A Revise on the Use of Financial Reforms to Prevent Future Financial Crisis: A Case study of United States of America


Contents 1.1 Project Background -------------------------------------------------------------------------------------3 1.2 Significance of Study -----------------------------------------------------------------------------------3

1.3 Research Objective--------------------------------------------------------------------------------------4 1.3 Literature Review----------------------------------------------------------------------------------------5 1.4 Critical Evaluation of Wall Street Reforms---------------------------------------------------------10 1.5 Conclusion and Recommendations-------------------------------------------------------------------14 Bibliography--------------------------------------------------------------------------------------------------15


1.1 Project Background: The present research study explores the causes of the recent financial crisis and discusses how the Wall Street reforms can prevent such kind of financial crisis in future. This study also compares the present financial crisis with similar kind of crisis, as that of Great Depression, in American history. The present financial crisis is considered the worst economic crisis since the Great Depression which has adversely affected the U.S economy. This financial crisis started in U.S.A and then reached to the rest of the world. It was only due to interdependence of the modern global economy that this crisis affected the other countries of the world. Consequently, in U.S.A several major investment banks, investment companies and commercial banks were sold at very cheap prices. Various financial institutions were declared as bankrupt and in such an uncertain environment, they could not survive themselves. Most of the institutions were bailed out with government¶s help. The present crisis started in last quarter of 2007 and surfaced itself in August 2008 when financial giant Bear Stearns & Co. and Leman Brothers, insurance giant American International Group (AIG) and numerous commercial banks collapsed. Such a desperate situation left adverse impact on US economy. People drew their money from banks and lost confidence in them. Due to this financial crisis, a considerable number of people lost their jobs and became worried about their future. New financial policies and reforms are being enacted to avoid such future economic crisis. US government is trying to prepare such guidelines that help in making sustainable financial developments. Wall Street reforms are considered as a big step in this direction. These reforms aim at regulating the financial institutions in such an effective way that they withstand any financial problem properly. New councils are being established to watch the activities and performance of the banking and non-banking sectors. Many of our contemporary scholars are also conducting the research works to trace the real causes of present crisis and suggesting effective course of action for government and the policymakers. The research work of these scholars would also help in identifying the shortcomings and loopholes in the financial system. The present financial system can be improved by taking in considerations the solutions given by them.

1.2 Significance of Study: The present research study has a great significance in available literature about financial crisis which has happened, generally in the world and particularly in the USA. This study presents a vivid picture of recent financial crisis and evaluates the wall Street Reforms in a more


comprehensive way. This study will prove helpful for the government organizations and other financial institutions finding solutions to recent crisis. Present study will also help the policy makers and managers to prepare new policies keeping into consideration the critical evaluation of Wall Street Reforms.

1.3 Research Objective: 1. The current research study discusses the causes of financial crisis in America and reviews the Wall Street reforms which have been made to avoid such future crisis in the country. 2. This study tries to explain that whether these reforms can prevent such crisis in future .The present study also focuses on the impact of the financial crisis on economy of the country.

1.3 Literature Review: There is a vast literature available on the recent financial crisis which has adversely affected global economy generally and U.S economy particularly. Overview studies and research papers are found which discuss the major problems which led to this desperate situation. The research work done by these scholars has great significance in relation to recent financial crisis. Among the most important research papers are Tarr (2010), Garcia (2010) Mazumder and Ahmed (2010), Brunnermeier (2009), Klein (2009), Ely (2009), Turner (2009) and some other eminent scholars whose research work is considered to be very significant. The present literature review has been divided in following sub-headings. 1.3.1 Recent Financial crisis: An overview The present international financial crisis is considered as the severe economic crisis after the period of Great Depression, which may continue for years to come. Much of the political blamegame has already started, with most of the fingers pointing towards, hedge-fund managers, investors, selfish bankers, and the financial deregulation system of recent decades. In most of the countries government system are working to enforce new regulatory protections which prevent another financial crisis of similar strength (Ely, 2009. p. 93). The current financial crisis is not influencing the economy and financial markets of U.S but has left adverse impacts on the financial markets of other countries of the world. The emerging financial markets have also not escaped its influence. For instance, since start of financial crisis in July 2007 till December 2008, the international financial crisis has badly affected the US stock market. This can be noticed by looking at declining value in the S&P500 index that is by 40.50 percent (Majid and Kassim, 2009).


