Regulatory Reality

May 21 2010   1:55PM GMT

The new Senate finance bill: not what I hoped for

David Schneier David Schneier Profile: David Schneier

I’m an optimist:  Ask anyone who knows me either personally or professionally and they’ll agree.  And I’ve been eagerly anticipating new legislation ever since the banks spiraled out of control and needed government intervention to save themselves.  As my wife likes to tell people, when the economy takes a hit it’s usually good news for my end of the industry because the echo boom that follows is typically caused by an explosion of new regulations and I am, after all, something of a regulatory compliance expert.  But as I’m reading through all the content that was generated today about the newly passed Senate finance bill I’m not feeling any optimism.

The bill talks about things like establishing a new council of “systemic risk” regulators to monitor growing risks in the financial system and allow the government in extreme cases to seize and liquidate a failing financial company in a way that protects taxpayers from future bailouts.  But that basically gives the government the right to step in whenever it deems appropriate to either derail a business strategy it considers too risky or seize control of an institution and dismantle it should a team of government appointed bureaucrats conclude that it’s the right thing to do.  How about taking a giant step back in time to 2009 and consider what FDIC Chairman Sheila Bair said of these same institutions: let them fail.  We live in a country that promotes a free market economy.  You take a chance, gamble the rent money on a risky strategy, it fails and you’re forced to own up to it and suffer the consequences.  If Citigroup imploded and was sliced up and sold off in pieces to the competition so be it; the economy would rebound and the only lingering pain would be felt by the shareholders who, you guessed it, also gambled when they invested in the company.  Instead, the bill reeks of creating a situation where there’s almost a guarantee of no risk and only reward.

The legislation further outlines plans to  create a new consumer protection division within the Federal Reserve and give regulators new powers to oversee the giant derivatives market.  On paper (or a Web page), that may seem like a good idea but here’s my problem with it: The current set of industry regulators already struggle to enforce the existing rules and now the federal government is planning to throw even more on the pile.  Every week my practice encounters banks and credit unions who are missing key or current GLBA components and who have recently passed exams where the gaps weren’t identified.  So tell me how anything new is going to work when the current set of requirements can’t be properly enforced or policed?

And to that point, when the bill discusses empowering the Federal Reserve to “supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy” I have to ask, how is that any different than what’s already in place?  Between the SEC, FDIC and the OCC, you’d have to figure there are already enough oversight bodies in place to get the job done.  And even with all of them hovering about and trying to keep an eye on things, the banking crisis came to pass right under their noses.  What’s going to be so unique and different about what the Fed will be doing to convince me that anything is going to truly change?

And so the optimism is reigned in and replaced with a healthy dose of pessimism.

I’m just not convinced that this bill will solve any of the problems it was supposed to and I’m all but certain it will generate an exhausting amount of additional compliance and reporting activity regardless of that fact.  As a regulatory compliance practitioner this may be a good thing, but as a taxpayer not so much.

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