This morning, we learned of a huge compromise in regulatory reform. The expectation was that no one was happy with the bill, but the politicians, who all get to go home to the voters and say “Well, at least we passed something.”

Overall, I give this a C minus: There are simply too many Fs to give them a much higher grade. Let’s look at what was passed and grade each section of reform:

TOO BIG TO FAIL:  Grade: F

The new regulation does not directly address either the repeal of Glass Steagall or TBTF. The crisis legacy is a financial services sector that is highly concentrated with dramatically reduced competition. The six largest financial firms — combined assets: $9.4 trillion — will still dominate the industry.  Too-Big-to-Fail remains the law of the land.

MORTGAGE UNDERWRITING STANDARDS: Grade A

Establishes new minimum underwriting standards for mortgages. No more no doc, NINJA, or Liar loans. Lenders must verify income, credit history and job status. Would ban payments to brokers for steering borrowers to high-priced loans. Of all the regulatory changes passed today, this seems to be the only one that, if in place a decade ago, would have prevented (or at least dramatically reduced) the crisis.

NEW REGULATORY AUTHORITY:  Grade:  C+

Gives federal regulators new authority to seize and break up large troubled financial firms without taxpayer bailouts; creates a sector rescue fund from banks with > $50B in assets. The time to assess this fee is before a crisis, not after — when banks need every penny of capital.

LEVERAGE:  Grade: F

Inexplicably, all of the new regulations fail to reduce leverage rules today .

FINANCIAL STABILITY COUNCIL:  Grade:  B-

10-member Financial Stability Oversight Council to address system-wide risks to stability, with the power to break up financial firms.  Oh, and about that leverage thingie? Directs them to look into it.

Question: Why not address leverage NOW, instead of kicking it down the road? Is Congress really THAT cowardly?

CREDIT RATING AGENCIES: Grade:  F

Sets up a quasi-government entity to address conflicts of interest. Allow investors to sue credit-rating agencies. Establishes new SEC oversight office. Retains Oligopoly; Fails to open ratings to more competition. Considering that the ratings agencies were the prime enablers of the crisis, this failure is shameful.

DERIVATIVES:  Grade B+

Moves most derivatives to exchanges, routed through clearinghouses,e etc.  Customized swaps remain OTC, but have reporting requirements. New capital, margin, reporting, record-keeping and business conduct rules for firms that deal in derivatives. Failed to overturn CFMA.

VOLCKER RULE: Grade A-

Curbs propriety trading by FDIC insured depository institution. Would not have rpevented this crisis, but addresses the moral hazard of banks in the future due to the bailout.

CORPORATE PAY: Grade F

Give shareholders a non-binding vote on executive pay. No clawback provisions. Does not address imposing liability on management for excess risk taking, corporate collapse or taxpayers bailouts.

FEDERAL PRE-EMPTION OF STATE BANKING RULES: Grade C+

Overturns OCC tool John Dugan Federal pre-emption of state regulations. states to impose their own stricter consumer protection laws on national banks. National banks can seek, and will likely receive exemptions from state laws, undercutting this entire law.

DEPOSIT INSURANCE: Grade B-

Permanently increases FDIC for banks, thrifts and credit unions to $250,000. Fly int he ointment: Congress failed to fund this, although the FDIC will be covered by taxpayers if and when they run out of cash . . .

CONSUMER AGENCY: Grade D+

The new Consumer Financial Protection Bureau is a half decent idea, but the exemption for Auto Dealers — the typical family’s 2nd biggest purchase is a car — is unconscionable.  Putting the agency inside the Federal Reserve is beyond idiotic.

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.

43 Responses to “Grading Financial Regulatory Reform”

  1. The Curmudgeon says:

    Bet you lunch at a deli of your choosing that nothing of this will prevent or even forestall the next financial system calamity, coming to a theater near you, my guess the opening will be sometime around the latter half of 2012.

  2. lillith says:

    I saw the screaming headlines on other sites and waited for your measured comments. As it develops, I’d like more on this.

  3. Mike Radigan says:

    Barry Ritholtz said, “Good suggestions, all. I hope someone in the White House pays attention.”

    The above was the final paragraph in Bailout Nation. Barry, please send them a copy.

    I just finished reading this book and it should be required reading for all pols. I would disagree with one thing, however. I do believe they practice self regulation in their best interests. What I disagree with is recognizing who they and their are. The assumption was that they and their referred to companies when in reality they and their refer to the company execs. They acted in their own best interest at the expense of their companies’.

