FM: It seems like the SEC keeps getting more authority after their failures, do you see this continuing?
BI: I don’t understand how the SEC, which is one of the primary culprits in this crisis, gets left off the hook. The SEC clearly needs to be reformed as an agency. It needs a new mission statement; it needs a real shakeup. It is a lawyer-dominated agency, so they need a different makeup of personnel and they need a new mission. They think as long as you disclose it, it is ok, they need to be more of a regulator. It used to be a proud agency that had quite the track record but they have lost their way.
FM: You have noted that many of these decisions have become politicized. How do we get away from that?
BI: I have never seen the bank regulatory climate or the crisis management process nearly as politicized as it is right now. The Treasury is a political agency, it is not an independent agency and it is the big winner in this. It has almost all the power. For decades, the Fed and Treasury have been locked in battle with the Fed fighting for its independence, so the Treasury doesn’t dominate it. It looks to me like that battle has largely been lost by the Fed and the Treasury has become the dominant agency and I do not think that is healthy for our economic system or our financial system and it makes us unique in the world.
I can’t think of another country where the Treasury is so dominant if these things become law. Even without these becoming law, the Treasury in this last crisis clearly was dominant and they made a mess of it.
FM: Congress is busy reconciling the two bills. What should be taken out of it and what needs to be put in the legislation?
BI: Probably the most serious problem is the Collins amendment. I am much more concerned with what is not in the bill, what the bill doesn’t do. The bill does not provide any oversight over FASB, which is desperately needed, the bill does not address the serious problems at the SEC, and the Bill does not create a systemic risk council that is independent. It turns it over to the Treasury and the Fed and other agencies that it is supposed to be overseeing. The bill does not enhance, in any way, a broken and badly politicized regulatory system and the bill does not do anything to address the Fannie and Freddie problems. Those are major deficiencies; I don’t know how you can call it a reform bill if it does address those things.
The Collins amendment says that Trusts preferred stock is no longer counter as tier one capital and while I have no problem with the direction that is heading, I think that is good, you can’t do it now, it is effective immediately and would destroy $130 billion in tier one capital. That is a lot of lending capacity they are killing. If you want to go there, then phase that in. You can’t lay that on the system immediately.
They also have to restore the crisis management powers. This is something in the bill that I find highly objectionable. If this becomes law they really have tied the hands of the FED and the FDIC to handle a crisis or a problem short of a crisis, to head it off by stepping in and intervening. The really gutted the authority of the Fed to lend and the FDIC to backstop institutions that are important and try and bring a situation into control before it creates a crisis. That is very unwise. If the Fed and FDIC’s hands are tied then in the next crisis, it will get out of control for sure because they won’t be able to do anything to stop it. Then we would be back to asking the taxpayers for a lot of money or nationalizing the system. They also need to address the concentration in the system. Our five largest banks control over 50% of the financial assets and banking asserts. That is just unhealthy to have that much concentration.
FM: Break them up?
BI: Some say break them up but I have another idea on how to address it. This idea came along late in the process but they are in such a hurry to get something passed before the election. I think [it] is a terrible idea to rush this in before the election because [everyone] is under such political pressure because they are all embarrassed by their TARP votes. They are trying to bang on the Wall Street banks and make them pay for the error of their ways. Lets have a reasonable debate and lets do reform after the election.