Obama’s Financial Reform Plan

 

Obama

Objective of this blog post is to explain in simplest possible terms Obama???s proposed financial reforms plan and its impact on the US and the rest of the world.

Need for financial reform arose from the 2008 meltdown triggered by the failure of large financial firms. These firms once considered too big to fail, engendered a systemic collapse.

Basic contours of the financial reforms plan

There are five tenets to the plan

Regulation of financial firms

Regulation of financial markets

Consumer and Investor Protection

More Tools to Government to Manage Crisis

Recommendations for the International Sphere

1. Creating Financial Services Oversight Council to coordinate among regulators

2. To enable Fed regulate firms big enough to pose risk to the entire system

3. To examine capital standards of?? banks etc

4. Creating National Bank Supervisor

5. Figure out the future of Fannie Mae and Freddie Mac

1. Regulatory framework for derivatives & asset based securities

2. More power to Fed over infrastructure that governs payments, settlement systems etc

3. Strengthen regulation of credit rating firms and reduce reliance on them

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1. Creating Consumer Financial Protection Agency for products like mortgages and credit cards

2. Power to write rules and levy fines

3. Educating consumers about finance

4. Promote access to credit in line with community investment objectives

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1. Creates mechanism that allows gvt to take over and unwind large, falling financial firms

2. Gives the Treasure the authority to decide how to fix such a falling firm

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1. About regulatory capital to improve quality, quantity and consistency of international capital

2. Implement the Group of 20 recommendations

3. Improve cooperation on supervision of globally interconnected financial firms

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Arguments for and against the financial reforms plan??

S.No.

Arguments against the reforms plan

Arguments in favor of the reforms plan

1 ???There is nothing in the plan that is going to fundamentally change the situation so that 5 or 10 years from now you don’t have a few big banks making wild bets with other people’s money and then expecting to be bailed out by the federal government??? Better regulatory control proposed. Many economists say that by raising the requirement on how much capital banks must have on hand, chances of another Lehman Brothers-t
ype failure are greatly reduced..

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2 ???Will the U.S. banking industry become less competitive? Yes, it could?????

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Better to have a steady, regulated growth rather than an unbridled one that engenders another meltdown. Moreover, 5th tenet of the plan envisages encouragement to international community to initiate similar reforms, which should bring about a level playing field.
3 Over emphasis on Consumer Protection is unwarranted. Instead, energy should be spent on addressing the main reasons for the meltdown, viz. excess credit created by the Fed, global imbalances, the unregulated shadow banking system, the concentration of systemic risk (which was abetted by the financial vehicles like the one Goldman created), and so on. Consumer protection is just one of the five tenets of the reforms plan. Consumers were taken for a ride by mortgage companies, credit card companies and other financial firms. Education to and protection of consumers is must to re-ignite confidence in the financial markets.

Impact of the Financial Plan on Rest of the World

In the globalized world economy, financial reforms in the US alone would be meaningless. There will be pressure on governments of other major economies to implement recommendations of the Group of 20. Once the reforms plan is adopted by the US, we will see adapted versions of the plan being animatedly debated across major economies in the world too.

What do you think about the financial plan and the need to have one? How will this impact the US and the world? Your comments are welcome!

References??????

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About Aman Sharma

Management Professional.
This entry was posted in America, Economy, USA and tagged , , , , , , , , , , , , . Bookmark the permalink.

5 Responses to Obama’s Financial Reform Plan

  1. ashwinkgopal says:

    Ok..two cents of mine:1. As long as there’re engineers, lawyers and MBAs there, no amount of laws would prevent their will being executed. They WILL have their way! Trust me, they were successfully able to execute a regulatory arbitrage, I believe they WILL not stop at that! Laws are just gonna be a farce…Wall St. is staffed with people from teh finest colleges, they don’t make it there for having no grey material..They are one of the world’s finest! They’ll still have their way.2. Although not highlighted here, the matter of capping of compensation and benefits would it make it unattractive for people to work there. In effect, this would up the price of money and credit. I believe the whole system was invented in order to bring down the cost of money by pumping up the circulation in the system. If further financial innovation is strictly stifled, I believe this will not be achieved in the long run. I believe the capping of compensation effectively restricts the industry itself.3. The idea of having a central clearing house for all derivative trades although seems practical, I’d like to point out that OTC derivatives themselves were very effective but were managed poorly. Traders went on to take excessive risks which eventually did not pay off. I’m not entirely sure how the central clearing is gonna make things better.4. As much as we like to blame the credit rating agencies for their oversight, we should also take into consideration that most of the tranches that gave in had adequate spread of credit and loans. Apparently, what gave in was that the imperfect correlation between the sectors. Yes they goofed up. But how much is enough blame? If we consider the government bonds being rated, u’ll find that very few of such bonds actually get AAA rating when compared to the sheer number of derivatives that used to get the rating. And even those getting lower than AAA ratings had a better performance than the derivatives rated AAA. Anyway they had to take a hard relook.Great thought provoking post! I would love to see more of these 🙂

  2. confabmac says:

    Good job Aman! There is some serious research gone in there. Good read. Looking forward to more of your blogs, Aman.

  3. Anonymous says:

    Thanks Muzakkir! Look forward to your continued support and feedback!Thanks Ashwin for some good and valid points to think over.1.
    Obama probably needs to pick up some of those ???best minds??? to execute his reform agenda! That would be quite a match to the talent at Wall Street trying to have its way!2.
    Compensation is a big issue only till the time taxpayers??? money is involved in bailouts. Once this money is returned by the firms, the issue will seize to exist.3.
    Centralized clearing house will help in better control and monitoring. 4.
    Agree with your point on the credit rating agencies. Look forward to similar such thought provoking contributions Ashwin!!

  4. vikaspgoel says:

    great aman , u explained i a lucid way . Regarding reforms , am bit skeptical about its implementation looks good on paper though. About more powers to fed – there is a thin line between regulatory oversight and intereference ….. .Point i strongly believe in is consumer education – we need informed customers as there is nothing called bad product , Financial Industry and Reg need to work together to ensure that customer know their risk appetite and products are transparent enough.

  5. Anonymous says:

    Dear Vikas, your views match with Obama’s as far as customer education is concerned. He too is emphasizing this so much that critics have accused him of neglecting other ‘more important’ causes of the melt down!Regarding regulation, the US has suffered so much that it cannot afford to not do anything about it. Obama’s plan is ambitious, and the American public opinion is with him. He needs to grab at least one vote from Republicans in a final vote in a full senate, which could happen within weeks. There is a strong possibility that his reform agenda will get through with a bit of toning down.

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