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What happened to financial reform?

John Dimsdale Dec 31, 2009

What happened to financial reform?

John Dimsdale Dec 31, 2009


Kai Ryssdal: I don’t know if you remember this but back in February and March, before the health care fight really got going, financial reform was the hot topic in Washington. The Dow was down at 6,000 and the near-collapse of the banking system was still fresh in everybody’s mind. That’s obviously not the case now, but a reform bill is slowly making its way through Congress. To talk about the prospects for substantive reform of the financial industry, or lack thereof, we’ve got our Washington bureau chief John Dimsdale on the line. Hiya John.


Ryssdal: This crisis has given us, and this is kind of a strong word, but it’s given us an opportunity to reshape the rules for the financial industry. Have we done that?

DIMSDALE: Not yet, but not for want of trying. We’ve been through hours and hours of hearings, reams of testimony. There were hundreds of proposals. Remember even before the crisis hit full force, the Bush administration was proposing a comprehensive restructuring of the system. That was back in March of ’08. And then President Obama’s team sent Congress its ideas. The House got to work first, thanks to some stubborn persistence by Finance Committee Chairman Barney Frank. And after six separate committees drafted parts of a bill that ultimately runs 1,280 pages, it passed the House earlier this month.

Ryssdal: And what did we the taxpayers get for all that effort?

DIMSDALE: Well, it’s a bill that is comprehensive with a little something for everyone. It provides for unwinding banks that are too big to fail. It requires banks to set aside more money to cover when their investments go bad. It sets up a consumer protection agency, regulates derivatives, tries to reduce those conflicts of interests for credit-rating agencies that continue to give triple-A ratings to those toxic investments. But to find out whether those reforms are on the right track, I checked with Joseph Grundfest. He’s a former SEC commissioner, now a professor at Stanford.

JOSEPH GRUNDFEST: I’m afraid that I would give Congress and the government a F – and that’s only because I’m an easy grader.

DIMSDALE: Grundfest says that all the reforms are missing a fundamental flaw in the regulatory structure. That the government remains the insurer of last resort in the financial system, and that’s encouraging risky behavior by lenders and investors.

GRUNDFEST: And if the government is going to be in the insurance business, it has to act like a rational insurer. If you’re a more dangerous driver you pay more for your insurance. If you’re a financial institution, and you engage in riskier behavior, you should also be required to pay more.

DIMSDALE: Now Grundfest says none of the reforms so far change these insurance subsidies to the financial industry, which means taxpayers could still end up bailing the system out.

Ryssdal: Which brings us to the $64,000 question, right, John, which is how do you get the government out of this thing that they’ve gotten themselves into of being the insurer of last resort?

DIMSDALE: Congress is pulled in so many different directions by powerful interests that have negotiated subsidies for worthy-sounding goals. Taxbreaks for mortgages, for example, are a huge subsidy for the housing industry. Or favorable home loans, small business loans, in hurricane-prone areas or earthquake zones, Grundfest says those subsidies allow industries to take risks and tap taxpayers when things go bad.

Ryssdal: So you mentioned the House earlier, John. We go now to the Senate. Chris Dodd has a bill that is going on there. Is anything substantive going to happen in 2010 or are we going to be back in health-care land again?

DIMSDALE: Well, I think that there will be something after health-reform is dealt with. Financial regulatory reform is next on the agenda. Senator Dodd’s bill is criticized for too much government intrusion in private markets. It consolidates the four bank regulators into one. So it’s unclear whether the bill has enough support to get out of committee, much less the floor. Then the House and Senate have to resolve their differences. So there’s been a lot of wheel-spinning, not a whole lot of traction. But I think that might be because health-care kind of made the road a little slippery.

Ryssdal: All right, well, we’ll see, I guess, it’ll be an interesting year. John Dimsdale in Washington for us. Thank you, John.

DIMSDALE: Thanks, Kai.

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