Insights & Advice


Rewriting the Rules of Wall Street

You can’t open a newspaper or watch television this week without hearing something about the coming legislative battle to reform our financial system. If you didn’t know the name of the chairman of the Senate Banking Committee before now, you will certainly get to know Christopher Dodd hence forward.

In my opinion it promises to be a whole lot of smoke and precious little fire. His proposals cast a wide net and would inject government intervention into areas as diverse as shareholder control of a company’s compensation to a super council that would supposedly be able to identify risks to the economic system and prod various agencies to take action before a crisis unfolds.

The scope of the proposal has republicans howling over this additional encroachment on the private sector, especially now, on the eve of the long-debated Obama public health care reform, that could be voted on as early as this weekend. Some political experts believe that the two legislative initiatives are linked. If health care passes, then the chances of the passage of a financial reform bill increases substantially.

Some of the highlights of the bill include the power by the Federal Reserve to oversee bank holding companies with more than $50 billion in assets, the right to seize and break up large failing financial companies, the mandatory government registration of hedge funds, SEC authority to re-write shareholder proxy rights and a new consumer protection division within the Fed.

My belief is that whatever passes will be watered down and immaterial to the next crisis anyway. Believe me, sub-prime lending will not be the cause of the next financial meltdown. It will come out of left field and be upon us before we realize what is happening. It is the nature of the beast and legislating past mistakes won’t be much help but it might help with the subsequent fallout.

One of the greatest areas of contention is this new consumer agency that would allow the Fed to write new rules governing the way companies offer financial products from brokerage and money management to credit cards and writing mortgages. It would govern all banks with over $10 billion in assets and some nonbank lenders as well. Opponents argue that it is unnecessary (read: we’ll lose too much money). Wall Street is pulling out all the stops to kill or water down this bill and by all indications, it appears they are succeeding.

Take for example, some consumer-oriented initiatives that are near and dear to me, such as forcing brokers to put their client’s interest above their own or their company. Another proposal would require so-called financial planners and consultants to be certified in that field rather than to simply add the title to their business cards.

Over the last ten years, Wall Street has spent millions attempting to transform the image of their brokers without changing their purpose. A broker’s job is simple: bring in commissions and fees. If they don’t, they’re fired and there is nothing wrong with that. However, that is not the message we receive. Brokers are now called .financial planners, wealth managers or financial consultants. The new rules would simply require those who wear those titles to be accountable to their clients first or otherwise go back to calling themselves what they are—brokers.

Alas, early reports indicate that any proposal that would seriously impact the financial services industry will be relegated to “study” status. This is an old political ploy that gets the legislator off the hook while ensuring that political contributions from the financial services sector continue to flow into his campaign war chest. It works like this; anything that the financial lobby feels would threaten their bottom-line or would cost too much to implement, but might be too popular with the voting public to kill outright, is assigned to a committee for “study”. This authority to study may include any number of issues. The study may be included in the final bill and passed. But because it is in study, it can’t be debated until the results are presented. Here’s the rub.

Most study findings are usually delayed for two, three or more years on purpose. In the meantime, both the politicians and the lobbies are betting the crisis will pass, voter attention will turn to something else and the legislation will go no where. In this case, the Senate and/or House would refer these issues to the Security and Exchange Committee for study.

What they don’t say is that the SEC has been studying these same issues for over a decade now and know all there is to know about what needs to be changed in this area and why. They have already suggested these very same proposals to correct these inequities several times and their study results have been ignored.

These are chronic problems and yet, year after year, the consumer continues to be bilked by the financial services industry. So to me it means that you, the individual investor, is on their own. If you don’t want to continue being victimized then it is your responsibility to do your homework and do it now. Don’t wait for the government to do it because they won’t.

Posted in Portfolio Advice, The Retired Advisor