The Song and Dance of the Financial Reform Act

President Barack Obama sent an e-mail to me on May 22, titled “they backed down.” In it, he said “the House and Senate must iron out their differences before I can sign [financial reform] into law.” He continues: “But the financial industry will not give up. They have already spent more than $1m per member of Congress, lobbying on this issue. And in the coming days, they will go all in. This is their last shot to stall, weaken, or kill reform, and they are not accustomed to losing.” The e-mail then solicits a donation to the Democratic Party. Perhaps I ended up on this e-mail list after HousingWire convinced the Federal Election Commission to provide a list of all the Goldman Sachs donations to Obama’s election campaign. That is not what this column is about, but for the record, we held off on an article after contacting some on the list and finding that they acted more in the energy of the election than in the interests of the investment bank that employed them. In fact, one said that his donations were kept under $200 (he made several in one day) because he thought that it would stay “under the radar.” It didn’t, but we respect an individual’s right to privacy. The widespread calls to have the President return donations, such as those by Goldman employees, is understandable considering the signals of the administration. The above e-mail is definitely a political machine versus the financial monster scenario. Yet, through the white noise of it all we’ve forgotten what exactly is today’s enemy at the gates. With the financial reform sure to be signed into law, it marks a huge success for the administration over Wall Street. Right? Really? Let me run this example: take the financial reform package, all 1,400+ pages and its bazillion amendments, and put it to work. Imagine the Dodd bill in its current manifestation being applied in debt-crisis riddled Europe. And imagine that the bill does nothing at all to curb the most worrying of all financial instruments: the current state of sovereign debt. Would Europe be safer, better off than it is today because of it? That’s precisely the problem that underpins the current legislation effort: The financial reform makes no attempt to control the government overloading on debt, and instead is content to focus on the private market as the root of all evil. According to the Office of Thrift Supervision, foreclosures are rising again, after dipping through much of 2009. Clearly government programs supporting mortgage modifications and short sales are not working, indicating that the real reform should be at the doorsteps of HAMP and HAFA. Recent regulations such as the Restoring American Financial Stability Act signed last week, offers government assistance to unemployed borrowers. In it, $3bn in TARP funds go to loans to the unemployed. Yet the Merkley (D-OR)-Klobuchar (D-MN) amendment in the Dodd bill establishes minimum underwriting standards in which borrowers must prove they can repay certain loans (I guess with the caveat being unless they can’t, in which case the government will loan money directly). Above it all, the one thing that really needs reform may be the mechanism of reform itself. Germans balk at helping Greece, but as Europeans they still expect it needs to be done. Apply this to the United States: Would state-led bailouts of other states prove to be innovative? Would Texans accept life being a little worse in the Lone Star state in order to make the lives of distressed homeowners in California a bit better? I believe the argument would be that Texans already feel they are doing enough already. So there is something to be said for David Cameron, the new prime minister of Great Britain, declaring a period of austerity and cutting back on government spending. It tight times, there is a greater need and necessity is the mother of invention. Unfortunately, however, with current reform tackling problems in the past tense, the only real accomplishment is that the spirit of innovation in the financial markets remains crippled. If the best we’ve seen so far is re-REMICS, then there is little hope for anything exciting anytime soon. The only thing that will really come of this, in fact, is that the increased regulatory burden will only serve to crush already struggling smaller financial players. Jacob Gaffney is the editor of HousingWire and HousingWire.com. Write to him.