  4. [...] Giving a grade to financial reform.  (Big Picture) [...]

  5. cswake says:

    “Bet you lunch at a deli of your choosing that nothing of this will prevent or even forestall the next financial system calamity, coming to a theater near you, my guess the opening will be sometime around the latter half of 2012.”

    I’d take your bet one step further and say that the remainder of the content in the 2000 page bill is so corrupt that it will incrementally make things worse in America than if the bill had not existed.

  6. Tarkus says:

    “DEPOSIT INSURANCE: Grade B-

    Permanently increases FDIC for banks, thrifts and credit unions to $250,000. Fly int he ointment: Congress failed to fund this, although the FDIC will be covered by taxpayers if and when they run out of cash . . .”

    So that means…if the bank owes you money, the gov’t will tax you to pay you?

  7. Reformed Broker says:

    Let’s Not Allow Our Largest Donors To Embarrass Us Again Act of 2010.
    http://www.thereformedbroker.com/2010/06/25/financial-reform-bill-is-like-watching-an-r-rated-movie-on-tnt/

  8. [...] Grading Financial Regulatory Reform – Barry Ritholtz [...]

  9. dsawy says:

    If it didn’t address leverage, the ratings agencies and CFMA, they’ve done nothing to prevent the next panic. Everything else is window dressing to plump up their already over-inflated egos.

    In response to Barry’s rhetorical question: “Is Congress really THAT cowardly?”

    No, they’re just that well bought and paid for.

  10. The Curmudgeon says:

    Indeed Tarkus. The FDIC ensures that a) banks will play fast and loose with your money, and b) they won’t be made to pay for their inevitable malfeasance.

    If everything is insured, then, in the long run, nothing is.

    The fact nothing at all real has happened to reform the inherent moral hazards and conflicts of interest in the financial system means we stay on the Gradual Decline to oblivion.

  11. DL says:

    On the corporate pay issue…

    In case of a taxpayer bailout, a clawback provision should kick in AUTOMATICALLY.

    There’s no excuse for any other policy.

  12. Chief Tomahawk says:

    Great, more oversight panels to be dumbed down with political hacks…

  13. AHodge says:

    Agree its generally a piddle

    on DERIVATIVES heres a really simple reform. make the two equal and opposite sides of a derivative (thats what they are) price the same. Counterparts are so not the same now. The gap explains most of what the desperately uninformed call opaque. Every sell sider and regulator i talk to including europeans (except Plosser) immediately get this, and regulators know they could check this. Its idiotically simple. Its emporers clothes when pointed out. But do not see any action from them yet. Grade D

    NARROW BANKING its a good idea and early days. Ultimately may need to say what it is—rather than what its not. Current law will likely break down, be unenforceable. Might it be discount windows and deposit guarantees only for payment system and corp loans held on books? Grade C-

  14. call me ahab says:

    The “Consumer Financial Protection Bureau”

    what a GREAT idea!!!!! Did I say great- I meant AWESOME!!!!

    best we look after the “small” people-

    obviously brainless and unable to make “demanding” decisions- hopefully everyone will be assigned a government appointed financial industry ombudsman to read the fine print and hold their hand if necessary-

    BR you give me good laugh sometimes

  15. hardaway says:

    This is one of your best posts ever. Incisive, clean, and informative. I’m going to spread it as widely as I can:-)

  16. Nic says:

    Very good post.
    There is absolutely nothing in here that is going to encourage investors to get back into the market.
    On top of that Skilling is about to walk, and the public sees that absolutely no one has been held accountable for the recent financial crisis.
    What a joke.

  17. Mannwich says:

    Totally agree, DL. Any “profits” made that turn out to not be profits need to be paid back or this is all a complete farce.

  18. ashpelham2 says:

    I know that some would like to see specific names and specific firms be held accountable for this mess we are in. Indeed, some of that might be appropriate.

    But I’d suggest to anyone who will listen that much of the problems we have economy-wise are due to a collective national addiction to credit, and our unwillingness as a people to look past our own greed. Much of what was done during the past 30 years was done in the name of “free markets” and “capitalism”, when those ideologies can so easily be confused with greed and selfishness.

    No one likes to hear that, but it’s a root cause.

  19. call me ahab says:

    . . .and regarding the Volcker rule-

    I wonder how long before the FDIC insured banks of GS and MS ( a joke in itself) will give up their charters?

    surprised I hadn’t heard somehthing w/i seconds of the bill passing

  20. flipspiceland says:

    @Mike Radigan

    Yes, a thousand times. Using “impersonal pronouns” like them, their, and him, her, is a huge fault in all that is written about who actually makes the decisions that cause calamities.

