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President Obama pushes for financial reform


President Obama pushes for financial reform
President Obama Returns to Wall Street to Push for Financial Reform
On April 22nd  the President addressed the nation again at Manhattan's Cooper Union. He said a number of things, but generally was not complementary to the financial services industry as a whole.  
No one wants to defend "bad banks" or other financial entities (like investment banks) that have behaved badly.  To suggest that's what's going on as part the OBA's "furious effort" to block or kill his idea of financial reform is misleading at best. 
And let's be clear about something else:  ICBA President Cam Fine was quoted in the Atlanta-Journal Constitution on April 22nd:  Here's what appeared in the article written by Bob Keefe and Paul Donsky:
“Basically the opponents of the [legislation] are trying to use the good name and reputation of community banks as a shield to hide their true agenda, which is to advance the causes of Wall Street banks," Fine said.
That's just not true.  
I don't know where Cam's getting his information, but I promise you – the Oklahoma Bankers Association is not a shill for Wall Street or anyone else.  And neither are Oklahoma Senators Jim Inhofe and Tom Coburn.
Reasonable people can disagree about legislative language, but the name-calling and innuendo are out of bounds.  Cam should know better.
Back to what the President said. We listened to his speech and had to wonder if he has read the same bill we're wading through. The President focused his entire speech on the need to reform Wall Street – something with which virtually every Oklahoma banker would agree. 
But when we look a little closer at the language that's actually being proposed in the bill's 1,408 pages, it's not so clear nor as easy as the President would have people believe. 
Consumer Protection: As The Wall Street Journal noted in a recent editorial, this new entity “would now be housed inside the Federal Reserve, but that doesn't mean it would have adult supervision.” Amen.   
But the important point is that entities regulated by the SEC and the CFTC are, for the most part, exempted from the new consumer agency's reach.  That's right:  this new consumer protection bureau would not have any authority over the firms that brought us the Great Recession.
Rather, the ones affected are traditional community banks across the nation.  And it stung just a bit when the President said, ". . . unless your business model depends on bilking people, there is little to fear from these new rules."
Really?  Since they don't apply to the "bilkers" on Wall Street, I guess he meant that the rest of the nation's financial entities like traditional community banks are the "bilkers" who live to abuse their customers.  Sorry.  That's just not true.
What is true is that these new rules are a trial lawyer's dream, and will end up imposing new costs and obligations on your bank.  It's likely that these costs will be passed along to bank and credit union customers.  
Our point: this 1,408 page bill does not address the problems or practices the President says "duped" consumers.  It targets traditional community banks and it's wrong to say otherwise.
There's more:  the new consumer bureau resides at the Federal Reserve, but the Fed has no authority to review, comment on or otherwise oversee how this new entity operates or the rules it creates.  Nor does it have the authority to intercede on behalf of banks if proposed rules are thought to interfere with concepts of safety and soundness.  The limited 'oversight' process with respect to creating rules is laughable in terms of whether it's meaningful.  
The new consumer bureau has the power to do whatever it deems appropirate in crafting the kinds of products and services, including terms and conditions, which it would like to see offered.  And anything the bureau deems to be "abusive" can only be determined after-the-fact.
There's still more:  Title X requires every community bank to gather deposit account data for every branch, every ATM at which deposits are accepted and for every other deposit taking service facility the bank offers.  You'll also have to keep a record as to whether it's a residential or business customer, the number and dollar amounts of your customer's deposit accounts.  You'll also have to geo-code your customers by their address as to whether they are residential or business locations.  Oh, and you'll have to make this information publicly available at least once a year.    
What happens with that information, by the way?  Well, the new bureau can use it to see how well you're doing in distributing your deposit account services across income and minority census tracts, and for any other purpose it may determine is appropriate. 
There's still more: When it comes to commercial loans you'll have to ask whether the small business is "women- or minority-owned" without regard to how the application is received (in person, by phone, on your website, through a e-mail, whatever).
You'll also have to maintain a separate record of your responses to any inquiry, the applicant has a right to refuse to give you information you requested, and you can't discriminate on the basis of not receiving the requested information (Section 1072).   
You'll also have to track the following information on these kinds of loans:  
 1.   the number of the application and the date on which the application was received;
2.   the type and purpose of the loan or other credit being applied for;
3.   the amount of the credit or credit limit applied for, and the amount of the credit transaction or the credit limit approved for such applicant;
4.   the type of action taken with respect to such application, and the date of such action;
5.   the census tract in which is located the principal place of business of the small business loan applicant;
6.   the gross annual revenue of the business in the last fiscal year of the small business loan applicant preceding the date of the application;
7.   the race and ethnicity of the principal owners of the business; and
8.   any additional data that the Bureau determines would aid in fulfilling the purposes of this section. [Section 1072 (e)]
And these are just the highlights. Your bank will have to meet a whole host of regulations from a new federal agency designed to protect consumers from risky Wall Street investments that most community banks don't now and never did make in the first place. More paperwork, more expense, more hassle, more upset customers. 
