President Obama’s ambitious overhaul of the financial regulatory system would create a new layer of consumer protections, expand the Washington regulatory establishment and change the way America’s banks do business. The goal is to provide more stability to the financial system, which would benefit most Americans. But such abrupt change would also cause some casualties. Here’s who stands to lose under Obama’s reforms:
Big Money. The nation’s biggest financial firms—those deemed “too big to fail,” like Citigroup, AIG and Bank of America—would get enhanced treatment under the Obama plan. Since the failure of just one such institution could trigger a global meltdown—the way AIG’s collapse nearly did last September—they’d have to keep more capital on reserve than smaller firms, disclose more information, endure more supervision from regulators and submit to quick corrective action if a crisis occurred. The danger is that government handcuffs could turn TBTF firms into quasi-nationalized monoliths that can’t keep up with more nimble competitors. Of course, that’s what AIG, Citigroup, and some other big bailout recipients have already become. The real aim could be a set of rules so stringent that the biggest firms decide it’s better to break themselves up than submit to superregulation.
Overpaid CEOs. The glory days seem to be over for chief executives getting multimillion-dollar bonuses based on a couple quarters’ worth of good numbers. Or even a couple quarters’ worth of lousy numbers. Proposed “say on pay” rules would require public companies to hold shareholder votes on the pay packages top executives get. Other proposed rules would require bonuses to be held in escrow for a few years, so the CEO’s pay can be better linked to the company’s performance. We’ll miss hearing about those golden commodes.
Fannie Mae and Freddie Mac. The two mortgage giants were taken over by the government last year, as they approached insolvency. They now back most of the mortgages issued in the United States, but the future of these lightning-rod agencies seems cloudy at best. The Obama administration has begun a review process to figure out what to do with them. One option is to nurse them back to health, then spin them off as public companies. But given their tattered history, that seems unlikely. Other options Obama has put on the table: slowly winding them down and liquidating them; incorporating their activities into some other federal agency; running them like public utilities, with regulated fees and profit margins; and dissolving them into a bunch of smaller companies.
S&Ls. The local savings and loan might be a nostalgic throwback to the days of George Bailey, but this breed of bank—also known as “thrifts”—may lose its niche. S&Ls, which typically offer limited services like savings accounts and mortgages, had an unwitting role in the financial meltdown: Some huge conglomerates, like AIG, bought a thrift or two, because it meant they could be overseen by soft-shelled regulators like the Office of Thrift Supervision, which has more lenient rules than the FDIC or the Federal Reserve. That’s one reason Obama wants to abolish the OTS, and turn thrifts into ordinary banks. The only change their customers may notice is that interest rates become a bit less generous, since the banks would have to meet stricter standards that would cost them a bit more.
Standard & Poor’s and Moody’s. These private-sector credit rating agencies played an insidious role in the housing bust, giving top ratings to mortgage-backed securities that contained lots of subprime mortgages destined to blow up. Their stamp of approval made “toxic assets” seem much safer than they were, drawing investors who never would have put their money into mortgages if they knew the true risk. S&P and Moody’s, the top two rating agencies, have revised their rating procedures, but Obama’s proposal dinged them anyway, stating that “regulators should reduce their use of credit ratings in regulations and supervisory practices, wherever possible.” The official rebuke indicates that these once venerable firms may need to make sweeping changes to get back in the government’s good graces.
Shadow banks. The housing boom was fueled by thousands of mortgage brokers that weren’t banks, and therefore evaded regulation by federal or state overlords. Those lenders were often the ones that issued the most egregious mortgages to borrowers who shouldn’t have qualified, couldn’t afford the payments and didn’t understand the risks. Obama’s plan would bring just about any kind of lender under the feds’ purview. And the proposed Consumer Financial Protection Agency would have the authority to issue new rules for debt counselors, mortgage advisors, and anybody else aiming to make a buck off unsuspecting borrowers. Fresh hucksters will no doubt materialize, but when they do, newly energized financial sheriffs may form a posse instead of looking the other way.
Consumers. Sure, there will be a lot of new rules designed to protect you and me, but if the government’s got our back, why bother looking out for ourselves? Financial illiteracy has been a major contributor to the economic meltdown, and for some people, more government responsibility will lead to less personal responsibility. Buyer beware, whether the government’s on the case or not.