    All too often the corporate shield is substituted for the humanoids that should be named at every opportunity. I don’t know if it’s the legal department of the publications, blogs, and other media reporters that are responsible or if it’s done intentionally by the authors to avoid reprisal, but the
    naming of names, prominently, is far more effective in assessing who caused this mess.

    It is ludicrous to write that “Goldman Sachs” did such and such. Nothing could be further from the truth.

  21. Mannwich says:

    Bingo flip. Corporations are made of living breathing PEOPLE, who do these deeds under the corporate umbrella that allows them to skirt responsibility and accountability for their personal actions. That must change for anything to change, meaning people need to go to jail when they commit a corporate crime or be fired when they are incompetent and very nearly bring down the world with their actions.

  22. call me ahab says:

    ashpelham-

    I was all over that idea last night on these very threads- we bring on our own problems-

    show me a politician who stands up and says we need to suffer and sacrifice- endure pain now for a brighter future later- and I will show you a man looking for a job after the next elections

  23. Nic says:

    @ ashpelham2
    I agree with you about collective responsibility for the debt we got into but what Joe public sees are that the Fed, big banks, big bank shareholders, credit ratings agencies, mortgage brokers, property appraisers, etc are not paying for the cleanup and all get to keep what they made whilst Joe Public is losing his job, his 401K, his home equity is being destroyed and his taxes are being used to bail out the fat cats.

  24. Tarkus says:

    call me ahab

    People would be willing to sacrifice I think – but not to be robbed by the same personages all over again later.

  25. Mannwich says:

    Exactly Nic and Tarkus. The tone is always set at the TOP. Is it any wonder the masses are following suit with similar entitlement behavior?

  26. ACS says:

    “Is Congress really THAT cowardly?”

    Short answer: yes.
    Long answer: well not so much cowardly as BOUGHT OFF!

  27. FrancoisT says:

    The preamble of this bill should read:

    “We, The Corporations, in order to….”

  28. constantnormal says:

    Nicely done, BR — although one can see that you’re an easy grader, weighing these subject areas as if they were of equal importance, when in fact they are not.

    While there can be reasonable dissent about the relative importance of these items, I think that it is possible to separate them out into things that are ABSOLUTELY CRITICAL in attempting to avoid another meltdown (I’m not at all certain that it is possible to guarantee stability, regardless of the rules), and those that only amount to icing on the cake.

    In any course of study, there are key elements that if one does not master them, one should not receive a passing grade. Leverage, TBTF, and the problem of incompetent-to-the-point-of-ridicule Credit Ratings Agencies certainly belong in the ABSOLUTELY CRITICAL set. And the Congress has failed to address each of these areas.

    A gentleman’s C-? Too generous by far, BR. Are you angling for a position at a ratings agency? ;-)

  29. AGG says:

    Alpine slope “level playing field” or why this shit never ends.

    http://articles.moneycentral.msn.com/Investing/JubaksJournal/why-banks-are-not-afraid-of-reform.aspx

    People are stupid to trust the big banks and the legislators they control. We should avoid their business. Our survival as a nation may very well depend on killing banks and their lobbying power.

  30. call me ahab says:

    Tarkus-

    my layman observation has been that one who is a sunny optimist w/ a rosy outlook will win an election over a realist w/ a more challenging view of our future every time-

    we elect those who tell us what we want to hear-

    and politicians may be afraid to do those things that are necessary because they will be out of a job-

    when is the last time you have heard someone campaign on saving SS by increasing the retirement age and using means testing? When is the last time someone stood on their soap box and said we need to be housing neutral and help the budget by eliminating the mortgage interest deduction? When is that last time someone campaigned for a gas tax?

    no-one wants to hear that nonsense- even though it may be a necessary path for this country to survive long into the future-

    no- for the person who wins it’s all about our exceptionalism and how we will always be a great nation- that’s what the people want to hear

  31. constantnormal says:

    @ahab — truthier words were never written. Your comment should be carved in stone and placed on every state capitol building and on banners at every polling place in the nation.

    Not that it would change anything — we are who we are.

  32. Mannwich says:

    Agreed, constant. Well put, ahab. I believe if enough leaders told the truth, it would be different. But I also believe there are a lot of people who still crave real leadership not more of the same self-serving bullshit, nonsense, and “rah rah” childish rhetoric.