Too Big to Fail:   The bill doesn't end "too-big-to-fail" as a matter of national policy, at least in the eyes of many, including us, who have read the actual language.  Some of the others who have reached this conclusion are Federal Reserve Bank of Kansas City President Tom Hoenig and Peter Wallison, the Arthur F. Burns Fellow in Financial Policy at the American Enterprise Institute for Public Policy. 
The President talked about how the FDIC is charged with resolving failed traditional banks, and the success it has had in managing that process over the past 76 years.  That's true enough.  But the FDIC has zero experience in managing institutional failures of mega-banks and large non-banking entities.  For one thing the the asset base of these giant firms is much more complex than simply analyzing a failed traditional bank's loan portfolio. 
Moreover, the Dodd bill gives federal banking regulators a significant amount of discretion in reaching judgments about which firms to regulate and how, which firms to rescue or close down, and which creditors to reward and how.  As the Wall Street Journal pointed out in a recent editorial: 
 “. . . the bill allows FDIC guarantees on corporate debt to be a 'widely available program' to any solvent banks, bank-holding companies and others. The Dodd bill also extends the FDIC's resolution authority (subject to other executive approval) beyond deposit-taking institutions to any financial company deemed to be systemically important. And it gives the FDIC the discretion to discriminate among creditors as it judges who gets paid what as part of a resolution.
“Current FDIC Chairman Sheila Bair wouldn't abuse this power, but her successors might. Recall how the White House exploited its authority under TARP to trash Chrysler's creditors and give unions a better deal. The political class can't be trusted with such unlimited power.
“The biggest banks are only too happy with this regulatory discretion because they figure they'll benefit if creditors think they are too big to fail. Their financing costs will be lower, a la Fannie Mae before the fall, and they can afford to hire the lobbyists and make the campaign contributions that can influence regulators and Congress. The smaller banks and hedge funds won't be so lucky.”
 Again, let's look at what the bill's language actually does
 1.   It creates a $50 billion resolution fund purportedly intended to “resolve” “systemically risky” institutions. How many of you believe $50 billion is even remotely enough to resolve, say, a Citibank?
2.   A 2/3 vote of the Financial Stability Oversight Council is required before a firm can be deemed “systemically risky”. The FDIC and Treasury Secretary will then be authorized to treat each of the firm's shareholders and creditors as they choose, without regard to bankruptcy law. Does that same treatment apply to traditional community banks in Oklahoma? In a word, no.
3.   Treasury and the FDIC will have the authority to grant loan guarantees to systemically risky institutions, without limitation. No Congressional authorization or appropriation is required.  Again, would your bank be treated like that if it were to fail?
4.   The Federal Reserve will have the authority to fund any “program” to assist institutions that meet the ultimate test, and will be able to accept just about anything it deems appropriate as collateral.
As former Treasury Secretary Lawrence Lindsay concluded in an April 16th Memorandum to House Minority Leader John Boehner: 
“How could any firm actually fail when all of its debt could be guaranteed by the Treasury, the Fed could print money to assist it, and just in case, there was $50 billion sitting around to reassure nervous creditors that they would be repaid regardless what contract or bankruptcy law said? Needless to say, the large Wall Street firms aren't complaining; they will permanently benefit from having lower borrowing costs thanks to these provisions, the same way Fannie Mae and Freddie Mac enjoyed implicit guarantees.”
There's a lot more that can be said, about “too-big-to-fail” and a dramatically increased regulatory burden on smaller community banks.  At this point we're hanging our hat on Senator Richard Shelby (R-AL) to negotiate a better bill with better underlying language. We'll know more on Monday, April 26, 2010 when the current bill or a compromise is brought to the Senate floor. 
Nothing will happen overnight, but the outline will be sketched clearly after Monday's vote. 
Here's our basic point in all of this:  these “reforms” have nothing to do with the financial crisis or its causes. Why then does the President insist that those who oppose this bill are really undermining “Wall Street Reform?” To be nice, that too is a pile of garbage. 
 Mr. President: we're not asking for bailouts, handouts or anything else. But let us help you go after the real problems that caused the mess. This bill – S. 3217 – does not present the solution you have said it does. And saying it's otherwise just isn't right. 


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