On April 13, 2011, the PERMANENT SUBCOMMITTEE ON INVESTIGATIONS in the US Senate released a report called WALL STREET AND THE FINANCIAL CRISIS: Anatomy of a Financial Collapse (pdf).
It is a massive report with plenty of damning evidence, implicating Goldman Sachs and Duetche Bank among others. The net of blame is cast wide, with good reason, citing failures of OTS regulators and the rating agencies.
I haven't had time to dig into too many details, but I read the overview and the 19 recommendations for reform included in the summary. The recommendations are broken into 4 areas, High Risk Lending, Regulatory Failures, Inflated Credit Ratings, and Investment Bank Abuses.
My initial reaction is that all of the recommendations are good and would improve the financial system, but none address one of the root causes identified in the collapse. No provision is made to dismantle Too Big to Fail institutions. There is a suggestion to make banks hold higher reserves against high risk investments, but nothing to address size and scope issues of TBTF.
A second glaring omission, I believe, is a better way to incentivize rating agencies. Instead of the issuer paying the agency, I think a much better model is for investors to pay the agency for an honest opinion. Kind of a consumer reports for financial investments. The Senate report suggests that the SEC rate the rating agencies on their accuracy, but this seems like a poorly thought out half-measure to me.
If any of the suggested reforms are enacted, it will be an improvement, but I believe it will leave the system vulnerable to a similar kind of collapse in the not too distant future.
No comments:
Post a Comment