From the Editor: Financial Regulation Reform Legislation Takes Center Stage

When the U.S. Congress returns from its August recess, it will have a full plate of draft legislation on financial regulation reform waiting for it, with still more to come. The U.S. Department of the Treasury has already submitted several pieces of proposed legislation, including one for the creation of the Consumer Financial Protection Agency. Many members of Congress have also introduced their own bills.

Meanwhile, as Congress heads out of town, the controversy over bonuses for financial services executives has reemerged, with newspaper headlines almost every day calling attention to actual or proposed bonus payouts.

This early August issue of Lombard Street has a potpourri of incisive articles. We begin with Isaac Gradman’s account of the litigation and lobbying that followed Countrywide Financial’s subprime mortgage meltdown. He focuses on a law passed by Congress in May 2009 that enabled the originators of these loans to settle lawsuits by writing down the loan’s value and passing on the costs of doing so to the bondholders who had bought the securitized loans.

We then turn to the second part of Richard Posner’s article analyzing the President’s regulatory reform initiative. Judge Posner concentrates on two aspects of the plan that have been hotly discussed recently: the Consumer Financial Protection Agency proposal, which would give this new agency the ability to issue “plain vanilla” versions of financial products, and the proposal that would extend the Federal Reserve’s powers to regulate executive and other managerial pay at financial institutions.

Arthur Long then analyzes the FDIC’s proposed obligations for private equity firms seeking to invest in failed banks. He argues that these obligations could effectively, and unnecessarily, close the door to private equity investments.

Finally, Franklin Allen reviews the book Restoring Financial Stability, in which professors at New York University’s Stern School of Business examine the causes of and cures for the current financial crisis. The book, which Allen highly recommends, was edited by Lombard Street contributor Viral Acharya and Matthew Richardson.

Each of the pieces are provocative and controversial in their own way. We’d encourage readers to come to www.finreg21.com and post comments on the articles or submit a blog post. LinkedIn users can also participate in our discussion group at http://www.linkedin.com/groups?gid=2076433

David Evans is Editor‐in‐Chief of Lombard Street and www.FinReg21.com. He is a Lecturer at the University of Chicago Law School and visiting Professor at University College London. He is also the founder of Market Platform Dynamics.