By: Matthew Arndt, CFA, CPA, CFP | June 18, 2009 | The Politicians, Who Can I Trust?

Once again U.S. taxpayers and investors may end up on the short-end of things. If you were not sitting behind closed doors with the Obama Administration and the lobbyists representing the financial industry to shape regulatory reform, then you are at risk of being affected by more incompetent, irresponsible legislation.

The banks are strongly resisting a proposal to create a unified banking watchdog. In the past, they have been overseen by a hodgepodge of federal and state agencies, which has allowed them to choose their own regulator. This structure has allowed them to seek the most favorable oversight through a practice known as regulatory arbitrage. It creates a situation where accountability is lacking and responsibility is avoided. Creating a single regulator threatens this cozy arrangement.

In addition, banks should not be allowed to become too big to fail. This only creates moral hazard; a situation where large banks gamble knowing they will keep all the winnings and if they lose the taxpayer will step in to pay off all their gambling debts. In other words, “Heads the banks win, tails the taxpayers lose”.  

More watered-down regulation will prove to be ineffective. The fact that these financial institutions are the cause of this meltdown and needed trillions of taxpayer dollars to prop them up only makes it more appalling that they are calling the shots when it comes to regulatory reform.

Taxpayers and investors need a strong advocate to represent their interests which they currently lack in Washington. Republicans and Democrats continue to indulge lobbyists representing the large banks that are responsible for this mess. Whenever self-serving institutions and corporate interests are overwhelmingly involved in shaping legislation you can be almost certain new laws will be unfavorable to everyday citizens and lack any meaningful change.