The Wall Street Financial Reform - Research Paper Example

The Wall Street financial reform The Wall Street Reform, otherwise known as the Financial Reform was accentedto by Barack Obama, the president of the United States during the month of July, in the year 2010. From the economic crisis that hit the country between 2007 and 2009, a debate arose on the insufficiency in regulation and oversight of the financial system in the United States. The debate mainly focused on the weak existing consumer protection mechanisms and the OTC derivative market that remained unregulated as the principal causes of the looming financial crises. The crisis had led to loss of jobs, failure in businesses, a drastic drop in house prices and washing out of savings within the American economy. The passing of the law was aimed at making the financial system of the United States more accountable and transparent in order to avoid similar situations in future and ensure that there is a working system in place to protect the money belonging to tax payers (Kolb 112). The law included such major topics as the creation of a bureau for protection of consumer finances, creation of an oversight council for financial stability, the limitation of complex and large instruments of finance and transforming the derivative market to assume a more transparent image. The law also included the introduction of oversight and new requirements for the agencies dealing with credit rating. It also gave company shareholders a say concerning the bonuses paid to their chief executive officers. All these components targeted to strengthen the economy of the United States and protect the consumer against the increased shrewdness of the business world (Kolb 114). Way back in the year 1933, a law called the Glass-Steagall act had placed what was seen as a wall of complete separation between brokerages and banks. The act was largely repealed in 1999 by another act that was aimed at modernizing financial matters in the country. The restoration of the Glass-Steagall act was regarded by some commentators as very vital, with some of them referring to it as the most functional component in the reform of Wall Street. However, the Democratic Party leaders in the house refused to permit an amendment by Maurice Hinchey, a member of the Republican Party. The amendment was meant to restore the Glass-Steagall act as part of the Frank bill of 2009 (Pezzuto 67). Later on in 2009, Hinchey introduced the restoration act of the Glass-Steagall act as a separate bill proposal. Despite the politics that has played on the restoration of the act, the Volker rule, which was introduced by the administration of president Obama has been viewed as the twenty first century version of the Glass-Steagall act. The rule establishes strict rules on banks against using their money in making risky investments. A few years earlier, in 2002, senator Sarbanes and representative Oxley proposed the Sarbanes-Oxley act. The act was a reaction to the escalating number of accounting and corporate scandals in the United States. Such scandals include the ones that affected Worldcom and Enron. The bill was signed into law by the then president of the United States, George Bush (Carney 48). During the enacting of the Wall Street financial reform act of 2010, the process brought political alignments mainly in the major political parties. The parties still had a large ideological separation since they had just come from an election, during which a large ideological rift had been created. By the Month of May 2010, the bill had been passed by both the senate and the house. However, there were differences in the version from the house and the one from the senate which was referred to the congressional conference committee of the United States for harmonization. The differences that were to resolved in the bills included whether the proposed consumer protection agency was to be independent as suggested by the senate or an affiliate to the Federal Reserve as proposed by the house of representatives. Another difference was whether the banks were to be required to issue derivatives of credit affiliates capitalized separately as proposed by the senate and how exactly the insurance corporation dealing with federal deposits would bail out or wind down large institutions that fail due to financial instability (Kolb 117). The congressional conference committee of the United States was also to resolve the circumstances that would see the breaking up of large institutions, a leverage limit of 15 to 1 in the house bill, how the federal audit was to be carried out, that is, whether it should be continuous as proposed in the house bill or one-time as proposed in the senate bill. Moreover, both bills contained the Volker rule that had prohibited banks and holding companies from proprietary trading. However, the two bills contained a caveat that allowed overruling of the rule by regulators. Despite both bills proposing the regulation of credit rating agencies, the senate bill was much stronger compared to the house bill. In examining the two bills, the one from the house and the one from senate, the house bill otherwise called the Wall Street Reform and Consumer Protection Act of 2009 by Barney Frank, a member of the house, was passed in December and forwarded to the senate for action. The senate bill which was introduced by Chris Dodd, the then chairman of the Senate Banking Committee in April 2010, included a liquidation fund of $50 billion. The fund which was meant to be a continuing bailout attracted sharp criticism. Chris Dodd was pressured by the Obama administration and the republican senators to remove the fund from the bill. The bill later passed in May 2010 after heated debates in the senate (Kolb 118). The Volcker rule which was proposed by president Obama was based on advice given to the president by Paul Volcker. The proposed legislation was drafted by the treasury department of the United States. The rule sought to limit any particular bank from holding, at any time, more than ten percent of deposits insured by the Federal Deposit Insurance Corporation. It also prohibited banks with division and that may be holding such deposits against making speculative investments using capital of its own. On introduction to the senate, the Volcker rule faced much resistance. This led to its withdrawal and was only introduced as a part of the Dodd bill, this time in limited form. The Wall Street reform act of 2010, also introduced a new oversight body that is multi-authority and chaired by the secretary of the treasury of the United States called the Financial Stability Oversight