The current series of proposals for reforming Wall Street and bankers are toothless facades of what real regulation should look like.

It seems that each new proposal for reforming Banking and Wall Street is more banker friendly – and ineffective – than the previous one. They are milquetoast, meaningless, appeasing nonsense. The reformers are in a race to see who can offer up legislation that is least offensive to bankers.

In order to legislate reform that will prevent the next meltdown from occurring, I suggest that anyone who introduces new reform legislation must answer the following questions about their proposals:

1. Ratings Agencies: The Nationally Recognized Statistical Rating Organization (“NRSRO”) such as Moody’s, S&P, and Fitch slapped triple AAA ratings on paper that was actually high yielding junk. The investment banks paid them for these ratings. The ratings agencies were the prime enablers of the credit collapse.

What does your proposal do about this business model? Does it maintain this unique privileged status? Does it introduce any competition to the ratings business?

2. Derivatives: The Commodity Futures Modernization Act of 2000 (CFMA) exempted derivatives such as CDOs and CDSs from all regulatory oversight, reserve requirements, capital minimums, exchange listings, transparent open interest reporting, and counter-party disclosures.

What does your proposal do to fix this?

3. Leverage: Prior to 2004, Investment Houses were limited to 12-to-1 leverage by the SEC’s net capitalization rule. In 2004, the Bear Stearns exemption was granted by the SEC, giving the five largest investment firms a waiver of this leverage limit. These five promptly  allowed their leverage to go up to 25, 30 even 40 to 1.

What does your proposal do about this excess leverage?

4. Insulating Main Street from Wall Street: Glass Steagall separated FDIC insured depository banks from the more risk embracing investment houses. Prior to the repeal of Glass Steagall in 1998, the market had regular crashes that did not spill over into the real economy: 1966, 1970, 1974, and most telling of all, 1987. These market crashes did not freeze credit for the real economy.

How does your proposal prevent the inevitable future market crashes from spilling over to the real economy – especially as applied to real credit availability?

5. NonBank Lenders: Most of the sub-prime mortgages were made by unregulated non-bank lenders. These firms abdicated all lending standards. They pushed the option arms, the interest only loans, and the negative amortization mortgages that defaulted in huge numbers.

How does your legislation deal with these (or similar firms) in the future?

6. Compensation: The banks and investment houses paid many of their senior employees huge bonuses. This encouraged employees to take tremendous risks to generate what we now know were phony profits.

What does your proposal do to address this? Does it allow for clawbacks of stock options, bonuses, and cash payouts for fake profits or future losses?

7. States Rights: Prior to the 2004, many States had Anti-Predatory Lending (APL) laws on their books. These states had lower default and foreclosure rates than the states that did not.

In 2004, the Office of the Comptroller of the Currency (OCC) preempted national banks from state laws regulating mortgage credit, including state anti-predatory lending laws. New subprime mortgages were sold in states that previously didn’t allow them. Subsequently, these states saw their foreclosure rates spike.

Does your legislation return to the States the right to oversee and regulate fraud and predatory lending?

8. Whistle blowers: The SEC had numerous whistleblowers identify funny accounting, malfeasance and even outright fraud. Yet they failed to thoroughly investigate most of these problems, including Bernie Madoff’s ponzi scheme.

What does your proposal do to put a strong police force back on Wall Street ? How does it encourage and reward whistle blowers?

9. Corporate Structure: None of the major Wall Street partnerships got into trouble, as they have full personal liability for their losses. Only the publicly traded Wall Street firms did. This strongly implies that personal liability of senior management prevents them from acting recklessly.

How does your proposal address the issue of personal liability for massive losses by senior management?

10. Fraud: Many families ended up obtaining mortgages they either did not understand or were materially misrepresented.

Does your proposal address consumer education or lender fraud?

If Congress can adequately answer these questions in reform legislation, they can prevent the next meltdown. Otherwise, we should expect the next collapse to be even more severe, and recovery more painful . . .

