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What FinReg does

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The financial regulation bill looks like it's on track to pass this week, and Henry Paulson is generally pleased. “We would have loved to have something like this for Lehman Brothers," he told Andrew Ross Sorkin. "There’s no doubt about it.”

I actually think that's the right way to think about the bill. If there's any problem it solves, it's the regulatory confusion and weakness we saw amidst the last financial crisis. That's different than the regulatory confusion and weakness that allowed the last financial crisis to happen, of course.

The bill does that in two ways: The first is providing regulators with a lot more information. By placing derivatives on exchanges and clearinghouses, by creating a systemic risk council, by forcing banks to provide "funeral plans" that explain how to unwind them in the event of a failure, by creating an Office of Financial Research to collect daily data and provide quick analysis on transactions, there's much less chance that a financial crisis would leave regulators totally confused about what's going on, and who owes what to whom.

The second way is by providing regulators with more power to oversee all financially important institutions, rather than just banks, and giving them clear legal authority and a predictable method for executing a failing institution. That's the resolution authority you're always hearing about, and though the number of sign-offs it requires before it can be used (Fed, Treasury, FDIC, and three bankruptcy judges) seems so onerous that it'll make early implementation impossible, once everyone agrees that a firm needs to be brought down, it'll be much easier to do.

Photo credit: By Marvin Joseph/The Washington Post

By Ezra Klein  |  July 13, 2010; 2:39 PM ET
Categories:  Financial Regulation  
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Comments

When all the risk is successfully bred out of the system, when incompetence and failure are not allowed to run their own courses, but instead are played out in political terms, the economy will slowly grind to a complete halt.

Posted by: msoja | July 13, 2010 2:53 PM | Report abuse

Does the financial regulation bill also create an Office of Minority Men and Women Inclusion, which purports to give an unelected official the authority to determine when a company is "inclusive" enough?

Posted by: rmgregory | July 13, 2010 2:55 PM | Report abuse

Ezra,
If you haven't seen this yet, perhaps it would make a good lunch break item:

RSA Animate - David Harvey: Crises of Capitalism

http://www.youtube.com/watch?v=qOP2V_np2c0

You know things are screwed when the Marxists start making sense.

Posted by: jnc4p | July 13, 2010 3:38 PM | Report abuse

Senator Gregg has gone around town saying the finreg bill will result in a severe contraction of credit. Have you done a post analyzing that claim? In his many media appearances, he also seems to go back and forth with two competing narratives depending on his mood and/or audience, sometimes saying: (1) the Democrats are bashing Wall Street through finreg and it will hurt the economy; and other times saying: (2) the bill is a toothless waste that will be loved by Wall Steet, but if we ignore the tedious, cynical posturing that boths sides do and focus on his specific criticisms, what, if anything, in the bill would cause a "severe" credit contraction?

Posted by: wswest | July 14, 2010 1:33 AM | Report abuse

Congress, in 2008, created a new "resolution" regime for Fannie/Freddie that looks a lot like the one in this bill. That didn't protect taxpayers - so why should we expect this bill to do so? It still allows bailouts. And expanding deposit insurance - don't any of these people read the academic literature? That's a huge moral hazard.

Posted by: iculus | July 14, 2010 10:15 AM | Report abuse

Congress, in 2008, created a new "resolution" regime for Fannie/Freddie that looks a lot like the one in this bill. That didn't protect taxpayers - so why should we expect this bill to do so? It still allows bailouts. And expanding deposit insurance - don't any of these people read the academic literature? That's a huge moral hazard.

Posted by: iculus | July 14, 2010 10:15 AM | Report abuse

Congress, in 2008, created a new "resolution" regime for Fannie/Freddie that looks a lot like the one in this bill. That didn't protect taxpayers - so why should we expect this bill to do so? It still allows bailouts. And expanding deposit insurance - don't any of these people read the academic literature? That's a huge moral hazard.

