Wide Range of Wall Street Reform Critics

(April 22) -- Not all the criticism of the Democrats' plan for new financial industry regulations is coming from Capitol Hill Republicans.

As President Barack Obama demands action, commentators from across the political spectrum are calling for changes in Senate Banking Committee Chairman Chris Dodd's bill. (Click here for summary in PDF.) Their complaints fall into three broad categories.

It Won't Really End 'Too Big to Fail' and Bailouts

The initial attack, led by Senate Minority Leader Mitch McConnell, claimed that Dodd's legislation would institutionalize "endless taxpayer-funded bailouts." The bill's supporters argued the opposite. The source of the dispute is a provision to make the largest banks contribute a total of $50 billion to a fund regulators would use to cover the cost of closing failing financial firms.

"This is not a bailout. It's more like an organized execution -- management will be sacked, owners will lose their money -- but it will still cost money to carry out, money that will be gained through fees on banks," Matthew Yglesias wrote in an AOL News opinion piece. Yglesias, a fellow at the Center for American Progress Action Fund, cited GOP senators, including Tennessee's Bob Corker, who helped come up with the "resolution authority" idea.

Corker insisted it's "absolutely not constructed to be a bailout fund," but he called McConnell's criticism "fair," according to Time, because "vast numbers of loopholes" could thwart the resolution authority plan.

In another AOL News op-ed Thursday, Heritage Foundation senior research fellow James Gattuso focused on the proposed Financial Stability Oversight Council, which would regulate companies deemed "systemically important."

"By singling out firms whose failure would present a danger to the financial system, regulators would in effect be telling investors that the government won't allow them to go under," Gattuso contended. "These firms would enjoy an implicit federal guarantee, protected from the full consequences of risk-taking. 'Too big to fail' would be institutionalized, not ended."

The American Enterprise Institute's Peter J. Wallison, a former White House and Treasury Department lawyer, made the same case -- arguing that if the failure of the largest financial institutions could, in theory, "trigger a systemic breakdown," it means that "they are, by definition, too big to fail."

Obama can't deliver on his promise of the strongest financial protections for consumers without ending bailouts that allow banks to remain "too big to fail," said Nicole Gelinas, a Manhattan Institute senior fellow. She noted in the New York Post that the bill says failed firms must repay taxpayer money "unless the United States agrees or consents otherwise" and that the government can bail out the firms' bondholders if "necessary or appropriate to minimize losses."

Despite the president's assurances, Gelinas predicted, "bailouts will still come when 'necessary and appropriate.' And bailouts will be 'necessary and appropriate' during the next crisis -- a crisis created by this very expectation."

It's Not Tough Enough

Even Sen. Corker, who's spent a good deal of time defending parts of the bill, laughed at the notion that this regulatory reform would hurt Wall Street.

"What regulation does is help the big guys and hurt the small guys," Corker declared on MSNBC this week. "When this bill passes, the only thing that's gonna happen is the large firms that exist are gonna get larger."

The "common sense" solution that's missing from Dodd's bill, according to critics such as Michael Silverstein, is to make "too-big-to-fail financial institutions less big."

"A complete financial reform would involve doing many things. The absolute best way to start, however, is to break up the big Wall Street banks that have only gotten bigger since they very nearly destroyed the world economy awhile back," wrote Silverstein, Wall Street columnist for The Moderate Voice.

Others have longer, more detailed lists of improvements they want in the legislation. Many of them include greater transparency -- especially in the trading and reporting of derivatives, the complex financial instruments at the center of the last crisis.

Former Labor Secretary Robert Reich said the bill must also impose a $100 billion cap on assets of the largest banks and completely separate commercial banks from investment banks. Reich was among 36 "former regulators, left-leaning economists and Democratic insiders" who sent a list of eight demands to Senate leaders this week, The Huffington Post's Sam Stein reported.

One of the most comprehensive lists was assembled by Nomi Prins, a senior fellow at the Demos public policy center who once worked for Goldman Sachs. In an AlterNet blog post, Prins said -- among other flaws -- the bill won't make the biggest banks any smaller, reduce the economic danger from "rampant, overleveraged trading activities," prevent the creation of new toxic assets or contain systemic risk.

"None of this is reform. We're actually better off with no legislation than we are with this vapid 1,336-page opus -- the false sense of security it creates will only encourage greater risk-taking," Prins warned. "If the Dodd bill passes in its current version, we absolutely, unequivocally will see another system-wide crash that will invoke greater hardships on the country than the last collapse."

It's Aimed at the Wrong Target

In addition to critics of the Dodd bill's specifics, there are those who believe it's wrong to cast Wall Street as the chief villain in this drama. They say government's role in the financial mess is being ignored.

The real problem is Congress, argued George Mason University economics professor Tyler Cowen. He said lawmakers have to be "more intelligent and more accountable" because there's no "once and for all" regulatory solution.

"It is like a chess game whereby the private sector eventually finds a way around most of the binding regulations," Cowen explained in a New York Times Room for Debate forum about Wall Street reform. "In the current debate, there's far too much attention paid to how we are reshuffling the regulatory boxes and what restrictions we are putting down on paper. It's the daily reality of regulation that matters and right now the U.S. Congress simply isn't up to the job."

"The reality is that the economic meltdown began with federal government policies which kept interest rates artificially low and forced banks to abandon traditional lending practices in the name of home ownership for all. These policies started under the Clinton administration, and continued under the Bush administration," Cornell Law professor William A. Jacobsen wrote on his Le-gal In-sur-rec-tion blog.

"I have spent most of my professional life suing Wall Street firms, so I have no sympathy for the many bad practices which have ripped off investors," Jacobsen added. "But just because Wall Street has engaged in some bad practices does not mean Wall Street is responsible for everything that goes wrong in the economy."

True/Slant's Matt Taibbi also looked beyond the bill's specifics to focus on government's responsibility to "actually enforce existing laws."

"While it is true that the near-complete absence of a regulatory structure to oversee derivatives trading is problematic, there is a lot the government could have done still, if it had wanted to, to prevent catastrophes like AIG and Lehman Brothers," Taibbi said.