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2010-05-24 09:30:44
By DANIEL WAGNER and STEVENSON JACOBS, AP Business Writers Daniel Wagner And
Stevenson Jacobs, Ap Business Writers Sun May 23, 10:21 pm ET
WASHINGTON The most sweeping changes to financial rules since the Great
Depression might not prevent another crisis.
Experts say the financial regulatory bill approved by the Senate last week, and
a similar bill that passed the House, include loopholes and gaps that weaken
their impact. Many provisions depend on the effectiveness of regulatory
agencies the same agencies that failed to foresee the last crisis.
A big reason for the bill's limitations is that banks and industry groups
lobbied against rules they felt would reduce their profit-making ability.
The financial sector's influence in Washington reflects its enormous donations
and lobbying. Over the past two decades, it's given $2.3 billion to federal
candidates. It's outdone every other industry in lobbying since 1998, having
spent $3.8 billion.
Here's how the bills, which must be reconciled and approved by the full
Congress, might address some causes of the financial crisis, and some of the
bill's perceived weaknesses:
Derivatives:
The problem:
Banks used these investments to make speculative bets that helped inflate the
housing market. Once home values crashed, these derivatives and related side
bets magnified the financial crisis.
The value of a derivative depends on the price of an underlying investment.
Examples include corn futures, stock options and mortgages.
The solution: The legislation would, among other things, require that many
derivatives be traded on exchanges, as stocks are, so they are visible to
regulators.
Why it might not work:
Business groups led by the U.S. Chamber of Commerce and the Business Roundtable
lobbied successfully to dilute the rules. They argued that exchange-trading
would make it too costly for companies other than banks to use derivatives.
The bill exempts companies that use derivatives to reduce the risk of
fluctuations in interest rates and commodity prices. Experts say this exception
could be exploited. Companies could, for example, find ways to combine
traditional business activities with purely financial investment through the
use of derivatives.
Weak regulation of banks and other financial firms:
The problem:
Before the crisis, some regulators failed to recognize risks taken by banks
they were supposed to oversee. Some companies sidestepped oversight entirely.
The solution: The legislation would eliminate one regulator, the Office of
Thrift Supervision, criticized for lax oversight. And it would tighten
oversight of large financial institutions that could threaten the system.
Why it might not work:
Smaller banks could still choose their own regulator. These banks would likely
seek out the most lenient oversight.
Key advocates for that loophole were the Independent Community Bankers of
America and the American Bankers Association.
The Senate voted against capping how much banks can bet relative to their
reserves. It left that up to the same regulators who failed to properly monitor
banks' risk-taking before the crisis.
One reason the system of regulators escaped more drastic changes, lawmakers
say, was that regulators lobbied to protect their agencies' authorities. For
example, Federal Deposit Insurance Corp. Chairman Sheila Bair fought changes
that could limit the FDIC's authority.
Too-big-to-fail institutions:
The problem:
After bad bets on housing and other risky investments caused the collapse of
Lehman Brothers, the government pumped billions into the largest banks to keep
the system afloat.
The solution: The overhaul would let regulators close banks whose collapse
could threaten the system.
Why it might not work:
The Senate bill lets regulators decide whether to protect the creditors of
failed banks. Creditors might take a too-rosy view of a banks' finances if they
feel they have nothing to lose in a failure. They might still lend to weak
banks and raise the cost of eventually closing them down.
The bill does little to prevent big banks from getting bigger, meaning
taxpayers might have to intervene again. A Democratic amendment to limit the
size of banks was rejected amid opposition from banks such as Goldman Sachs.
Consumer protection
The problem:
Risky lending to homeowners who couldn't pay helped inflate the housing bubble.
Some of the worst offenders were nonbank lenders.
The solution: A new consumer protection watchdog would police banking products
and ban those deemed too risky no matter who offers them.
Why it might not work:
The consumer watchdog's authority would be confined to firms with at least $10
billion in assets. Thousands of community banks wouldn't be supervised by the
agency. Nor would many nonbanks.
The Chamber of Commerce has led the push to limit the reach of the consumer
agency. The payday lending industry and the National Automobile Dealers
Association have joined the effort.
Credit rating agencies
The problem:
Credit rating agencies gave safe ratings to high-risk mortgage investments that
later imploded.
The solution: The Senate bill would end banks' ability to choose the agencies
that rate their investments. An independent board, appointed by regulators,
would choose the rating firms.
Why it might not work:
The big firms Standard & Poor's, Moody's Corp. and Fitch Ratings would
still be paid by the banks whose products they rate. That means the ratings
could be influenced by those banks.
Others have questioned whether regulators should choose which agencies rate
which financial products. Regulators themselves missed warning signs leading to
the crisis.
____
Jacobs reported from New York. Associated Press Writer Jim Drinkard contributed
to this report.