Wall Street Reforms: Small Change

This week, legislators will come together to write a final bill on financial legislation, despite an outcry on the dearth of scope and depth in current reform proposals
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 to 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.

The following appears to be the view on US Financial reform from the Chinese Business Magazine, Caixin Online. “Appears to be” because the story is written by Bob Dowling, former Business Week editor for Caixin, and it has not been translated for the Chinese Language edition. But it does appear with a whole series of five articles on Budgetary Reform in China which are being featured in the Chinese edition. So think of it as a Chinese elites view on America’s Financial Reforms – or how much financial room does China have to maneuver.