Financial Reform Plan Unveils New Bank Regulations

The reform plan, unveiled in an article in the Washington Post written by Treasury Secretary Timothy Geithner and Director of the National Economic Council Larry Summers, is likely to be the most extensive regulation of Corporate America since Sarbanes-Oxley.

The financial plan follows the adoption of extensive new credit card laws, measures to help consumers stop foreclosure, and the announcement of a new financial products regulator to act as a consumer protection agency regarding mortgages, mutual funds, and credit cards.

The measures of the latest financial plan would impose higher capital restrictions on banks and other financial institutions, decrease the weight given to the ratings of credit agencies in investment decisions and regulatory oversight, provide government regulation of the over-the-counter derivatives market, require banks to keep a portion of the debt they securitize as investments to ensure that they have some skin in the game, and institute a mechanism for the orderly resolution of financial institutions who have become so large that their collapse would threaten the stability of the entire system.

The details of the plan have been expected. The 30 to 1 leverage used by some investment banks, hedge funds, and other financial institutions proved too much for the system to handle in a downturn. Stock market analysts have been discussing the need for regulation of the credit default swap market for some time now. The credit rating agencies didn't serve as a warning mechanism as they maintained high ratings on some financial institutions despite their drive toward collapse. And the public's willingness to support additional bailouts after AIG, the banks, and two of the nation's largest automakers has worn thin.

While Geithner and Summers only painted the broad brush strokes the details of the plan, two things are evident from the release this morning. First, the Obama Administration has yet to engage in the type of transparency which President Barack Obama promised while a candidate. The details of the new financial reform plan were released in the Washington Post, which requires one to register to read the article if you happen to not subscribe to the newspaper. Wouldn't prominent placement on the White House website have been more appropriate?

Second, the Administration is concerned that the financial markets will not sustain the current stock market rally. They have been on the offensive lately to ensure that market rumors about government action are either fulfilled or dismissed as speculation in order to sustain positive economic news and prevent stock investors from worrying that another shoe is about to drop.

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