One Step Closer

Last night, the US Senate voted in favor for the Restoring American Financial Stability Act of 2010. This has certainly been a long time in coming and, while important, it is just another step towards a major restructuring of the financial regulatory system in the US. The Act will certainly change as the Senate works with the House over the next several weeks to reconcile differences in the two versions of the bill.  Also, at nearly 1,500 pages in length, the interpretation and implementation of the Act's provisions will be fraught with debate. Finally, the Act does not address many of the major factors that led to the financial crisis of 2008 as The Economist points out below.

Financial reform is coming to America. On May 20th, after more than three weeks of often rancorous debate, the Senate approved the biggest overhaul of the financial system since the Great Depression, by 59 votes to 39. Its bill must now be reconciled with one passed by the House of Representatives in December. The result will be Barack Obama’s second big legislative victory of the year, after the passage of health-care reform in March.

As with most bills, this one has its share of pork and irrelevant provisions, including one requiring buyers of Congolese minerals to prove that the money they hand over is not being used to fund militant groups. But there is much meat at its heart. The bill would beef up the system for monitoring systemic risks. It would empower the Federal Deposit Insurance Corporation to wind down failing financial giants, imposing losses on creditors as well as shareholders. It would create an independent consumer financial-protection bureau. And it would toughen up oversight of derivatives, requiring most contracts to be channelled through clearing houses and traded on exchanges or exchange-like platforms.

Could this bill have prevented the crisis? Not by itself. Some of the most important reforms are outside its purview. Toughened-up capital and liquidity standards for banks will be hammered out by regulators from around the world in Basel. The Obama administration’s proposed tax on big banks will likely be advanced in different legislation. One glaring omission from the Senate and House bills is a plan to deal with Fannie Mae and Freddie Mac, the giant, accident-prone mortgage agencies now under government conservatorship.

As has been discussed on this blog for the past year and a half, change is certainly coming and only the companies that are well prepared will prosper during this unprecedented period of change.  Having a strong and resilient enterprise risk management program is critical and Wheelhouse Advisors can help.  To learn more, visit www.WheelhouseAdvisors.com.