HAKAN TAŞÇI

Financial reforms: four years after Lehman Brothers

A subprime mortgage is a way to buy a home that you cannot otherwise afford. Hedge »»

A subprime mortgage is a way to buy a home that you cannot otherwise afford. Hedge funds are a way to escape from tax and transparency. Securitization is a way to distribute risk and increase the availability of finance to everyone.

Insurance is a way to encourage investors and funds to buy their own securities and, finally, leverage was a way for the banks to commit suicide in the early years of the previous decade. The result turned out to be the biggest mess since the Great Depression. CEOs are getting millions of dollars in bonuses for running failed banks. The lack of transparency was the root cause of the financial crisis of 2007-2009. Financial deregulation became a necessity for most of us in those years.

In the US, this common understanding of the crisis brought the biggest financial regulation reform act into law on July 21, 2010. That act -- the Dodd-Frank Wall Street Reform and Consumer Protection Act -- includes 2,300 pages of proposals from Volcker Rule to regulating hedge funds, from restructuring the insurance and investment banking sectors to transparency in the top management pay system of the multinational corporations. Two years after it was signed into law, there has not been much progress on the implementation side. Most of the failures that caused the financial crisis are still intact in the US market and Wall Street is working to use every single tool it has to block the implementation of the reforms.

In the meantime, new fraud cases in HSBC, Libor market disruptions in London, and the revelation of JPMorgan trading losses due to misconduct, also in London, are all signs of a corrupt international financial regulatory framework, and yet the US is still not ready to implement a law that was signed three years ago. Barclays alone agreed to pay a $435 million fine for the Libor scandal. JPMorgan set aside another $2 billion to cover these trading losses. And these are just the beginning. On Monday, a small bank filed a class action lawsuit against 16 large commercial banks who are market setters for Libor, and nobody knows how many more banks will get involved in this case. This is shaping up to be one of the most famous court cases of our time.

The Dodd-Frank financial reform act is nowhere close to being perfect and it will, of course, not be able to solve all the problems of the system, but it is a law that a democratic system can produce to regulate a financial market. The financial industry dominates the world economy more and more every day. Der Spiegel recently ran an analysis that said $87 trillion in bonds and stocks were purchased in 2010. A total of $601 trillion in financial derivatives and $955 trillion in foreign exchanges were traded the very same year, whereas only $63 trillion in goods and services were produced per annum back then. How come we can leave this highly leveraged market to operate in a highly unregulated manner in tax heavens and unregistered, unregulated trade areas?

The banking industry and business lobbies in the market were not ready for the implementation, of course, and they are asking for cost-benefit analyses before implementing the law, which is a very interesting debate to watch in Washington, D.C., currently. The opposition blocks the appointments the law requires, every single article is brought to court to delay the process by the interested parties and Wall Street’s non-profits, the necessary funding was not given to the financial regulators by Congress, like the Securities and Exchange Commission, to start the implementation, which is postponed and postponed, over and over again. These are all signs of poor management, yet at the same time strong invitations for the next great depression to plague the world economy.

It is always easy to say that these are all costly reforms for taxpayers and banks, but this would ensure a more stable system that will not lead to another crisis, which is apparently coming from Europe now. The US has to lead the way and strong financial regulations should be spread around the world to make it safer for individuals and corporations to invest. Instead of spending huge amounts of money fighting necessary regulations, the banks and Wall Street have to find a way to reform the very system they operate within, and be more accountable to the other stakeholders, or simply us -- the people.

2012-07-31

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Columnist:: HAKAN TAŞÇI