Even as President Obama’s financial reform looks all set to make a place for itself in the economic fabric of the country, critics within political circles say that these changes will still not address the risks posed by “too big to fail” institutions.
Some financial organizations like Citigroup, which transformed itself from a no-frills bank into a highly complex entity, were seen as companies that were ‘too big to fail’. The company found itself in deep financial trouble during the crash and had to be rescued from three near collapses with the help of government support. These led to a public outcry about taxpayers’ money being used to rescue irresponsible financial companies.
Democrats seem to believe that setting maximum limits on a bank’s unsecured liabilities and holdings is the solution to ensuring that such a financial crisis does not occur in the future. But some other reform provisions have not gone down well with the Republicans.
The provision for unlimited taxpayer fund usage has been strongly criticized by the Republicans. They claim that it will give regulators the power to fully control this aspect of the financial system and will effectively institutionalize bailouts. On the other end of the spectrum, some critics have claimed that allowing ‘too big to fail’ companies to collapse will have a detrimental effect on the growth of the US economy.
Criticisms have also been leveled against the government for not taking a hard enough line against Wall Street, despite the fact that it had a significant contribution to causes that led to the crash. The SEC has initiated action against firms like Goldman Sachs, which have been accused of encouraging unwary investors to buy unsound mortgage loans, but these measures are said to be too little, too late.
As expected, financial companies have protested vehemently against the reforms.
Most of the objections relate to the proposed derivatives trading rules. According to these, derivative trades will be carried out through a clearing house and contingent funds will need to be provided and maintained by parties as and when called for. Government bailouts will no longer be a fall back option for those dealing in derivatives.
Another provision that has drawn protests from the financial industry pertain to imposing a ban on proprietary trading or investing against client interests by banks and a ban on hedge fund ownership. Higher capital adequacy ratios are also expected to be set for banks, making them more capable of withstanding economic downturns.