Gaping holes in FinReg bill doom reform effort

Congressional leaders and the Obama administration are congratulating themselves on the about-to-be passed financial reform legislation. They claim the bill will end “too big to fail” and will prevent future crises.

They are totally wrong. Here’s why:

* Reckless Growth of Fannie & Freddie. These giant government sponsored entities pursued two decades of reckless growth with strong encouragement from political leaders. The bill does not deal with them.

* Weak and Ineffective Regulation. The regulatory system that brought this crisis is politicized and badly broken, as Sen. Chris Dodd (D-Conn.) recognized when he proposed a new, independent Financial Institutions Regulatory Authority. The bill does not address the issue.

The Securities and Exchange Commission is one of the principal culprits in the financial panic of 2008. It helped implement mark-to-market accounting, which needlessly destroyed over $500 billion of capital. . The bill is silent on reforms at the SEC.

* Inept and Highly Politicized Crisis Resolution.

The Savings & Loan crisis of the 1980s, which was far more serious, was managed by an independent Fed and FDIC that made maintaining stability their top priority.

The crisis of 2008 was handled by a highly politicized Treasury Department that careened from one failure to the next with no coherent strategy.

The bill is a political document intended to assuage a public rightfully angry about the taxpayer bailouts of car companies and Wall Street. Any politician of either party who voted for the 2008 bailout bill and votes for the current reform legislation is not sufficiently serious about fixing our government or financial system.

William M. Isaac was chairman of the Federal Deposit Insurance Corp. from 1981 to 1985.