How Is That Financial Industry Reform Process Working Out?

Back in 2008, the following agencies of the Federal government failed to see the oncoming disaster known as a Great Recession, a recession that grew out of risky, shady, possibly illegal, and stupid financial activities of banks and other financial institutions:

• SEC
• FDIC
• HUD
• FHA
• Fannie Mae
• Freddie Mac
• Treasury Department
• Federal Reserve Board
• Senate banking committees
• Senate financial industry committees
• House Of Representatives banking committees
• House Of Representatives financial industry committees

None of these government agencies foresaw or acted to avert or minimize the impact of the recession. We all know the economic stress and pain this oversight caused just about every American.

As a result, the political class belatedly jumped into action with the Dodd-Frank Financial Industry Reform legislation. Although the horses were out of the economic gate, the politicians rushed in late to build and create new gate. As always, a dollar short and a day late.

But they did act so I guess they should get some credit for that. Unfortunately, there was not much meat on the bone of the legislation, once it was passed. The legislation was very general and non-specific and left the hard work of financial industry reform to various organizations of the executive branch.  That is where the actual government reform regulations would be written.

However, as we reported earlier this week, 75% of those regulations that should have already been written already have not made their expected deadlines  Thus, financial reform is very much work in progress, or work far behind schedule.

That may explain why the biggest financial business crash since the Great Recession, which recently happened, collapsed almost immediately, seemingly minutes before anyone realized it was going to collapse. Very reminiscent of Lehman Brothers, Bear Sterns, and others back in 2008, healthy companies one day, extinct companies the next day.

As before, no one in the list of suspects in the list above seemed to know MF Global was going over the edge. Could it be the delayed implementation of Dodd-Frank left the country and the industry no better off than three years ago? Details of the collapse were summarized in an article in the November 18, 2011 issue of The Week magazine, "Were The Rules Too Lax For MF Global?":

• Jon Corzine, former U.S. Senator, former chairman of Goldman Sachs, and former Governor of New Jersey took over MF Global last year.
• According to Daniel Wagner of the Associated Press, Corzine "set out to create a mini-Goldman Sachs but ended up creating a mini-Lehman Brothers" when MF Global collapsed.
• Not only did the company collapse, but the FBI is investigating whether or not Corzine and MF Global illegally co-mingled the firm's money with the money of the clients whose investments they were managing, with a reported $600 million of client money now missing.
• Jay Hancock writing in the Baltimore Sun called the regulators "negligent and clueless," stating MF Global made the same type of risky, irrational decisions on investments that helped cause the Great Recession.
• Francesco Guerra, writing in the Wall Street Journal, called for the formation of a "lead regulator" to replace the "crazy quilt of watchdogs" for non-bank financial institutions." Since there were at least four government regulators who were supposed to be keeping a watchful on firms like MF Global, and just like the run up to the Great Recession, none of the four saw the collapse coming until it was too late and $600 million went missing.
• The article concludes that the political class has been so busy just worrying about he handful of very large banks that they have been negligent in covering other financial institutions. I guess that Dodd -Frank reform bill was not as comprehensive as we were led to believe.
• Adam Ahmed writing in the New York Times claims some effort and potential rules were actually proposed for smaller companies like MF Global but they were thwarted by an influential opponent to these rules, the one and only Jon Corzine. The Times article claims that Corzine "personally pressed regulators to halt their plans" for this type of oversight. Corzine's argument won out, the additional oversight never took place, and now clients are potentially out $600 million.

So let's review:

1. A former member of the political class still has enough pull to get his way on lax oversight, a way that crashed a company and possibly lost hundreds of millions of client dollars of investment.
2. The rest of the current political class is so worried about only a handful of large institutions that this type of behavior goes unseen and not paid attention to until it is too late.
3. At least four government agencies are so inept, even after the lessons of the Great Recession, that they failed again to foresee a major financial collapse before it happened and ordinary American investors get screwed.
4. Risky Wall Street behavior still goes on despite the lessons learned from the Great Recession.

Or were no lessons learned? According to Alexandra Alper, writing for Reuters, even if the the Dodd-Frank legislation was on schedule for implementation, as opposed to being 75% behind schedule, it would not have made any difference in preventing an MF Global collapse since the main parts of the law would not have applied and MF Global was too small for the Federal Reserve to care about. Little solace to those who lost money within the $600 million mystery.

You get tired of saying it, but this is just another example of why Step 39 from "Love My Country, Loathe My Government" is so important. Step 39 would impose term limits on every Federal government politician. This is just another example of how our sitting politicians are just so ineffective in everything they do and everything they touch. There is no follow through to make sure laws get implemented in the proper way, no one ever seems to be accountable in the Federal government bureaucracy or the political class.

Tragedies and collapses are not seen ahead of time. Situations fall through gigantic cracks. Disasters are repeated over and over, costing American taxpayers and investors dearly. Even when they do try to fix something, e.g. Dodd-Frank, the effort is not comprehensive, not strategic, not effective, and in this case, not even completed on time.

And worse of all, the political class continues to take care of itself and its own members, in this case allowing Corzine to override some basic safeguards that may have prevented another financial institution collapse. Personal enrichment of themselves vs. doing the right thing for America. Sound familiar? Seems we have been writing about this disturbing trait often lately.

Thus, the answer to the question posed by today's title, "how is that financial industry reform process working out" Answer: not very well, at the cost of upwards of $600 million.



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