Guardians of Finance: Making Regulators Work for Us

Contents......Page 5
Preface......Page 6
Acknowledgments......Page 9
An Accident?......Page 12
This Book......Page 15
Financial Regulation Matters......Page 24
Some Final Introductory Remarks......Page 26
Road Map......Page 29
Introduction......Page 31
Shareholders versus Debt Holders: The Essence of Regulatory Complexity......Page 32
Three Approaches to Financial Regulation......Page 37
Adam Smith and James Madison on Making the Guardians Work for Us......Page 52
Innovation and Financial Regulation......Page 55
International Financial Regulation: A Sisyphean Task......Page 59
Complex but Not Hopeless......Page 64
Chapter 3. Incentives Run Amok......Page 66
Why Shareholders Don’t Rule......Page 67
Compensation and Incentives......Page 70
Going for Growth in Mortgage Lending......Page 77
Harder Evidence......Page 82
The Special Role of Ratings Organizations......Page 85
Risk Managers and Risk Models: Where Were They?......Page 88
Chapter 4. How US Regulators Encouraged the Financial Crisis......Page 94
Greenspan’s Fed......Page 96
The Fed, Credit Default Swaps, and Bank Capital......Page 100
Born versus Greenspan, Rubin, and Levitt: Guess Who Won? Guess Who Lost?......Page 105
The SEC: See Nothing, Know Nothing, Do Nothing......Page 109
The Credit- Rating Agencies: The SEC, Congress, and Everyone Else......Page 115
The FDIC: People Are People......Page 120
Fannie Mae and Freddie Mac......Page 124
Some Final Remarks......Page 127
Chapter 5. American Crisis? Ain’t Necessarily So......Page 130
The Luck of the Irish......Page 132
The Run on the Rock......Page 139
An Icelandic Meltdown......Page 143
Notes on Other Crises......Page 146
Failure Is Not Inevitable......Page 149
Chapter 6. Been Down This Road Many Times Before......Page 156
Crisis . . . Financial Reform . . . Crisis . . . Financial Reform . . .......Page 158
A Solution to Systemic Banking Problems: Create the Federal Reserve System?......Page 159
A Still Better Solution to Preventing Bank Runs and Costly Bank Failures: Create a Federal Deposit Insurance System?......Page 161
A Solution to Inadequate Securities Disclosure and Underregulated Investment Banks: Create the Securities and Exchange Commission?......Page 163
A Solution to Promoting Home Ownership: Create New Federal Housing Institutions and a New Federal Housing Regulator?......Page 164
Savings and Loans: A Case Study of Financial Regulatory Failure......Page 166
Ticking Time Bomb......Page 169
The Savings and Loan Industry Plunges into Insolvency......Page 172
Gambling for Resurrection......Page 174
Commercial Banks Did Not Entirely Escape Problems......Page 176
Summary and Conclusions......Page 178
Chapter 7. More of the Same: Post 2007–2009 Financial Crisis Regulation......Page 180
The Dodd–Frank Wall Street Reform and Consumer Protection Act......Page 181
A New Guardian of the Financial System......Page 184
Consumers Get Their Own Consumer Financial Protection Bureau......Page 189
No More Taxpayer Bailouts: Too Big to Fail Firms Will Now Be Allowed to Fail......Page 191
Summary and Conclusions about Dodd–Frank......Page 195
Basel I and II Didn’t Do the Job, So Now Basel III......Page 196
Minimum Capital Requirements and Phase- in Timetable......Page 197
Overall Summary and Conclusions......Page 199
Investors Get More Protections, and New Constraints Are Put on Financial Firm Compensation......Page 201
Given the Failure of AIG, What Happens to the Insurance Industry?......Page 203
Deposit Insurance Limits Increased......Page 204
The “Volcker Rule”......Page 205
Parent Companies of FDIC Institutions Are Required to Be a Source of Strength......Page 206
Industrial Loan Corporations: What Are They and Why Are They in the Law?......Page 207
Chapter 8. Making the Guardians of Finance Work for Us......Page 211
The Guardians of Finance Did Not Work for Us......Page 212
Why Don’t the Guardians of Finance Work for Us?......Page 214
Current Reform Efforts Do Not Fully Address the Root Causes of the Problem......Page 221
The Sentinel......Page 223
Alternatives to, Critiques of, and Reflections on the Sentinel......Page 232
Conclusions......Page 239
Glossary......Page 241
Notes......Page 244
Index......Page 265
About the Authors......Page 285