Due to this crisis, most of the investment banks were busted in USA. According to White (2009, p. 60) many major insurance companies, commercial banks and investment banks related to real estate lending have been sold at low rates. Trading volumes and prices in mortgage-related securities have decreased to a great extent. Unwillingness to lend has also spread to other markets. The mortgage-related crisis made great news in year 2008. Subprime loans were accused for the fall of financial giant Leman Brothers, insurance giant American International Group (AIG) and Bear Stearns and other banks. The Mortgage Bankers Association (MBA) has said in its report that one in 10 homeowners were not able to return their loans, and it is considered the highest number since 1979 when data is collected (Klein, 2009. p.116). Volatility in the US stock markets was the highest during September- November 2008. During peak hours of financial crisis, Bernard Madoff (former Chairman of Nasdaq) was blamed for about $65 billion fraudulent loss in a Ponzi scheme. More than 125 US commercial banks, savings banks and thrift institutions with cumulative assets of approximately half a trillion collapsed during 2008-2009. The magnitude and extent of bankruptcies during present financial crisis is far greater than any past events (Mazumdar and Ahmed, 2010, pp.110). The quickly deteriorating financial crisis became a political exploitation that attracted the attention of the public. Paulson and Bernanke asked congress to approve such a rapid legislation that may give up to $700 billion to purchase critical assets which included most of them mortgage derivatives from banks, for the purpose of building up trust in banking sector. The bailout that came to be called in right or wrong terms was apparently not popular. However, Congress was cautioned in private sessions that with credit being frozen or terminated, in case of failing to accept the $700 billion appeal could pose problems and deteriorate the economy (England, 2009. P.42) As a result of this crisis, America is experiencing great unemployment rates which were not seen since 1979. If this employment continues to rise, it is not likely to watch a increase in foreclosures but the result is foreclosure volumes which continue and could increase in 2010. This crisis has also badly affected the recreational markets, auto and vehicle markets including banking and tourism (Klein, 2009. p.117). 1.3.2 Comparison of current US financial crisis with previous crises: According to (Tarr, 2010), financial crisis periodically occur in the world. There were 100 crises in the world in past 30 years. The most serious in the USA were the great Depression and the crisis of 1989. One factor common to past crises has been that the banks were unable to raise capital largely because potential investors were uncertain about how deep the problems were with the banks seeking to recapitalize. What has been different about current crises is that banks have been able to recapitalize to some nontrivial extent. For example in the SL crisis, bank recapitalization averaged about $3billion per year in 1989-1991 and in the year ending September 2008 banks raised $434 billion in a new capital. Calomris (2008b cited in Tarr, 2010)


argue that consolidation, deregulation, and globalization contributed to substantial profits in the banks in the past 15 years and left banks in a stronger position at the start of crisis. They could more credibly argue that the banks would survive the crisis and thereby attract the investors.. But Tarr (2010) again that with consolidation and deregulation of interstate branching, banks are less vulnerable to regional shocks. As a further benefit, globalization of banking sector has allowed banks to access credit from sovereign wealth funds and other international sources.

