What to Watch For In Obama’s Financial Sector Reforms

Image by J. McPherson

Here’s a partial scorecard for looking at the administration’s regulation plans next week.  What Obama should, in my opinion, of course, do, along with notes on how likely I think it is.

Is Obama going to regulate Collateralized Debt Swaps like insurance, meaning that you can’t insure something if you can’t pay it back and you have to use government mandated tables, make sure there’s insurable interest, not allow over-insurance and so on?

Will Obama do this?  He may do some of it, but I doubt he’ll do all of it.

Is he going to limit leverage properly, by which I mean not just not allowing leverage rations above 10:1, for anyone, but not allowing leverage on leverage – not allowing someone to use a leveraged asset to leverage off of.

Will Obama do this?  Maybe, maybe not.

Is he going to properly regulate securitization? By which I mean not allowing securitization of already securitized assets, full reform of the ratings agencies so they have no incentive to over-rate securities, not allowing collateralized assets to have higher ratings than the underlying securities, and not allowing financial innovation which is not approved by regulators?

Will Obama do this?  We’ll see.

Move to highly progressive taxation. If he doesn’t do this executives will always have an incentive to create bubbles because they will be able to make so much money in a few years that it doesn’t matter what happens to their companies in the long term.

Will Obama do this?  No.

Is he going to move to a financial transactions tax like the Tobin tax in which every transaction is taxed a little bit so that if the government gets stuck with the bill again, it’s been collecting cash for the job of cleaning up banker’s messes?

Will Obama do this?  Hardly.

Is he going to break up the “too big to fail” banks and other financial firms so that in the future failed financial firms can just be put into receivership and can’t hold the economy bankrupt?

Will Obama do this?  Don’t make me laugh.

Is he going to reinstitute the Glass-Steagall provisions to not allow brokers, investment banks, commercial banks and insurance companies to conglomerate?

Will Obama do this? Hardly.

Is he going to tell his Attorney General to engage in widespread fraud investigations as to whether mortgages were sold fraudulently, Collateralized Debt Obligations were created fraudulently, and Debt Swaps were sold fraudulently?

Will Obama do this?  Probably a few prosecutions, but nothing wide ranging.

Is he going to try and pass anti-usury laws?

He’ll try.  But somehow they won’t pass.

Is he going to spend as much money, or even half as much money, helping homeowners and people who  lost their jobs as has been given to banks and financial firms?

Will Obama do this?  No.

I’m hoping to be surprised on the upside here.  Of course, any regulations are only as strong as the regulators will and resources to enforce them, so the other question will be “is this all for form?”

We’ll see.