11/17/2009 05:12 am ET Updated May 25, 2011

Obama's Financial Reform Speech Fizzles

The President has marked the anniversary of the demise of Lehman Brothers with a new speech designed to breathe new life into his financial reform proposals. But the Obama administration already forfeited its best chance to reform the banking system when the crisis was at its height.

For all of the lofty talk about establishing "the most ambitious overhaul of the financial system since the Great Depression," Obama's reforms amount to nothing more than a reshuffling of the deckchairs on the Titanic.

Why? Because Too Big to Fail (TBTF) banks have grown even more bloated in the past 2 years. And because leverage has increased across the board. Bank of America, the biggest of the "TBTF" institutions, now holds 12% of all US deposits. The top four (Bank of America, JPMorgan Chase, Citigroup and Wells Fargo) now have 46% of the assets of all FDIC-insured banks, up from 37.7% a year ago. Goldman Sachs, the biggest securities firm before it was handed a bank charter, has plunged into even riskier business and upped its trading and investment profits by two-thirds over the past year.

Systemic banks benefit from implicit and explicit government backstops. But a resolution regime for all systemically large and complex institutions like Fannie and Freddie -- arguably one of the most important measures -- is stalling in Congress amid waning political support. And -- surprise! -- lobbyist are gearing up to fight the Consumer Financial Protection Agency, whose fate is unclear as the bill works its way through Congress.

We haven't yet even determined who will be the systemic risk regulator. Could be the Fed. Or it could be the Systemic Risk Council (a new body proposed to keep an eye of financial markets). Given the Federal Reserve's dismal record in anticipating this crisis and promoting the wrong-headed economic models that blew up the bubble, it is extraordinary that we are even discussing the notion of providing the central bank with yet more power. But is a Systemic Risk Council really the answer? Why reinvent the wheel, when the obvious alternative is the Federal Insurance Deposit Corporation (FDIC)?

Our key recommendations:

• Banks should not be allowed to have subsidiaries of any kind....

• Banks should not be allowed to buy (or sell) credit default insurance....

• The FDIC should be directed to examine the books of the largest insured banks to uncover all CDS contracts held....

To read Marshall Auerback's full argument, including analysis on the recommendations, visit NewDeal2.0.