  33. Paul Jones says:

    Thanks for telling the truth.

  34. Tarkus says:

    call me ahab

    Sacrifice for a greater good is useful only if the overall system is fundamentally sound and will put that sacrifice toward a noble purpose. When the system itself is controlled and corrupted – a game of 3-card monte that will take your sacrifice and use it to buy a luxury apartment and Ferrari and private plane – then the sacrifice is pointless.

    It is leadership and honest stewardship that directs the sacrifice of the masses to a greater good and higher goal. Without the leadership, is it any wonder that there is no desire to sacrifice?

    As Claudius says in ‘Hamlet” – “In the corrupt currents of this world. offenses gilded hand may shove-by Justice. And oft ’tis seen the wicked prize itself buys-out the law…”

  35. alfred e says:

    I think I used this one before. But it seems relevant:

    It’s easier to attract bees with honey than vinegar.

  36. [...] I cannot help but be struck by one thing in this reform bill: [...]

  37. StatArb says:

    You grade it perfectly BR .

    They get a “Incomplete ” for effort ,

    and a flawed bill as warped as the “Medical reform” sham passed a few months ago

  38. [...] Grading Financial Reform: The Big Picture [...]

  39. Rescission says:

    Hoping or believing centralized government bureaucrats can regulate, protect you is a flawed belief. This will only result in less competition, more crony capitalism. Throw the bums out.

    Let the big banks fail and make way for new, smarter and smaller ones. The same for the bailed out Auto companies. I wish we could find a leader and leaders who understand that government should look for regulations and structure that creates a framework for MORE competition rather than policing and protecting and enhancing corporate oligarchy. To take the unpopular position, the free market would have fixed this problem on its own had weak, stupid companies been allowed to die off. Long term we would see an amazing growth in entrepreneurs unleashing better practices and new ideas, which now has been squashed.

  40. [...] I have a ton of work to get through today, but here are the readings that I found interesting . . . • Grading Financial Regulatory Reform (TBP) [...]

  41. [...] financial reform: Barry Ritholtz goes through the bill and provides his grade for each major component. Overall, he gives IT a C-. In all, he hands out [...]

  42. bruerr says:

    The new Consumer Financial Protection Bureau is a half decent idea, but … Putting the agency inside the Federal Reserve is beyond idiotic.

    Mr. President Obama sir, I hope you are listening to wise economists and people with their feet on the ground.

    There is a poison pill put into this reform bill by your republican enemies. They are hoping you do not notice. It is like a toxic “asset” and they want you to be one of the “fully qualified” buyers at one of the Pension funds, who bought one. …

    If you sign this bill and put the Fed in charge of consumer protection, all scorn for the Fed will be transferred to you. Do you not see this is your friends at Peterson trying to sabotage your Presidency? They are paying for its inclusion hoping you do not catch on due to you being a first termer. And when you sign, it … They will all be watching on their televisions and home theaters, saying “bye bye.”

    All your enemies want you to be hoodwinked. They will think it is a marvelous feather in their cap they put that in front of you and like a bag of bolts, you walked right up and signed your own one term limit.

    If you sign it, i will be saying the same thing… Sayoonara

    It is a trick Mr. Obama.

    The Fed has no business being a consumer protection agency. They have already shown their hand during a crisis. It is the color of AIG money. That should be enough for you to take them out of any “consumer protection” roll.

    If the AIG tip-off is enough reason for you Mr. President, here are several more reasons: They care more for bank executives than the other 99 percent. They defy perfectly good Federal Court Orders to make disclosure (require people to go through Court to get info, and after a considerable amount of effort, then still withhold it for perverse amounts of time). They do not uphold Standing Law¹ and instead ridicule it and provide model of flaunting the law (substantial executive-level mistake). They fuss over new regulation when the old laws were sufficient.¹ They failed to adequately stop flow of dividends at large banks during a time of impending economic peril. This action could have been done suddenly and with dramatic flare to call upon shareholders to judge executives, instead of calling in the American Consumer to judge bank executives; while knowing many American Consumers do not have a voting rights over executives, and therefore have no clout (goes to potential mockery of the working class).

    Let Facts be known in a candid world Sir. Hope you’re still in touch.
    ¹ http://www.ritholtz.com/blog/2009/06/obamas-regulatory-proposals-smarter-or-just-more/#comment-184398

  43. [...] Grading Financial Regulatory Reform (June 25th, 2010) [...]