Category: Bailouts, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “10 Questions for Finance Reformers”

  1. jimbonita says:

    Excellent! Should be required ready for everyone in House, Senate, and Administration. Once again you’ve got it straight and succinct, Barry!

  2. Sircornflakes says:

    Great questions, all. Please don’t hold your breath waiting for an answer.

  3. b_thunder says:

    brilliant summary of “what is to be done.”
    I’d only explicitly define
    #11 (or #9.1) – Explicitly defined clawback amounts
    #12 Re-regulation of GSEs, with new lending standards and limiting their size
    #13 Explicitly define provisions for nationalizing (need that famous pollster to come up with a “friendlier” term) banks, explicitly allow busting up banks in receivership; bondholders get their money after the firm is sold off and the gov’t recovers all their bailout funds.

  4. sysin3 says:

    The bankers have totally punked out the politicians. Without a viable third party, it will probably come down to torches and pitchforks eventually.

  5. The Curmudgeon says:

    All the regulation in the world won’t mean anything if you don’t regulate the regulators, mainly the federal reserve, and not in its capacity as bank regulator, but in its capacity managing the supply of the commodity that all these regulatees need in order to function–money. Properly regulate the money and all the other regulations will be superfluous.

  6. zell says:

    Accounting treatment has to be transparent and uniform. End off balance sheet entities. Specify which and when MTM applies. Carve it in stone. Bring the supervisory functions and enforcement into the F.B.I. .

  7. Greg0658 says:

    Mr Barry Ritholtz .. if we started a grassroots campaign to get you drafted to a position at the FED or in the WH .. would you run off to Canada?

  8. Robespierre says:

    Great questions for which we already know the answers. Here you will see bipartisan support to simply ignore all of them and give their masters what they want so no regulation, no investigation and no convictions. As Obama said these are savvy investors who bought pretty much everyone on both parties…

  9. Marcus says:


    Your list and analysis are very prescient. These 10 points could be a grading scale for this Administration and this Congress.

    A = 9 issues or more fixed.
    B = 8 fixed.
    C = 7 fixed.
    D = 6 fixed.
    F = <6 fixed.

    Your points primarily address historical problems, situations that were shown to implode the markets from 2004 – 2008. What about other problems that could cause similar melt downs? Credit card and financial debt? Off shore accounts and international financial shenanigans that are outside domestic supervision? What about reporting mark-to-market AND mark-to-model values in determining asset risk?

    There should be a two-tier approach to financial reform, followed by monitoring.

    1. Correct Greenspan-era abuses for which your list is an excellent guide.
    2. Study all overhanging risk to the economy, then put in place forward looking preventative measures.
    3. Monitor by creating an independent auditing entity (please not part of the quasi governmental Fed). This entity would report to Congress annually and be responsible for warning our Government and the American people before these disasters occur.

    Fix the immediate problem. Fix future problems. Monitor diligently.

    The human cost of these failures has been horrific in our country. Our representatives have the power and responsibility to fix this broken system. We deserve better than the lobby money that drives DC. Any Administration and Congress should be chased from office if they do any less.

  10. gloppie says:

    I don’t see why Regulatory capture and it’s incestuous cousin, revolving publicprivate door are not on the list of ailments that need fixin’.

    “This town needs an enema”

  11. inthewoods says:

    Just forwarded your list to my Congressman and Senators – it’s a great starting point for action. Now if we could actually get something close to it. I would love to know what, if any, of the points are covered by the Dodd bill. My guess is none.

  12. V says:

    Do you think there should be provision in 6) for shareholders to have more say in the approval processes for executive compensation?

    Also as far as 9) goes there needs to be more scope for shareholder appointment of board members, rather than an old boys network plus token female system that exists at present.

  13. batmando says:

    bullseye zell!
    “Bring the supervisory functions and enforcement into the F.B.I. ”
    until or unless there is real enforcement with indictment, prosecution and hard time, no amount of reform or re-regulation will mean spit.

