Wall Street Reforms: Small Change

As legislation finalizes on the financial and banking industry, efforts are finally beginning to reach a boiling point and prominent critics have come out saying the Chris Dodd-Barney Frank brand of reform will produce nothing but steam. The bill reads as too weak stop big banks from getting bailouts and, as giving too much power to bureaucrats to write rules for consumer protection.

The newest critic to call the reform bill hollow is a heavyweight. Richard Fisher, president of the Dallas Federal Reserve Bank says the new law would do nothing to stop another too-big-to-fail bank crisis. In a speech on June 3, titled, "Financial Reform or Financial Dementia," Fisher said the reform bills won't prevent another giant bank from getting bailed out because it doesn't deal with bank size. Americans will spend some US$ 800 billion on taxpayers through a special government fund. With that money is being paid up, nothing seems to have incensed voters more than saving large banks and Wall Street firms who then went on to make near-record profits last year and pay their managements large bonuses.

Fisher said the fundamental problem with the reform legislation is that there are no limits on bank size, and as a result, the banking industry has tilted in favor of "bigness." At a conference in May, Fisher said the efficient size for a large bank ought to be capped at US$ 100 billion in assets.

Paul Volcker, the former Federal Reserve Chairman and also a large bank critic said US$ 100 billion in assets is a good top limit, and Federal Reserve President Thomas Hoenig of Kansas City has also endorsed the US$ 100 billion cap.

Volker has also advocated separating large banks from trading derivative securities – or securities that are designed for hedging but that in practice create what Volcker calls "casino banks," who trade to purely speculate on price. The legislative reform would make many but not all derivative securities trade through exchanges so that investors could see actual prices, but would not exclude big banks from playing in the market.

Fisher outlined a chance to limit bank size if the politicians come up short. Under the new law, regulators like the Federal Reserve Bank might still be able to limit bank size and financial institutions that look threatening by making them sell-off operations or assets. Fisher added that regulators should use the authority to reduce the interconnectedness of risk exposure in potential losses.

Coinciding with the regulatory reforms is the ongoing Financial Crisis Inquiry Commission (FCIC), which held a press conference to say it was legally ordering Goldman Sachs to turn over records important to the commission. The commission, as quoted by wire reports, has termed the actions of Goldman Sachs, "abysmal," "unacceptable," "egregious," and "disturbing."

The panel's Vice Chairman, a former Californian named, Bill Thomas, said the delay on Goldman Sachs' behalf to produce the subpoenaed documents appeared to be part of a defense strategy, adding sardonically, "Seems to me they have more to cover up than we thought." The FCIC's pincer movement comes just weeks after the U.S. Securities and Exchange Commission filed civil charges against Goldman Sachs for fraud. If Goldman Sachs were found to be involved in criminal actions by the Justice Department, a criminal securities fraud conviction could force the company to go out of business.

The reform and commission meetings suggest that Washington is growing sensitive to increasing public distrust of anything government is doing. A few weeks ago, for example, the bets were lined toward Goldman Sachs finding a quiet exit by settling, with the possibility of a large fine. Now, with the weight of mounting public expectations, there may be more pressure to play a heavy hand and go to trial in an attempt to peg down details behind the Goldman derivatives. The summer political heat is just beginning.

Robert Dowling is the former managing editor of Business Week International and editorial advisor to Caixin Media