What now: Writing the laws of financial reform

Bethany McLean, co-author of "All the Devils are Here" with Joe Nocera of the New York Times.


Kai Ryssdal: We're four days into 2011, but the truth of it is that a lot of what's going to happen in the economy this year is going to be flavored by what happened last year. One of the big debates of 2010 was financial reform. How to do it? Who should be in charge? What should be regulated? President Obama signed the Dodd-Frank bill last July but a lot of the specifics have yet to be ironed out.

So as we try to imagine what might be in the news this year as part of our series "What Now?" commentator and Vanity Fair writer Bethany McLean has this warning about financial reform.

Bethany McLean: At the increasingly congested intersection of finance and politics, the New Year is going to bring the same challenge as the old year: How to write the actual laws that will make or break the Dodd-Frank financial reform legislation.

Right now, the landscape is murky. We've heard incessant whining from bank CEOs and hedge fund managers that regulators and the White House just don't understand their issues. The leaders of the non-partisan Committee on Capital Markets Regulation, which is dedicated to improving regulation, recently complained that the rule-writing so far was "seriously flawed" and was "risking lengthy court challenges and poor rules that will damage our financial system..."

Yet financiers clearly do have friends. The incoming chairman of the powerful House Financial Services Committee, Spencer Bachus, just uttered words that are as conciliatory as it is possible to be: "My view is that Washington and the regulators are there to serve the banks."

The one thing that's clear is that it's all bad news, because while collusion between the financial and the political class isn't healthy, nor is antagonism. In the years preceding the financial crisis, we saw Bachus's worldview at work. Politicians turned a blind eye to the dangerous expansion of credit, even though they knew it was more about putting money in banks' pockets than enabling homeownership. They failed to impose any oversight on derivatives, or do anything to limit the skyrocketing leverage at big financial firms, because the banks argued this would stymie American competitiveness. Forget whether this was bad for consumers: It was also, in the end, bad for banks.

But poorly written rules are just as dangerous. That's because financiers fight back by finding loopholes that may be more deadly than the original sin the rules were supposed to prevent. Money moves like water, and it pours into the fissures that open up between the rules with astounding speed. Which means the rules have to be tough, but they also have to be smart. That takes healthy doses of both skepticism and respect from politicians, regulators and financiers.

Ryssdal: Bethany McLean is the co-author of a new book on the roots of the financial crisis called "All The Devils Are Here." We've got interviews with Bethany and her co-author Joe Nocera on our book blog.

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Ms. McLean said what I have been saying for years: The government is an extension of the banking system and all the feed-good laws that they create are easily overcome by the smarmy, high-powered lawyers who do nothing but spend their time looking for new loopholes. They are always 50 paces ahead of the regulators. I thought we had a shot when we elected an MBA to the office (I know, I know), but even the current Democratic president is easily bamboolzed by the banks. Is anyone looking out for us, the taxpayers?

Bethany McLean's comments are spot on, but they leave out an important aspect of this issue: judges. Federal judges have altered the meaning of rules and statutes through their rulings, generally favoring less regulation in recent years. No matter how clearly a rule may be written, it can become convoluted through the rulings judges make to favor one or another party in a particular case.

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