1.3.3 Causes of Financial Crisis: Fisher (2009, cited in Garcia, 2009) writes that earlier crises as that the US banking and thrift problem during the decades of 1980s and early 1990s and those of subsequent Latin America and Asia, gave a great number of warning signs for knowing problems in their beginning. A great deal of blame game has started since first quarter 2008. Research studies are being conducted to explore the causes of recent financial crisis. Researchers and academic scholars are trying to know the factors leading to that desperate economic situation in the country and leaving its adverse impacts on global economy. This research work aims to shed light on the causes which resulted in this financial crisis and stock market volatility. Recent financial crisis is studied from different aspects and shortcomings in various rules and regulations are analyzed carefully. Present research looks in those shortcomings brought the US economy to a brink of sudden halt. Causes behind any financial crisis are not unique but scarcity of cash flows which is also called as liquidity crisis or credit crunch is deemed to be outcome of any financial crisis (Brunnermeier, 2009). Cash flow shortage may occur due to turmoil in the banking sector and credit, currency and debts markets and s intensified by stock market volatility and systematic declines in macroeconomic variables such as production, employment, real income and increases in interest rates spread. Therefore any bank can face financial crisis when its liabilities such as borrowings, depositors accounts etc. exceed its assets, which can be securities loans, capital investments etc. It has been observed that commercial banks usually extend loans to the real estate markets and household consumptions. If these commercial banks do not get the expected returns from these real estate loans, then chances of liquidity crisis are great which result in bankruptcy situation (Mazumder and Ahmed 2010). Commercial banks can experience a similar situation of liquidity crisis when unexpected number of customers withdraw large sum of their deposits. Now looking at the recent financial crisis in USA, present research study has focused on main causes resulting in an adverse financial condition.


A. Macro-economic Imbalances: Macro-imbalances are considered at the core of financial crisis. These imbalances have increased since ten years. They have increased at great pace during last decade. Japan, China, East Asian emerging nations and oil exporting countries have collected current account surpluses. While in USA, UK, Spain and Ireland large current account deficits have increased. High saving rates in countries, like China, are a key driver for those imbalances. As these high savings surpass domestic investment, China and such similar countries have claims on other parts of the world. The rising claims made by these countries take the shape of central banks reserve. These are invested in government guaranteed bonds or the risk-free government bonds. Resultantly, it has caused a decrease in real risk-free rates of interest to considerable low levels. They have caused two types of impacts. Firstly, these long-term and low medium interest rates have caused rapid growth of credit extension with degradation of credit standards in USA and UK. Secondly, they have impelled investors a violent search for output, who want to invest in similar instruments looking like a bond so that they obtain too much from the risk free rate (Turner, 2009).

B. Financial Innovations: Financial innovations are considered as the major cause f recent financial crisis in USA. According to Trimbath (2010) financial innovation is just like an engine which drives the financial system towards better performance in the field of real economy. He further writes that innovative debt securities like mortgage-related securities and other collateral mortgage obligations (CMOs), he had hoped would add value to the economy by changing the location of risk and increasing liquidity and reducing the costs agency. But like the exceptionally high promises of communism, it resulted in a mere utopia that could not materialize. CMOs were not made to spread the risk by relocating it to greater and diversified institutions were capitalized in an improved manner. In a traditional pattern, a bank in riverside called California would write and contained the mortgages for the houses in that location. And, if some negative shocks impacted income and the jobs in that area, that bank has to take up all of the resultant failures. This would place the bank in an excessive risk. With CMOs this risk factor would go towards other banks and investors in the larger geographical area. Since the CMOs could be held worldwide, even a nationwide economic crisis might have little impact on any individual mortgage holder. It is unfortunate that the dealmakers gave away the perilous pieces to a less number of hedge funds, in this way they consolidated the risk rather than reallocating it in a broader context. Consequently, there was the spectacular collapse of Bear Stearns and the great damage was done to American and other international financial institutions. Similarly, Turner (2010) writing about financial innovation says that the demand for yield uplift, stimulated by macro-imbalances, has been met by financial innovation which focused on the packaging, origination and distribution of credit instruments which were securitized. Common shapes of securitized credit such as corporate bonds have been there for a long time since modern banking


