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04:15 PM
Larry Tabb
Larry Tabb
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Financial Reform: A Colossal Failure of Leadership

The leaders of the financial industry are largely to blame for accelerating the financial crisis and bringing on the regulatory changes that it now faces.

The heads of all of the major banks should be fired. The leaders of our industry have poured gasoline on the banking crisis and accelerated it completely out of control. It has gotten to the point where legislators and regulators seem to be doing their best to burn the industry down to the ground to rid it of the evils that caused the crisis in the first place.

I put this squarely at the feet of our industry's leaders. They ignored common sense, signs, hints, nudges and flat out requests to curb their risk taking to the point where governments now are proposing rules that not only will force institutional break-ups and hurt our industry, but that very well may cripple the capital formulation engine Main Street needs to generate jobs. Talk about cutting off our proverbial nose to spite our face.

All that our industry leaders needed to do was come together, highlight the major gaps that led to the subprime crisis and come up with a solution to solve the most egregious issues. Yes -- in order to keep the industry whole and the world sane, some profitable business would need to be eliminated, sacred cows slaughtered and sacrifices made to appease government leaders and stop the gathering hordes from marching down the Street with torches and pitchforks.

But, no. What do these guys do? First, during the worst of the crisis, they hunker down in a bunker scared as cockroaches under a spotlight. Next, they Hoover up as much cheap cash offered by the Fed and lend it back to the government, capturing more than 300 basis points on each dollar and generating billions in profits, but they don't lend a penny to consumers or businesses. Then they pay record bonuses when many Americans are losing their homes.

They also fight the consumer financial products agency that stops institutions from creating financial products designed to blow up. They protest capital and leverage controls. They obstruct funding a bailout pool for resolving failed complex institutions so taxpayers don't have to bail them out again. And they marshal herds of lobbyists (ineptly) to fight the curtailment of even the most obvious of flagrant abuses.

So what did we get from all this lobbying? We still have consumer protection rules, but now we are looking at the Volcker Rule, which bans proprietary trading; the Lincoln Bill, which moves virtually all OTC derivatives toward central clearing and exchange trading and cleaves off derivatives trading into a separate, independently capitalized subsidiary; and the newly proposed Brown/Kaufman amendment, which looks to cap the size of banks to 10 percent of national deposits and non-depository institutions to 2 percent of gross domestic product. Further, the SEC now is looking at civil actions against firms for their issuance practices for OTC derivatives.

Don't these guys understand that the more they fight financial reform, the more legislators and regulators will join the battle, the less support our industry will have, and the easier it will be for governments to pile on the rules and restrictions? And if you think, "Ah, what will these guys find?" think again. Haven't we learned anything from the Spitzer and Giuliani sideshows? When regulators are digging through e-mail, there will always be one idiot that says something that won't look good on the front page of the Wall Street Journal. Can you say, "Fabrice Tourre?"

While most of this is now water over the dam, our leaders (either new or existing) need to ratchet down the rhetoric, work within our community and determine which sacred cows need to be slaughtered so the industry and the global economy can survive. They need to offer these sacrifices to our legislators as a peace offering and work with the global community to ensure that our financial markets are structurally sound and will remain so long into the future. Otherwise we will be playing right into the hands of our worst critics. And that will not help the industry or the global economy.

Larry Tabb is the founder and CEO of TABB Group, the financial markets' research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the interview-based research methodology of "first-person knowledge" he developed, TABB Group ... View Full Bio
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