Scott Brown: Inadvertent hero of banking reform?
If Scott Brown's election was very bad for health-care reform, it looks like it was very good for financial reform. Desperate to add a new issue into the news cycle and give Democrats something they can actually fight for, the White House is set to propose a raft of regulatory reforms that go far beyond anything that Congress has suggested so far, or that the White House has hinted might be in the offing.
The new rules would do two things: Limit what banks can do and how big they can get. The early reports aren't so clear on how the administration will handle size (some imply it's just the bank tax while others focus on vague, new regulatory powers), but the new limits seem pretty defined: Banks that have both a commercial banking division (where they take your money) and a proprietary trading division (where they invest in things like subprime mortgages to increase their money) will no longer be able to use the cash from their commercial accounts to finance the trades in their proprietary accounts.
This makes a lot of sense. No one worries about their commercial deposits because they're insured by the government. That means the lenders (me, say) don't worry about what the borrowers (the bank) are doing with that money. Conversely, if my bank account weren't insured, and I heard Wachovia was running a hedge fund funded by my deposits, I'd be out of there in two seconds. This amounts to a large subsidy from the government to the bank's trading arms, and it should stop.
The idea appears to have come from Paul Volcker, who most people thought had been largely sidelined in the administration. This shows, I guess, the utility of keeping a few more radical folks around. When the politics changed and the administration suddenly wanted to go a lot further than the political constraints would suggest, they had someone who'd been drawing up proposals along those lines for some time.
That said, I'd like to see some hard numbers on how many banks this will actually affect, and how much it will affect them. Goldman Sachs got itself a commercial charter at the depths of the crisis because that allowed it to take money from the Federal Reserve. But it doesn't actually have a serious commercial loans division, so it's not clear how this would change its behavior at all. And this wouldn't have done anything to stop Lehman, which also had very little to do with commercial banking.
Photo credit: Lauren Victoria Burke/AP.
January 21, 2010; 11:21 AM ET
Categories: Financial Regulation
Save & Share: Previous: Obama offers the case against paring the bill back
Next: Live chat today
Posted by: fuse | January 21, 2010 11:37 AM | Report abuse
Posted by: simmonslcsw | January 21, 2010 11:41 AM | Report abuse
Posted by: Ronnie76 | January 21, 2010 11:42 AM | Report abuse
Posted by: kovachs | January 21, 2010 11:44 AM | Report abuse
Posted by: bupkiss | January 21, 2010 11:46 AM | Report abuse
Posted by: rwclayton7 | January 21, 2010 11:48 AM | Report abuse
Posted by: scott1959 | January 21, 2010 11:49 AM | Report abuse
Posted by: srw3 | January 21, 2010 12:06 PM | Report abuse
Posted by: simmonslcsw | January 21, 2010 12:25 PM | Report abuse
Posted by: etdean1 | January 21, 2010 1:50 PM | Report abuse
Posted by: staticvars | January 21, 2010 1:57 PM | Report abuse
Posted by: onewing1 | January 21, 2010 2:04 PM | Report abuse
Posted by: Middleston | January 21, 2010 2:47 PM | Report abuse
Posted by: sameolddoc | January 21, 2010 3:27 PM | Report abuse
Posted by: Kevin_Willis | January 21, 2010 4:12 PM | Report abuse
Posted by: robjen116 | January 23, 2010 12:17 PM | Report abuse
The comments to this entry are closed.