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A Revise on the Use of Financial Reforms to Prevent Future Financial Crisis: A

Case study of United States of America

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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
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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
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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 blame-
game 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).
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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)
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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.
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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
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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
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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 sub-
prime 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).
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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 “hold 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
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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 “permit 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
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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 ‘too big to fail’:

As the financial crisis began, a great number of financial institutions which were thought as ‘too
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.
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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) “a 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 risk-
taking would be avoided. This would also provide safeguards for the un-cleared trades. But
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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
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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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Perspective, Volume: 23. No: 1 pp. 77-100

Davison, Paul. Wiseman, Paul & Waggoner, John. (2010) Will New Financial Regulations
Prevent Future Meltdowns? USA today. www.usatoday.com

Ely, Bert. (2009). Bad Rules produce bad outcomes: Underlying Public Policy outcomes of US
Financial Crisis. The Cato Journal, Volume: 29. Issue: 1 pp. 93+

Foo, Chec-Teck. (2008) Strategy following the US sub-prime crisis. The Journal of Risk
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