Sunday, July 4, 2010

Financial regulation not all on the same page

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The Economist

America’s Congress nears agreement on a financial-reform bill, but the final shape of the new regime is unclear. The international picture is murkier still.

It takes thick rose-tinted glasses to accept Mr Obama’s assertion that the new law will ensure an end to bank bail-outs. Moreover, there are some glaring omissions. The bill’s authors ducked big decisions on the future status of Fannie Mae and Freddie Mac, to the chagrin of Republicans, who rightly view the mortgage agencies as having been instrumental in causing the financial crisis. Nor is there a meaningful tidying-up of the tangle of federal regulatory agencies. On both counts, an excuse for doing nothing was the concern that political opposition would have jeopardised the whole bill.

Still, the document covers a lot of ground in its effort to replace the PVC in the financial plumbing with copper pipe, as one official put it. It creates a new consumer financial-protection bureau. It empowers regulators to dismantle any failing financial firm, not just banks, and pushes more of the clean-up costs onto surviving competitors, rather than the taxpayer. Those who securitise loans will have to retain more of the risk. The so-called Volcker rule will limit banks’ proprietary trading and investment in hedge funds and private equity. Derivatives markets will no longer be left to their own devices.

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