Finreg...Huh?

This past week Congress passed the most sweeping financial regulatory reform since the 1930’s. Because I tend to be a tad verbose in my opinions, numerous folks have asked me what I thought about “finreg” (shorthand designation for financial regulations). Given that I have a hard time balancing a checkbook, I quote Sergeant Shultz with an emphatic “I know nothing…I hear nothing!”

That being said, here is what I know. In September of 2008, the world financial system was hours away from total collapse. There literally was a run on the bank. Not from ordinary people, but from other banks that scrambled to cover all of those ingenious collateralized instruments in their portfolios as the weight of debt collapsed the system. It was scary. What was even more disconcerting was the lack of understanding of the problem by many of our national leaders. Notwithstanding, whether in spite of their actions or because of their actions, these folks managed to stop the bleeding and we survived…barely!

There were two roots to the problem. The first was the rescission of the Glass Steagall Act passed in 1933 in response to the Great Depression. This separated retail banks (the ones you and I use) from investment banks (the ones that underwrite stock issues and trade bonds). Bill Clinton repealed this as one of his last acts in office. In fairness to Clinton, he repealed it because it made our financial institution non-competitive with other international banking entities; but it opened up the abuse floodgates to those kinds of instruments that the law was intended to prevent. It only took nine years for the poison to kill the system.

The second were abuses at Fannie Mae and Freddie Mac in the issuing and trading of mortgages to folks who couldn’t afford them. This was a direct result of governmental policy fueled by both parties. Bush believed in an ownership society…and Barney Frank said "Amen" to that. We were off the races as home loans were given to anyone who could almost spell their name and had ten bucks in their pocket.

I am old fashioned. I believe in old fashion values when it comes to modern finance. If you want to buy a home, put 20% down and get a responsible appraisal as to the value of the real estate.

And if a bank issues a mortgage, the bank should carry the paper…not resell it. That way, they will be double sure as to whom they are loaning money.

If you want to buy a credit default swap (an insurance policy insuring a bond), you should have an insurable interest in the bond. I can’t buy a life insurance policy on a stranger betting he is going to die. I shouldn’t be allowed to buy a default policy on a bond owned by stranger hoping there is a default on the bond. It’s the same thing. Buying a life insurance policy on a stranger could hasten the stranger’s death, accidentally that is!! Same with a bond insurance policy. The person holding the policy may try to force a default on the bond to collect the insurance…accidentally that is!! And that's what really happened!!!!

No naked short selling. That means I sell a stock that I don’t own betting I will be able to buy the stock cheaper when I have to actually produce the certificate. It used to be the broker handling the sale would loan stock to people to do this. That still happens, but people now do it with no access to the stock, which causes the stock to fall in price.

Reinstate Glass-Steagall. I don’t want the bank that is giving me my mortgage and holding my money to be selling a CDI or CDS or any other alphabet security to Denmark…putting me, my money, and my home at risk.

Now some of the above sounds simple, and some of the above is complicated for many folks including myself. I will guaranty you this, finreg does nothing to address any of the above issues. So what is in those 2400 pages of new law and regulations? To quote Nancy Pelosi, we simply will have to pass the bill to see what's in it. And I don’t think we are going to like what we see.