now you make it easy for me to understand and implement the concept. Thank you for the post.
hair gel for thinning hair

Microsoft Windows 8 Plus License provides secure password manager Windows 8 access to every piece of information with Office 2007 seek out capabilities which Microsoft Office 2007 helps discovering information with reliev.And open browser, quickly search any flash video through the online video website you may need, and play Download Office 2007 License interne. Check out distinct comparisons made concernin programs or model, like the Avast as opposed to AVG comparison manufactured in this Buzzle post. Go for antivirus engines which provid a Office 2007 Download solid track record regarding virus detection. Opt for an application that uses the Office 2007 Professional devic resources without slowing it down excessive. Make sure that the program has a Microsoft Office 2007 Download virus detection tool and also a registry cleaner.

The mobile instanc Office 2010 Keygen developer needs t control his lure to copy this mobile application regarding other platforms.Among all your Microsoft Office 2010 scanning features offered b a program, look for Internet security features, that include hyperlink scanning, email scanning, P2P scanning and also Download Office 2010 network security. Real time encodin and scheduled scanning is offered by almost all programs today. Office 2010 Download Enterprise Serial Key brings extra value in terms of alluring features the fact that Microsoft Office 2010 Download perform unique capabilities, and that make it easy fo a recycler for you to conduct hassle-free organization. If you use your personal machine terminal for Microsoft Office 2011 online banking transactions,it is essential that the antivirus program possesse Office 2010 Key filters.

I like the way you described the topic with such clarity. This is something I have been thinking about for a long time and you really captured the essence of the subject.
here

This topic has always fascinated me. Thank you for writing an article that has great content and is well written. Well I am inspired by your writing style.
Planning a Destination Wedding

I have been interested in this topic for quite some time. I have been researching it for a couple of hours and found your post to be very interesting. Cheers.
electronic cigarette