  14. farmera1 says:

    I will send this list to the White House and my Congressmen. It won’t do much good, this list vs the billions spent on lobbying.

    To get any traction the list would have to be backed by some of the biggest players in the world of finance. Call them the wise old men. In general I “think” in their heart they know this in some form is what needs to happen. My list of dream supporters:


    Maybe Gates, and maybe even Greenspan. Dream big.

    It would make a huge difference if some small number (say a max of six) of wise men would actively get behind this. Otherwise, it has about as much chance as a snow ball in hell of going anywhere.

  15. WFTA says:

    Do you mind if your comments are forwarded to our members of congress?

  16. nebyarg says:

    Excellent review and clear to the point questions!

  17. torrie-amos says:

    Why should sanity prevail now?????????? that is the question

    everyone of those issues could have been addressed a week after tarp because none of them have changed and they were obvious to everyone, even the bankers, yet, they have lobbyists and they rule the roost, and thus the beat goes on

  18. [...] Big Picture piece asks ten key questions about the proposed over-haul of financial institution [...]

  19. doctorleff says:

    I agree that these are sound conventional policies. But as Rittholtz and Hyman Minsky observed, there
    are problems with the debt system as a whole. One alternative to debt is shares of gross revenues. Or another analogy is, do we promote safe driving or do we promote a better system
    than individual automobiles? If we are going to have a conventional financial system or automobiles,
    do it safely, but let us look at radical changes to the system.

  20. riley says:

    “In order to legislate reform that will prevent the next meltdown from occurring”

    That’s a big part of the problem. They are trying to legislate the impossible. Just as regulation does not prevent theft (it did a great job preventing Bernie Madoff) nor can regulation force an action (ask John Corzine about seat belt regulations) no legislation can or will prevent the next meltdown from occurring. Regulations only allow legislators to say “look what I am doing for you…so reelect me”.

    Why do we need additional/different regulations that apply just to financial firms. Many of the problems that led to the credit crisis are a result of 10. Fraud and this is already illegal. No new regulations are necessary to prosecute violations of #s 1, 2 & 5. They are all fraudulent activity. As has been said we need the existing regulations to be enforced. If the regulators don’t do their job, they should be subject to prosecution.

    “This strongly implies that personal liability of senior management prevents them from acting recklessly.” Financial risk is a much stronger motivator of behavior than any potential legal action. For a partnership, the partners had the financial risk, not unknown shareholders. The regulation we need is one that prevents the government from taking any action that protects an individual financially. Make a bad financial decision you loose.

  21. ancientone says:

    People have been writing for over a decade that our financial sector was out of control, and the meltdown of 2008 confirmed it. The same thing happened to Holland and England at the beginning of their declines into lesser economic status, so much so that our problem should look very familiar to anyone who has read history.

  22. BR,

    as before, don’t We have a more basic, systemic, problem–our utilization of a Debt-based Currency Schema?

    and, with that, isn’t that the biggest Fraud, of all?

    #10, on your list, should lose its Zero. Better, that, than our losing our Heads trying to rationalize the irrational, no?

  23. WFTA says:

    Since I have what we might term “antistroke” with members of the Texas congressional delegation, I forwarded the link to one of the biz editors with the Houston Chronicle. Hopefully you’ll get a call.

    As usual, good article.

  24. [...] are “toothless facades of what real regulation should look like,” Barry Ritholtz writes. He offers 10 questions finance reformers need to answer before passing [...]

  25. Lewis says:

    This is an outstanding summation of what’s needed. Truly worthy of broader dissemination.

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  27. philipat says:

    When did “Government of the people, for the peolpe, by the people” get amended to “Government of the Sheeple, by the Congress, for the Bankers?

    Why and when did the US lose its way so badly and can it ever get back on track again?

  28. [...] Ritholtz has a few questions for lawmakers looking to tackle a number of the causes of the near-meltdown of financial markets. It seems that [...]

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