In an interview with FOi ahead of the Senate
Act’s final reconciliation with an earlier House
of Representatives reform Act, Mendelowitz stressed that data
monitoring was "more important than anything else in the bill."
He said that: "The other provisions are worthless if your
regulators are flying blind."
Ce-Nif (the Committee to Establish the National Institute of
Finance) has called for a new independent body to collect
and manage all transaction and position data for US financial
entities and their affiliates. It has also requested that a
database be created to store the data, which would be
accessible by regulators so they could monitor the build up of
"Anyone who looked at what happened in the crisis came to
the unavoidable conclusion that the government lacked the data
to know what was going on," Mendelowitz said. "This is the key
to understanding what happened."
While the new entity will not be known as the National
Institute of Finance, Mendelowitz said that 95% of what Ce-Nif
had been campaigning for would be provided by the Office of
Financial Research, the new oversight body which would be
created were the Senate Act to become law.
Such a body would spell huge changes for the
over-the-counter derivatives market, which is under no uniform
obligation for transaction reporting.
Mendelowitz, a former chairman of the Federal Housing
Finance Board (the agency responsible for regulating the
Federal Home Loan Bank System), started the voluntary Ce-Nif
with three fellow academics and a quantitative analyst in
Mendelowitz says the five were "drawn together by a common
view as to major failings with respect to data and analysis
available to government regulators and policy makers [during
the crisis], and by a shared objective of fixing those failings
with legislation included in the regulatory reform bill that we
knew would be passed in the wake of the 2008 financial market
In a February 2010 letter to senator Chris
Dodd, head of the senate banking committee and chief author of
the Senate's Wall Street Reform Act, which was signed by six
Nobel prize-winning economists (including Myron Scholes and
Robert Engle), Mendelowitz wrote:
"Going forward, a significant regulatory weakness is the
absence of a sustained effort to gain a deep understanding of
risks to the financial system, including the lack of essential
data and the analytical capacity to turn that data into useful
information to enable regulators to better safeguard our
"The current legislative response to the crisis has focused
primarily on expanding regulatory authorities and determining
who should exercise those authorities. There has been far too
little attention devoted to strengthening the research efforts
and fixing the inadequate data and analytical capability on
which sound regulatory decisions must be based.
"To be successful, legislation intended to equip the
government to understand and monitor systemic risk and be able
to reduce the risks of major financial crises in the future
must include provisions to strengthen research efforts and
provide the government with previously unavailable data and
Buoyed by the passing of the Senate Act on May 20,
Mendelowitz echoed those sentiments today. He said that: "We
wanted the government to ensure going forward that they had the
capability to find out what's going on. We looked at what new
entities would be created, and there was no discussion of data
He claimed that there was no understanding of what systemic
"You have to have a build of inter-connectedness in a
financial system," he argued. "Two people on both sides of a
trade is an unavoidable situation. What we did is put together
a proposal that government collect granular transactional
position data on a daily basis – that’s
the only way you can do it."
He was optimistic that the Office of Financial Research
would be part of the final reform law. The group had strong
support from even conservative think tanks such as the American
Enterprise Institute for Public Policy Research.
"More important than big names," he argued, was "broad
support across academia, parties, politics, [and] even data
firms – SunGard, IBM Research, for instance. We even
got a letter from the American Bar Association."
Mendelowitz said the greatest barriers to the legislation
passing was the Republican Party, led by Dick Shelby, the
former Alabama Democratic senator who turned Republican in
1994, along with "anyone that thinks data is irrelevant to
systemic risk issues".
Asked whether he was worried the provision might be
unilaterally discounted by reconciliation committee head Barney
Frank, as Blanche Lincoln’s proposal for banks to
spin-off their swap-trading desks was this week, Mendelowitz
admitted: "It’s a possibility. Stranger stuff has
happened…. There’s always a risk with
negations. The risk is in the process [of convergence]
– it’s a sudden death playoff", he
"The issue, when it comes to it," he argued, "is the
enormous amount of vested interest [against the reporting
requirements]. There are more than 3,000 bank lobbyists in
Washington right now," he claimed.
"In addition, certain departments won’t like
this. We’ve stressed very emphatically that this
body has to be independent, and that second, it can't be
regulatory. The wording is structured to ensure
As the bill stands, the Office of Financial Research
would have the capability to offer Congressional testimony
without prior regulatory approval, Mendelowitz said. "Even the
secretary of the Treasury doesn’t have that. The
Treasury will try and weaken [the provision], I’m
positive of that."
He said that: "All we could have hoped for is in that bill
– probably 95% of what we were pushing for [in the
campaign for a National Institute of Finance]."
"It’s fingers crossed time," he concluded.
Tom Osborn +44 207 779 8361 firstname.lastname@example.org