has existed. In America, securitized credit has played a pivotal role in mortgage lending since the establishment of Fanie Mae during the decade of 1930s and has been doing a persistently increasing role in an international financial system and particularly, American financial system for fifteen years before the period of mid-1990s. It culminated not only in considerable growth in the significance of securitized credit, but also in a complete change in the features of the securitized framework. Mazumder and Ahmed (2010) looking at the financial innovations in a historical perspective write that the credit boom created by low interest rates during 2001-2004 was accentuated by some financial innovations that took place in recent times. Wide varieties of residential mortgage-backed securities (RMBS) and mortgage-backed securities (MBS) were developed in last few decades and more than 50 percent of mortgages were securitized. Since there is mismatch between duration of assets and liabilities in banks mortgage loans are converted to a financial security which is known as securitization of mortgages. Bryan (1988, cited in Turner, 2009) writes that securitization increased in significance from the period onwards 1980s. Its development was eulogized by many industry commentators as a way to decrease banking system risks and to cut the total expenses of credit mediation, with credit risk passed through to last investors. That also reduced the need for redundant and highly expensive bank capital. Turner (2009) again writes that securitization permitted loans to be packed up and be sold to different set last investors. Securitized credit mediation would decrease risks for the whole banking sector and credit losses would be less likely to produce banking sector coming to a standstill. But when the crisis became apparent it became visible that this variegation of risk holding had not actually been obtained. In place of the most of the holdings of securitized credit, and considerable number of losses which came out, were not calculated by end investors. C. Regulatory Failure: Regulatory failures are considered another cause of US financial crisis. Top of the list of regulatory failures is the Fanie Mae and Freddie Mac. Pinto (2008 cited in Tarr, 2010) has estimated that approximately $1.6 trillion or about 47 percent of the toxic mortgages were purchased or guaranteed by the government sponsored enterprises (GSEs), and government is on hook for these mortgages. According to him two main economic principles were ignored. One is that if the government and taxpayers sat behind the financial obligations of a company, the company should be regulated against taking excessive risks for which the tax payers are responsible. The government agreed not to regulate the GSE¶s and even encourage them to take risky mortgages in order to widen home ownership among low and moderate income households. Government also pressured banks to take on risky mortgages for the same reasons (Tarr, 2010) D. Sub-prime housing Market MBS written on subprime loans bear higher interest rates and risks with fragile documentation (infamously liar loans). Many of these subprime mortgage loans were created without any or


little supervisions (Gramlich, 2007 cited in Mazumder and Ahmed 2010). In this way lenders began to convince the borrowers that investing in the housing was a foolproof investment. Gresham¶s law worked perfectly in mortgage markets and bad lenders began to drive good lenders out of market. To entice borrowers, mortgage lenders came up with a variety of subprime loans instruments (Mazumder and Ahmed, 2010) The Fed reduced broader interest rates immediately after the dotcom crisis and 9/11 disaster. Fed funds rate was decreased from 6.5% in May, 2000 to 1.75% in December, 2001 and ultimately to 1 percent in late 2004 to strengthen the troubled economy. At low interest rates credit became cheaper and was extended to people with substandard and troubled credit history with poor credit rating (i.e. sub-prime loan). While the reduced interest rate stimulated investment, employment, output and consumer spending, it also encouraged risk taking behavior of banks and other financial institutions (Allen and Gale, 2007 cited in Mazumder and Ahmed, 2010). It is considered in the field of economics that one finds two major variables; one that of demand and another that of supply. Similarly, in finance there are two variables of risk and return. In subprime derivatives, one major problem faced by the investors is the identification of intrinsic risks and returns which they do not consider at initial stage. Though experienced investors, as bankers, could not recognize the crux of the risk and return for recently made financial product. In particular, it can be argued that in sub-prime derivatives, even experienced investors had not grasped the specifically significant feature of the risk and return connection. It can be analyzed that return and risk connection is bounded intrinsically; while, it can be said that perfect borrowers had been more than the borrowers of the earlier offer of sub-prime bundles (Foo, 2008). Risky assets as those of having great concentration on loans deemed for commercial property, development and construction were considered as a problem during the decade of 1980s. They are still in the same shape and form and indeed, they contributed to the current collapse of First National Bank of Nevada and ANB Financial. They are connected by a few forms of risk taking. such as concentrating on Alt-A and sub-prime loans to credit those unsuitable customers, which contributed at losses at ANB Financial, Indy Mac, Wachovia, Washington Mutual, First National Bank, Superior bank and many others (Garcia, 2010) Some commentators and President Obama have accused the greedy behavior of recent financial crisis, while some others think that deregulation is the main cause of present crisis. But the real causes of these financial problems have been unusual financial policy steps and queer Fed regulatory mediations. These carelessly taken decisions badly affected asset prices and interest rates which turned loan funds into the mistaken investments. They also diverted powerful financial institutions into temporary and vague positions which created a lot of problems (White, 2009 p.61).


