US Financial Overhaul Falling to Financial Industry Tactics

The NY Times ran an interesting article on how the overhaul of US financial regulation is being bogged down and not implemented.  This article confirms Simon Johnson's observation two years ago that the financial industry would deploy a number of tactics to neuter or otherwise prevent financial reform.

Nearly one year after Congress passed financial changes to rein in the banking sector, more than two dozen of the legislation’s rules are behind schedule, and no end to the wrangling over details is in sight....  

So far, 28 of the financial overhaul rule-making deadlines have been missed, according to Davis Polk, a law firm that is tracking the rules. Of the 385 new rules to be written, the law firm says, regulators have completed only 24 requirements; they were supposed to have taken 41 such actions by now.  

“There’s an attempt to kill this through delay,” said Michael Greenberger, a law professor at the University of Maryland and a former official at the Commodity Futures Trading Commission, which is in charge of writing batches of the rules. “The difference between eight or nine months and 24 months could be cataclysmic here.” 

The setbacks and resistance extend across many types of new rules, including ones to limit the debit card fees that banks can charge retailers and to require banks to retain more of the risk in certain home loans. 

But the efforts were especially apparent at a hearing last month in Washington related to derivatives. Some of the most powerful players in the derivatives market — which is closely controlled by just a small group of banks — argued that the government should allow a slow pace of changes for rewriting derivatives contracts. 

On Monday, the Treasury secretary, Timothy F. Geithner, spoke about the Dodd-Frank rules in a speech in Atlanta, warning that there were efforts by groups that oppose the reform to starve regulators of the resources they need to put new rules in place. 

“Those in the U.S. financial community who are supporting these efforts to block resources and appointments are looking for leverage over the rules still being written,” Mr. Geithner said. 

He specifically focused on derivatives rule-writing, where some financial groups have complained that European rules may differ from the new rules in the United States. He said he hoped regulators in Europe and Asia would create standardized rules to prevent a “race to the bottom.” 

Regulators in the United States overseeing the process say it is difficult to tell how many of the concerns that financial executives and their lobbyists raise are valid and which ones are exaggerated.  

The inability of the regulators to tell if a concern is even valid is the primary reason that most financial reforms are susceptible to being co-opted by the industry.

... Perhaps nowhere are the stakes higher for the megabanks than with derivatives, which insure against many different risks in the economy. Some of the Dodd-Frank rules center on increasing security and transparency in this $600 trillion market. For instance, many are related to clearinghouses, which provide a central repository for money backing those wagers. Some of the changes threaten to cut into banks’ lucrative profit margins.  

... One way that banks can delay progress is by haggling within industry associations over small turns of phrase in legal agreements. 

The banks lately have been clashing with large customers, like hedge funds, in discussions of new paperwork needed for dealing with trade rejections, situations in which derivatives trades do not go through because of client financing problems. Late last month, JPMorgan Chase was supposed to host a meeting to discuss it, but lawyers for large banks canceled the meeting at the last minute. 

This same tactic has been used by the banks when dealing with loan-level disclosure for structured finance securities.  In this case, the banks, through the industry trade groups they control, have been arguing over which data fields should be disclosed for each loan.  By making the argument on a data field by data field basis, the banks ensured a long delay in implementation.

More importantly, since the regulators do not really know which data fields are critical for analyzing structured finance securities, the banks can bias the selected data fields in their favor.

The banks, large customers say, drafted the documents in ways that favor the biggest banks because it would make it more difficult for customers to use a large number of banks for trading. 

The issue of whether new documents or rules give advantages to just a handful of banks is particularly relevant because the Justice Department and the European Commission have been investigating this market for antitrust behavior.