Financial Plan Ignores Real Cause of Crisis

Almost two years into the financial crisis, we remain without reforms to protect consumers from another Wall Street meltdown. Policies proposed by the Obama administration will do little to change that and will actually hinder economic recovery by punishing community banks that had nothing to do with the crisis -- while promising special treatment to those that did.

In a letter to the Senate last week, the American Bankers Association (ABA) detailed 27 new or expanded regulations the "Restoring American Financial Stability Act" would pile on the nation's 8,000 community banks. These local banks, on which cities and small towns depend, are the leading source of loans for small businesses and farms. The ABA warns that federal regulation "has reached the point where the massive overall burden is a threat to the future of community banks" that already "are struggling with difficult local economies." Placing costly new burdens on these neighborhood banks will further restrict credit and increase interest rates, making it even more difficult for businesses to create jobs.

Meanwhile, the "too big to fail" institutions that got us into this predicament continue to be shielded from the consequences of their reckless practices. Through a proposed "Financial Stability Oversight Council," unelected bureaucrats would be empowered to step in and reorganize failing companies. This implied government guarantee means that Goldman Sachs, AIG and other firms made infamous by gaming the system, defrauding investors, and paying outrageous bonuses will have no incentive to reform.

Conspicuously absent from the legislation is any mention of government-sponsored lending institutions Fannie Mae and Freddie Mac. Despite widespread consensus that unsound lending practices originated by Fannie and Freddie played a significant role in creating the housing collapse, these entities are not subject to any new reforms.

According to the CBO, taxpayers are on the hook for at least $389 billion to rescue Fannie and Freddie, and the Treasury Department has pledged to provide unlimited taxpayer support through 2012. It's simply astonishing that Fannie Mae and Freddie Mac are left untouched by legislation that purports to address the crisis they helped cause.

No one disputes that financial reform is necessary. However, barring major bipartisan improvements, the legislation currently under consideration in the Senate falls far short of achieving real reform. I voted against similar legislation in the House, and I will not support any policy that undermines community banks while protecting Wall Street.

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