Humpty Dumpty sat on the Wall (Street),
Humpty Dumpty had a great fall.
W, Congress and the Senate weighed in,
But couldn’t put Humpty together again.
In my first article of 2009, I had hoped to talk about all the wonderful and creative opportunities for GonzoBankers in the year ahead. My hopes were seriously high – and why shouldn’t they be? If the Arizona Cardinals, yes the Cardinals, can make it to the Super Bowl, then anything is possible!
Across the state of Arizona I see Cardinals banners proclaiming, “We Believe.” It is easy for Cardinals fans to adopt a “we believe” stance; with a known competitor, the Cardinals can focus their game plan on a single entity.
In parallel, when it comes to U.S. financial institutions (primarily the large ones), the majority of Americans no longer believe. At the same time, the financial institutions have no idea what to plan for in the coming year/s. With the events of the past year, rest assured GonzoBankers, you ain’t seen nothing yet when it comes to new regulations.
To set the stage let’s take a brief glimpse back to 2008.
In 2008, a total of 40 bank and credit unions failed. Compare that to 2007, when only six institutions failed. I will admit that bank and/or credit union failures are bound to happen, but at the same time aren’t the regulatory bodies that govern our financial institutions supposed to prevent or circumvent some of these failures? Now I am not implying that the 40 institutions that failed in 2008 were the fault of the regulators. At the same time, it is fascinating when you take a look at which agencies “regulated” the majority of these failed institutions.
# of failed institutions
Approx. $6 billion
Approx. $1.3 billion
Economists and other pipe smoking philosophical theorists will debate the current crisis for years to come. Admittedly, I am no economist, but I came up with a simple Gonzo version of why Humpty fell off the wall.
A Severely Damaged Foundation
Friends, if you came across a dilapidated brick wall or a 160-year-old structure that was one strong wind away from crashing to the ground, would you be compelled to look around inside or sit on top of it? I imagine most of us would either walk by or, if it happened to be in our neighborhood, we would more than likely have it torn down.
Current Structure and How We Got Here
According to the Department of Treasury, the current regulatory framework for U.S. financial institutions is based on a structure that was developed when some guy named Abe was running the show. In fact, the foundation of this country’s regulatory framework was first laid in 1863 when Congress established the national bank charter during the Civil War. The National Bank Act of 1863 created the “Dual Banking System,” i.e. state and federally chartered institutions. Consequently, the Office of the Comptroller of the Currency (OCC) was born.
The Federal Reserve Act of 1913 created … yep, you guessed it: the Federal Reserve. This act was put into place to prevent bank runs and panic attacks in response to financial instability that often occurred in the late 19th and early 20th centuries. Makes sense … doesn’t it?
A few years later the mother of all banking acts was passed. The Banking Act of 1933 aka the Glass-Steagall Act required strict separation of commercial and investment banking and hence the creation of the Federal Deposit Insurance Corporation (FDIC).
One year later, the Federal Credit Union Act of 1934 was passed, creating the National Credit Union Administration (NCUA).
During the 1980s, the Savings and Loan crisis prompted Congress to introduce the Financial Institutions Reform, Recovery and Enforcement Act of 1989. Charged with enforcing this act was yet another new agency: the Office of Thrift Supervision (OTS).
Everything seemed to be running somewhat smoothly until 1999, when the Gramm-Leach-Bliley Act was passed, and, in my humble opinion, all hell broke loose.
So friends, in 2009 the U.S. financial industry is regulated by five federal agencies:
2. Federal Reserve
The aforementioned regulatory bodies step on each other’s toes more often than a pair of left footed ballroom dancers.
Thankfully for the Gonzo Nation, the U.S. Government Accountability Office issued a press release on Jan. 22, 2009, listing the federal programs it considers “high risk.” Wouldn’t you know it, folks, item number one on this high-risk list was the outdated U.S. financial regulatory system. I guess better late than never would be an appropriate statement.
Proposed new structure
But wait, Gonzos, a proposed new banking regulatory structure document was published in March of last year. The Gonzo summary of The Department of the Treasury Blueprint for a Modernized Financial Regulatory Structure proposes the following:
The U.S. Treasury calls this new model an objectives-based regulatory structure. I guess today we have a subjective based structure? Nevertheless, on page 142 of the Treasury’s report they do admit that this type of structure does pose a key problem in ensuring that effective lines of communication exist among the various objectives-focused regulators. Effective communication among regulators is critical for coordinating examinations and other activities impacting the operations of financial institutions.
Basically, my Gonzo brethren, our own government just suggested that its proposed “objectives-based” framework may not work. Seriously, isn’t the lack of communication and collaboration among our existing regulators part of our current problems?
In today’s real world the regulators have us running around like ADHD 10 year olds on Red Bull. The focus of everyone in the Gonzo Nation for the past several years has been compliance, privacy, security, risk, etc. The good guys are getting screwed down tighter than ever while the big and bad guys take undue risks that tear our economy apart.
Sadly, I don’t think we will see relief any time in the near or distant future. And heaven help us if this country actually does revamp its regulatory framework because it could end up shooting the innocent while doing nothing to stop the unholy alliance of Wall Street, big banks and Washington.
That said, you can bet your ass more regulatory change is coming. The scary question is when. Yet have no fear, Gonzos, I have put together a small watch list for 2009.
2009 Top Regulatory Issues
Compliance isn’t cheap, our budgets have been sliced to the bone, and most of the people possessing the necessary skill sets within I.T. to actually implement the majority of these regulations are being reviewed for “budgetary” purposes right now. So I say to you, Gonzo Nation, the next time Humpty Dumpty falls off the wall … we scramble up those eggs, fry up some bacon, add some grits and enjoy a healthy breakfast.
See you in the trenches.
We can help calm the waters.
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