Posted by: iculus | July 14, 2010 10:16 AM | Report abuse

Harvey Pitt, former SEC Chairman, disagrees. On the Daily Beast, he opines that FinReg is a sure-fire failure. Now who am I going to believe, the former SEC Chairman, or an Obama political operative embedded with WaPo? Hmm, tough choice.

Posted by: Posteroid | July 14, 2010 12:02 PM | Report abuse

I invite Mr. Klein to read the WSJ July 14th review and opinion. The Uncertainty Principle. .. "In a recent note to clients, the law firm of Davis Polk & Wardwell needed more than 150 pages merely to summarize the bureaucratic ecosystem created by Dodd-Frank. As the nearby table shows, the lawyers estimate that the law will require no fewer than 243 new formal rule-makings by 11 different federal agencies." ........... and then: " As the Davis Polk wonks put it, "U.S. financial regulators will enter an intense period of rule-making over the next 6 to 18 months, and market participants will need to make strategic decisions in an environment of regulatory uncertainty." The lawyers needed 26 pages of flow charts merely to illustrate the timeline for implementing the new rules, the last of which will be phased in after a mere 12 years.

Because Congress abdicated its responsibility to set clear rules of the road, the lobbying will only grow more intense after the President signs Dodd-Frank. According to the attorneys, "The legislation is complicated and contains substantial ambiguities, many of which will not be resolved until regulations are adopted, and even then, many questions are likely to persist that will require consultation with the staffs of the various agencies involved." And Mr. Klein signs off in four wordsmith paragraphs of little than pablum for who??????????

Posted by: ZebZ | July 14, 2010 12:12 PM | Report abuse

We received letter from our Representative Barbara Lee on the day FinReg passed through the Senate, stating that there is nothing her office will be able to help us. Clearly, FinReg means nothing to her. What a joke about rebuilding the integrity of our financial system and protect American general public!

We filed complaints against Wells Fargo 's appraisal and mortgage loan fraud with Office of Comptroller of Currency, Barbara Lee, Dianne Feinstein, Barbara Boxer and Harry Reid in 2006. In 2006, with overwhelming evidence, we were told that Wells Fargo did not commit appraisal and mortgage fraud against us.

We spent 10 months from June, 2006 to March, 2007, trying to convince everyone that Wells Fargo made the mortgage loan to us based on hugely inflated appraisal. No one cared or bother to listen.

In March, 2007, after clearly indifference from Wells Fargo and our regulatory agencies, we filed the lawsuit against Wells Fargo and continued to follow up with OCC and senators. After we filed the lawsuit, OCC and all senators told us that they can't make any comments on our complaints since it is in litigation.

The irony is that should Senators made sure OCC do its regulatory job, we don't even need to file lawsuit. On top of it, should OCC take action upon our alerts two years before the housing crisis, how many homes could have been saved. How many wrongful foreclosure could have been prevented?

All our senators voted for FinReg, but none of them cared about homeowners beig defrauded by Wells Fargo and have no intention to protect homeowners like us or future victims or hold Wells Fargo accountable for defrauding homeowners.

Wells Fargo committed prosecutable crime against us. We lost our home. Something is wrong with this picture. Here are the facts.

1. it is illegal for Wells Fargo to make mortgage loan to us based on hugely inflated appraisal.

Fact: - Wells Fargo's fraudulent appraisal valued our home at $718,000
- Wells Fargo's own review appraisal valued our home at $475,000
- Nevada Attorney General's office suspended the appraiser's license for committing appraisal fraud on our home.
- Nevada Appraiser Licensing Board mandated the appraiser to complete appraisal fraud course before regaining his real estate appraiser license.
- Nevada Revised Statue NRS 205.372 states that it's category C felony to make mortgage loans based on fraudulent appraisal.
- Cases of Attorney General's indictments against attorneys, loan brokers for teaming up make fraudulent loans to defraud homeowners.

2. it is illegal for Wells Fargo to wrongfully foreclose our home based on fraudulent appraisal and mortgage loan.

You can find all the facts on our website. www.wellsfargomortgagefraud.com

Posted by: WellsFargoFraudVictim | July 19, 2010 2:48 PM | Report abuse

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