1.4 Critical Evaluation of Wall Street Reforms: President Obama signed the Wall Street Reform and Customer Protection Act in Ronald Reagan Building in Washington D.C on July 21, 2010. This bill has 2,300 pages, 16 titles and contains 383,000 words. According to lawmakers, purpose of the bill, is to ³hold Wall Street accountable´- so that it never happen again. The majority of nation however does not believe that. The new law has 53 new regulations (Hebert, 2010). This bill aims to better protect consumers, tighten the reins on financial institutions and stop rewarding executives for taking reckless risks to fatten their quarterly earnings and their bonuses. Many of the consumer advocates and great economists are of the view that these regulatory reforms sharply reduce the chances of another crash by forcing the financial giants to set aside more capital to cover losses which have incurred to them. Forming of a new agency will also assist in cracking down on deceptive mortgages and other financial products (Davidson, et al. 2010). The present study focuses on how these reforms respond to the major causes of the crisis and how they help in preventing such financial crisis in future. 4.1 Consumer Protection: During the past decades, millions of consumers took out the mortgages which they did not understand and started purchasing houses. In fact, these consumers could not afford to these houses which were very expensive. When the bubble burst then it caused a great number of foreclosures that devastated the Wall Street firms. These firms had packaged the loans into securities. Then they froze credit markets and brought the economy to a complete recession. In such a complex and problematic situation there was no regulatory and powerful authority to take hold of protecting consumers from predatory lending and other abuses. The fractured system could not provide efficient solution of the emerging problem. Salient features of Bill regarding Consumer Protection: To protect the consumers from predatory lending and other similar type of abuses, a new Consumer Financial Protection Bureau would be housed inside the Fed. The agency would write regulations on consumer financial products of all kinds. To ensure its funding, Bureau would get a percentage of Fed¶s budget that is initially about $450 million a year. The bill further says that a council of banking regulators could veto the bureau rules, I they have a two-thirds of votes. According to Davison et al. (2010) consumer advocates had hoped to see a stand-alone agency and worry the new watchdog may suffer from being at the Fed, which until recently showed little interest in consumer protection. Congress also did not support the Obama administration¶s real plan. For example, the dealers working in autos industry developed about 80 percent of loans but