Council. The council is a body of regulators consisting nine members, who include Federal Reserve System regulators, the exchange and securities commission of the United States, the finance agency of the federal housing and other significant agencies. The council was charged with the responsibility of identifying any possible risks in the financial system. Moreover, the council was charged with the task of looking at the interconnectivity in financial firms that are highly leveraged. The council can ask firms whose structures pose a threat to the national financial system to divest their holdings. The council was empowered with significant control over the operations of the highly leveraged companies and helps in increasing transparency thereof. From the process of enacting the Wall Street Financial Reform act of 2010, the American democracy is presented in the image of pluralist theory. This is the theory of democracy contending that control and power over public policy is competed for by several centers of influence, with no particular group or a collection of groups dominating (Guevara 231). From the legislation process, it is clear that compromise and bargaining are important components in the democracy of the United States. At the time Maurice Hinchey, a republican, attempted to restore the Glass-Steagall act of 1933, he faced opposition from the Republican Party as a centre of interest in the matters. The opposition was not only politically motivated as seen in the unity portrayed by the Republican Party, but was also a promotion of interest from the business community who were opposed to the separation between brokerages and banking institutions. Despite the failure of the restoring the Glass-Steagall act, another centre of influence, the administration of President Obama, introduced the Volcker rule which was viewed as the twenty first century version of the Glass-Steagall act. This time, the bill faced much resistance from the various interest groups in the senate, not necessarily aligned to political parties, forcing the government to withdraw the bill and only introduced a small section of it as part of another bill. Another incidence in the enactment of the Wall Street Financial Reform Act of 2010 that portrays the American democracy as pluralist is the difference in the versions of the bills that emanated from the House of Representatives and the one that emanated from the senate. In this case, neither of the houses was more powerful than the other and the bill had to be compromised through harmonization by the congressional conference committee of the United States. There is also an incident in which, the bill introduced to the senate by Chris Dodd was criticized by the Obama administration and the senators from the Republican Party for including liquidation fund of $50 billion. In this case, the centers of influence depicting pluralism come from both the Obama administration and the Republican Party, with neither of them displaying more power than the other at any point in time. Finally, the Volcker rule which was introduced by the Obama administration faced sharp resistance in the senate to the point of pressuring the administration to withdraw it. It is imperative from the enactment of the legislation that the American democracy is largely pluralist with no one particular center of influence dominating constantly. Despite, some centers such as the Obama administration having their way on given fronts, they are seen to compromise on other fronts with various centers of influence pulling to control policy only through bargaining and compromise. Viewing the American politics from the other possible dimensions, the pluralist view would be diluted significantly. Stratificationism based on the class and elite theory has it that the American society is distinctly divided along the class lines with the elites, that is, the upper class ruling over rest (Guevara 233). In this case, the uppermost class constitutes the president, his administration and the senators. Following the upper class is the business community then the common citizen as at the lowest level. Stratificationism looks at wealth as the basis of power in policy making (Guevara 233). The policy makers in upper class were mainly representing the interests of the wealthy in the business community, including their own interests and there are very few occasions during the process of legislation that the voice of the common citizen in the lowest class was represented. The enactment of the Wall Street Financial Act of 2010 saw the debate of business interests at the expense of the common citizen. From the hyper pluralism point of view, which represents pluralism gone sour, explains the confusion that marred the legislation process to the point of having most of the introduced bills either rejected or completely restructured. Hyper pluralism is of the idea that too many influence groups make it difficult for the government to act while the policy makers end up making muddled up policies or no policy at all (Guevara, 234). This is evident in the enacting of the Wall Street Financial Act of 2010 where so many interest groups both political and business sought to influence the policy to an extent that no interest belonging to a particular interest group was eventually enacted. In conclusion, it can be seen that, each of the three concepts of democracy are evident under different circumstances. It can be seen that, American politics tend to be pluralistic in cases where many influence groups have diverted interests forcing them to compromise through bargain. The politics tend to be hyper pluralistic in circumstances where the policy in contention is so important the involved influence groups yet their interests remain divergent. Each group pushes to influence the policy but eventually none of them have it leading to distorted policy. Finally, the politics tend follow stratificationism in cases where the upper class has vested interest in the policy hence ignoring the lower class of common citizens during policy formulation. Works Cited Carney, Elearnor. The Death of Public Financing. National Journal Magazine, 2009 Guevara, Kathyleen. The theories of American Democracy: An Analysis of the Strategies Used to Secure Power and influence. Maryland: University of Maryland, 2008. Kolb, Robert. Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future. New Jersey: Wiley Publisher, 2010 Pezzuto, Ivo. Miraculous Financial Engineering or Toxic Finance? The Genesis of the U.S. Subprime Mortgage Loans Crisis and its Consequences on the Global Financial Markets and Real Economy. New Jersey: Prentice Hall, 2008 Read More