Before the credit crisis Wall Street Bulls almost brought the
economy to its knees.(New York Historical Society)
The Obama Administration's Wall Street reform strategy is receiving a lot of negative reviews. Liberals think it doesn't do enough to prevent systemic risk to the economy. Conservatives believe the reforms hinder economic growth. Politics aside, reform is coming and that's great news for Los Angeles.
The White House wants to create a resolution authority able to reorganize or wind-down institutions at risk of insolvency that threaten U.S. financial stability. It would create a bankruptcy court that prevents firms like Lehman Brothers from flaking on their $433 million debt to state employee pension funds like CalPERS- the largest public pension fund in the U.S. and home to retirement accounts for thousands of Southern California's residents who are government employee including teachers, policemen, and firemen.
New capital requirements for financial institutions that take deposits are also included. Strict capital requirements are not new, until 1999 banks were only allowed to have 30 times more debt than available capital. Now, they can have 60 times more. Nobel Prize winning economists Joseph Stiglitz and Paul Krugman believe this lower standard was fundamental to the financial crisis' start. Regardless of their opinions, businesses across the Southland have not been able to find the necessary liquidity to continue operations resulting in a quarter of a million Southern Californians being laid off because of bank overleveraging.
Previously the most controversial piece of the administration's legislative agenda was compensation reform. The average annual performance bonus on Wall Street is two times annual salary- which on average is three and a half times the national median ($143,133 versus $44,389). The bonuses lead to a blatant disregard for moral hazard while investing. Even Paul Volcker, Fed Chair under Reagan, calls the pay scheme "grotesque". However, Senator from Connecticut Chris Dodd's plan to completely strip the Fed of its ability to regulate financial institutions has trumped any legislation of compensation. While Dodd's actions may hurt the U.S. economy in the long run by handcuffing the Fed's ability to support economic growth, compensation reform will remove some of the profiteering that lead to the risky investment strategies (called moral hazard in finance speak) that spawned bundling home loans as securities to be traded on the stock market- a practice that almost single-handledly funded the Riverside and Inland Empire real estate market.
With the largest state budget deficit in the country ($24 billion), third highest number of bank failures in the nation (13) and most jobs lost in any state (750,000), California has been brought to its knees by the recession. Angelenos are paying close attention as President Obama tries to pass bank reform legislation that hopefully culls the securities firms that spawned a fourteen and a half percent unemployment rate in the Greater Los Angeles region.
If you'd like more detailed information check these links out:
PBS Special: Wall Street reform and You
Robert Reich's article "Why Wall Street Reform is Stuck in Reverse"
Greenspan backs Key Obama Wall Street Reform Effort
Next Up: The Battle Over Wall Street Reform
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