they have are free from jurisdiction of the agency. Critics have also reservations about the veto power of the council over the rules of Bureau. One of the Harvard University professor, Warren says that now there will be financial regulator, first time, based in Washington to monitor the families but not the banks. 4.2 Bank risk-taking: Large bank companies as that of citigroup and the banks dealing in investment lost many billions during the financial crisis. These companies used the money in a very speculative environment, taking great risks. It was the real motive of these banks to earn more profits in a very short period of time. Banking sector changed from culture of security and safety to a path of speculation. It believed that banking could influence the decisions of government by lobbying and political assistance. Taking high risk, which was once considered as sinfulness, was changed into piousness. Once there was a time when saving was deemed a dominant trend in banking was replaced by speculation (Nassbaum, 2010). This speculative behavior created a lot of problems for banking companies and investment banks in times ahead. Salient features of bill regarding Bank-risk taking: According to a new bill approved by Congress says that the banks that take federally insured deposits would be forbidden from making speculative dealings. These banks have to sell their interest in shape of hedge funds and the private equity fund thus retaining 3 percent of their in them. The bill further bounds the investment banks to set aside more capital to cover the losses which can happen at any time of crisis. If one analyzes the barring of speculative dealing in banking sector then it appears to be a wise step towards improving the bank regulations. It is better that the banks should not take risks which result in their collapse. According to Raj Date, head of Cambridge Winter Center for Financial Institutions Policy, (cited in Davison, 2010) this bill would ³permit banks to make proprietary trades for reasons other than speculation. For instance, the companies in most cases play a role of market makers. These companies use their funds to sell or buy a security and fix a price in the market. Thus they earn a small profit on transaction. These companies could also do that from their own accounts by hedging against other investments. But Date further says that once such activity is prohibited, economic incentives make the lines foggy. But Bob Profusek (cited in Davison, 2010) writes that these constraints reduce the revenue of U. S. A banks and make the less competitive. 4.3 Executive Compensation: The executives who were at top positions in the banks, got great bonuses by increasing the earnings through selling and buying the mortgage-backed securities. But at the time when this


subprime mortgage market collapsed, it ruined many firms. Incentives given for short term gains excited the executives to take big risks which intimated the economy as a whole and stability of their companies. During such a critical period, government had to come forward to bail out this market to avoid further financial system collapse. Salient features of the Bill about Executive Compensation: According to this bill, shareholders would get a non-binding vote on the executive pay. Shareholders can also nominate their own directors for the seats on corporate boards. It is required for the directors that they must win by majority vote in elections. The bill gives authority to public companies to set such policies through which they return executive compensation if that was based on statements proved incorrect later on. By giving a non-binding vote authority to shareholders would pressurize executives to pay attention to their own concerns. It also gives the shareholders an opportunity to hold the executives of the companies to take responsibility for their miscalculated and wrong decisions. These steps can help in changing management¶s focus from the short-term profits to long-tem development and growth of the company. 4.4 Ending µtoo big to fail¶: As the financial crisis began, a great number of financial institutions which were thought as µtoo big to fail¶ grew bigger only by getting more failing companies. These giants such as AIG left the country with vulnerable points leading to bailouts by USA government. The government bailed out such giants because it considered that if they collapsed, financial system of thy country would be devastated (Davison, 2010). Salient features of the bill: The Financial stability council would look upon the risks and send recommendations to the Fed Reserve for severe rules in terms of capital. Risk management, and other necessities as companies increase their structure and size. This council will also have the authority of requiring the non-bank financial companies to submit to be supervised by Fed Reserve. The banks which have more than 50 billion dollars assets would pay their fees to create 19 million dollars fund which would cover extra costs for closing the firm. Considering the salient features of the bill, it can be said that if any firm collapses in future, it would be closed and government will not provide any bail out to the giants. This will enhance the capability of firms to face the stress and survive in critical situations. But according to Date, it would be very challenging for the government to close any financial firm because some of the firms are serving as main financial hubs for the economy of the country.


