Saying the White House will fight the bank lobby's effort to weaken Wall Street reform, Deputy Treasury Secretary Neil Wolin declared yesterday that "the administration will oppose efforts to provide exemptions for certain kinds of lenders."
He pointed to regulatory reform approved by the House in December, for example, which allows auto dealers to escape oversight of the consumer protection agency and said the administration wants that exemption stripped out of the legislation.
Wolin also said that the administration is watching closely the talks on regulation of derivatives that are going on between Democratic Senator Blanche Lincoln of Arkansas and Republican Sen. Saxby Chambliss of Alabama. He said that while President Obama is "open to compromise," he wants to ensure that the two lawmakers do not increase the scope of exemptions for lenders or create any other loopholes that financial firms can exploit.
Regulation of derivatives is one of the most important but least understood pieces of finance reform. Derivatives are essentially bets on the prices of other assets, like stocks and bonds. The credit default swaps that brought AIG to Washington with hat in hand are an excellent example of the problem causing potential of this financial instrument. AIG's derivatives portfolio was largely a bet on bonds backed by mortgages. When the mortgages sunk, the bet left AIG on the hook for billions in losses.
Consumer Watchdog's Judy Dugan warned Congress yesterday against thinking it is safe to give up strong derivatives reform in devising a compromise.
She rejected thinking that says some financial matters are too complicated for the public to understand, making them safe to exclude from the list of things to be regulated.
"Consumers wouldn't care?" Dugan asked. "How about if derivatives trading is explained by the example of energy commodity trading - the wild speculation that drove the price of oil to the stratosphere in 2008, and gasoline to $4 a gallon? Show me an American who doesn't understand $4 gasoline and what energy prices did to the economy.
"Foreclosure, job loss and the price at the pump; billion dollar bonuses at Goldman Sachs: consumers understand those all too well. And they're all linked to derivatives trading."
The need for strong government regulation of the finance industry continues to emerge from numerous quarters.
Elizabeth Warren, head of Congressional oversight for the Troubled Assets Relief Program and a backer of both a consumer protection agency and reforms to curb financial gimmickry, said yesterday that the economy still faces major disasters.
"By the end of the year, about half of all commercial real estate loans are gonna be underwater, and they are connected to the midsize banks," she said to the press. "We now have 2,998 banks that have these dangerous concentrations of commercial real estate lending."
The problem, she said, has at least two serious implications for the economy. The first is that since those banks have already been rocked by the subprime crisis, their stability is a real issue.
The second is that the midsize banks which will be most affected "are the banks that are supposed to be doing small business lending, and when they're getting a sock in the teeth over commercial real estate loans, they're not in a position to be lending to small business," Warren says. Many are counting on those businesses, observers note, to start hiring some of the millions of unemployed.
Prominent economists, independent experts, regulators and even bankers themselves are coming out also for regulatory reforms that would limit not just the activities, but the size of banks. They are demanding that the so-called "too big to fail" banks be broken up.
Economists in this category include the Nobel prize winners, Joseph Stiglitz and Ed Prescott. Former Labor Secretary Robert Reich, Dean Baker and Neil Wolin are among the long list of other individuals calling for regulations that would limit the size of financial institutions. Limits on size have also been endorsed by the Bank of International Settlements, which functions as the central bank for the world's central banks.