The Financial Reform bill, now known as the Dodd-Frank bill for Senator Dodd and Representative Frank, passed the Senate last Thursday by 60-37, with the help of three Republicans. It passed the House on June 30. When signed by the President (probably this week), it will become law.
Its 2319 pages make it the longest bill in the history of financial regulation. The Federal Reserve Act of 1913 was 31 pages; the Sarbanes Oxley was 66 pages. In its 2319 pages could be found by any reporter Section 342, the Office of Women and Minorities.
In our July 7 column, we reported this Office was no longer in the bill. A mistake. How did it happen? Not seeing it mentioned in the media, we assumed that it had been deleted. Its first mention was on Internet July 8, the day following our column. It was inserted by its discoverer, Diana Furchtgott-Roth, of the Manhattan Institute, who was searching for derivatives.
The bill says that gender- and race-employment ratios must be observed in the public and private financial sectors. Though it does not mandate quotas, which are illegal, its language moves smoothly from anti-discrimination to quotas. It sets up 29 such offices in nine government bureaus: the Federal Reserve Board of Governors, the 12 regional Federal Reserve banks, the Treasury, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration, Comptroller of the Currency, Securities and Exchange Commission, and the new Consumer Financial Protection Bureau.
Each Office will have a director to develop policies promoting “fair inclusion” in the agency’s workforce and the workforces of its contractors and sub-contactors.
The head of each Office is to be named by the President. Those who fill these positions will be at the highest personnel level.
Will the new diverse employees have a role in monetary policy? No one yet knows.
A more relevant part of this bill is, will it help prevent another financial crisis? That question was put to seven experts by The Wall Street Journal.
Will this bill help prevent another financial crisis?
“Not at all,” said a former head of the SEC, who graded it F.
“The new tools in this legislation will help mitigate and manage another crisis, which should be in the next six to 10 years,” answered Henry Paulson, former Treasury Secretary. His grade, “incomplete.”
“It won’t repel further crises but it will certainly make them less likely and less severe,” said the chief economist of Moody’s Analytics. B+
“A botched financial reform is planting the seeds of the next financial crisis,” says a professor of economics at NYU, who grades it C+.
A manager of the PIMCO Total Return Fund didn’t answer the question, gives it a D+
“We can’t eliminate financial crises, but the bill will make them less frequent and less costly,” responded an economist a Brookings Institution economist. A-.
“Realistically, we may need to go through another major financial disturbance before officials ‘get this’ to a sufficient degree,” comments a professor of entrepreneurship at MIT, who graded it B, “the lowest passing grade MIT allows.”
The consequences of the Bill
What’s the biggest likely change, they were asked. They couldn’t answer because they didn’t know. Rules have to be written. One attorney calculates there are 243 rules yet to be written. Another says 400. Among them are 54 relating to the Fed, 95 to the SEC, and 24 to the Bureau of Consumer Financial Protection.
Of the seven interviewed, three agreed that Fannie Mae and Freddie Mac’s non-inclusion was a principal defect, a typical comment. So let us turn briefly to Fannie Mae and Freddie Mac.
Fannie and Freddie were created by Congress to buy mortgages and package them for investors. The housing bubble loosened lending standards. They own or guarantee half the mortgages in the country representing over 30 million home loans worth about $5.5 trillion.
Fannie-Mae and Freddie Mac are noted for their purchase of political influence. They give to 60 congressmen, perhaps every congressman on the two relevant congressional committees, and Speaker Pelosi. Freddie ran afoul of the law and was fined $3.8 million by the Federal Election Commission in 2006. Senator Dodd assisted in writing a rescue plan, to be signed by the “next president.” In 2008, Fannie and Freddie were nationalized. The rescue plan is awaiting the next president’s signature.
Fannie’s PAC gave over $6l7, 900 and Freddie’s PAC over $202,907 from January 2007 to May 2008. Currently, President Obama and Senator Dodd are the biggest recipients. Fannie and Freddie are also known for generous bonuses to departing officials: $26 million to Jamie Gorelick and $99 million to Franklin Raines. The White House is not concerned about bonuses in the public sector.
The New York Stock Exchange will not permit a stock to remain on its list whose price is below $1 on average for 30 days. Fannie has closed at $0.92, Freddie at $1.22. They have been “delisted.” Their stock will now be traded over the counter along with the other penny-stocks, but they hold about 97 percent of all subprime mortgages.
By Natalie Sirkin c2010
Natalie Sirkin is a Connecticut columnist. The above column is here printed with her permission