4.5 Credit-rating agencies: The top rating agencies such as that of Moody¶s, Standard & Poor¶s and Fitch consider themselves as providers of independent in-depth credit analysis and research. But during the period of financial crisis, these agencies instead of providing better understanding about the risks, failed to inform people about the invisible risks which people had not thought of before. In such a critical situation these agencies magnified the financial shock and made people very fearful about future developments Salient features of the bill: The Securities and Exchange Commission (SEC) would monitor the big agencies on annual basis and it would report the key findings to public. This would punish and fine those agencies which would not act on the financial rules and regulations. It would also cancel the registration of those agencies which have poor record. It also legalizes that the investors can sue the rating agencies which fail to investigate debt issuers properly. Security Exchange Commission would enhance and strengthen regulations of the credit-rating agencies. The newly introduced rules for independence, transparency and internal control would avoid weaknesses and shortcomings and loopholes of already existing companies and they would build investor¶s confidence in these agencies. 4.6 Derivatives: Derivatives are considered to play a major role in worsening credit crisis. According to Davison (2010) ³a derivative is a synthetic security whose value depends on the movement of something else such as securities indexes, interest rates or commodity prices´. These derivatives assist the companies to bet against any risk. These derivatives can also fail in a speculative environment. Davison (2010) again says that Congress is worried about those derivatives which are negotiated between two different companies. The derivatives which are negotiated privately are difficult for the regulators to be assessed for the risk. Salient features of the Bill: According to bill the derivatives which are considered as standardized would have to be traded on exchanges for increasing the transparency. The banks have to spin off risky derivatives which are trading into banking affiliates. Most of these include dealing in agriculture, mortgage credit swamp, energy and commodities. This bill provides transparency and accountability to the Derivatives market. Excessive risktaking would be avoided. This would also provide safeguards for the un-cleared trades. But


Issac, former Chairman of FDIC (cited in Davison, 2010) has criticized the requirements to spin off derivatives which are trading into affiliated branches. He argues that if a bank¶s affiliated branch fail, then the bank would bail it out certainly. So the bank has the risk of collapsing. 4.7 Stronger Oversight: During the period of financial crisis there was no any stronger regulatory authority to monitor or look out for the shortcomings or weaknesses of the financial system and report to the public on certain critical issues. Many of the big banking companies and investment banks were not examined properly and closely. Salient features of the Bill: A new Financial Stability Oversight Council (FSOC) would trace the financial companies which may be non-banks or banks. It would also identify that whether they pose any potential danger to financial system of the country. Voting members of this council would be the heads of prominent regulatory agencies. By acting on the advice of Council, Fed would break those financial companies which pose threat to the whole economic and financial system of the country. By studying the salient features of bill it can be said that the stronger oversight will help to strengthen and enhance the credibility of the financial institutions of the country under the effective supervision of the FSOC. With help of this council, future threats to the financial system of the country can be traced easily and in a very proper way. 1.5 Conclusion and Recommendations: It can be concluded from the above given research studies of the eminent scholars and the review of the Wall Street reforms that there were a number of weaknesses and shortcomings in the financial system which were not taken into the consideration by the people at helm of affairs. Neither the previous Bush administration nor the present Obama government diagnosed the nature and magnitude of problem. Major causes of recent financial crisis are considered as the macro-economic imbalances, financial innovations, regulatory failures and the sub-prime housing market. The present Wall Street reforms which aim to avoid future such crisis are a positive step in right direction. Through a new the regulatory system, checks and balance would be created among the financial institutions and the government machinery. The measures taken through these reforms would enhance and strengthen the performance of financial institutions to withstand any future crisis and build confidence in consumers. Risks taken by the banks created a lot of problems at initial level which culminated in recent financial crisis in the country. This dealing was apparently based on speculation. Now the present bill ensures that the banks should set aside more capital to withstand the losses in any critical situation. Incentives given to executives also


contributed in recent financial crisis. But through new reforms executives are pressurized to work responsibly. In addition to this, the present bill addresses the firms and other giants that in future if such problematic situation arises then government will not give any kind of financial help to those firms. On government side, it is an appropriate decision. Credit-rating agencies during the period of financial crisis were unable to inform the people about that critical situation. Through present reforms these agencies would be fined if they do not abide by latest financial rules and regulations. This bill also provides transparency to derivatives market, thus excessive risk would be avoided. The role of FSOC is also very significant in monitoring the financial companies
of the country.

By analyzing the Wall Street Reforms, it can be recommended that the present Obama government must ensure the consumer protection in a more perfect way and it should not allow any private financial institute to take great risks by investing in certain mega projects. Government must keep vigilant eyes on the financial institutes in the country and ensure that they are following the policies recommended by government. Banks should never be allowed to take risks at present or in future. Supervision of these institutes will be of great importance to avoid such crisis in future.


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