In an effort to restore public confidence in our nation’s financial system, Senator Susan Collins has introduced the Financial Regulation Reform Act of 2008. The bill would regulate Wall Street investment banks for safety and soundness and close the gap that has allowed credit default swaps and other financial instruments to escape regulation by both federal and state regulators. Specifically, it would strengthen the financial system by establishing regulation for investment-bank holding companies, instituting reporting requirements for credit default swaps, and establishing a commission to study and recommend additional comprehensive regulatory reforms.
The current structure of our financial system lacks much needed reporting and transparency requirements, which many experts believe has contributed to the current economic crisis that has affected every sector of the economy, including the Maine lobster industry.
In a speech to the Senate, Senator Collins said, “Public confidence in our nation’s financial system has been shaken badly by the financial meltdown. As a former Maine financial regulator, I am convinced that significant regulatory reforms are required to restore public confidence and to ensure that lack of regulation does not allow such a crisis in the future.
“The consequences in our country have been dire: falling home prices, rising foreclosure rates, plunging consumer sales, increased unemployment, and a tremendous erosion of retirement savings. The Maine lobster industry, the paradigm of hardy small-town entrepreneurship, has also felt the blows of the economic crisis.
“While local credit unions and small community banks are subject to safety-and-soundness regulation, enormous Wall Street financial institutions that have a far greater impact on our economy have not been subject to such regulation. The legislation I have introduced will close such dangerous gaps in the government’s system for overseeing financial markets, and it would establish a formal process for developing additional comprehensive reforms of our financial regulatory system. It is my hope that this legislation prompts a much-needed debate on the fundamental changes needed to modernize and strengthen our system of financial regulation.”
The Financial Regulation Reform Act has three main reforms to restore confidence and create stability in the markets:
1. Fill the void in regulation of investment-bank holding companies. Investment-bank holding companies, such as Bear Stearns and Lehman Brothers, operated with high levels of debt, yet under current federal law no agency monitors their safety and soundness or the risk they may pose to the economy. The bill assigns that authority to the Federal Reserve, so that investment-bank holding companies would be subject to supervision.
2. Provide transparency and oversight for the markets in credit-default swaps. The failure of Lehman Brothers and the federal takeover of the AIG insurance holding company were in part caused by large risk exposures from credit-default swaps (CDS) – unregulated and largely unreported over-the-counter contracts that involve paying another party to pledge compensation for losses in value of a corporate or government bond or mortgage-backed security. The bill addresses this regulatory void by requiring reporting of CDS contracts to the Commodity Futures Trading Commission and by requiring that parties use a federally approved clearinghouse to process trades.
3. Create a National Commission on Financial Regulation Reform. The bill also provides for a special commission of financial experts, former government officials, and scholars to conduct a full review of our nation’s financial regulatory structure and to develop comprehensive recommendations to revise the laws that govern financial markets; reconstitute and possibly reorganize agencies; and improve transparency and oversight.