Tuesday, July 06, 2010


The sheer complexity of the … [Dodd-Frank] bill is certainly a threat to future economic growth. But if you sift through the sections and subsections, you find much more than complexity to worry about -- Economist John B. Taylor

The 2,319-paged financial reform bill of Senator Christopher Dodd and Representative Barney Frank “widens” the regulatory net, installs “better shock-absorbers,” and “provides a road-map for big firms that fail,” according to the Wall Street Journal. It is supposed to prevent future bail-outs, but it may facilitate them. Here follows a sampling of its provisions.

How it will work out, even Senator Dodd says he cannot anticipate, though President Obama, a little behind on reviewing the history of business cycles, anticipates that the bill will ensure that a financial crisis will never happen again. A radio caller dubs the bill the “Frank-Dodd Fraud bill.”

What’s in the Bill?

The Federal Reserve retains oversight over thousands of community banks.

The bill involves government agencies that had nothing to do with the financial crisis. “Far from effective reform, this legislation includes provisions totally unrelated to the financial crisis which may disrupt America’s fragile economic recovery, and increase instability and risk,” says the Business Roundtable’s president. Among BR’s criticisms is that regulations on derivatives raise costs for firms that merely use them to hedge risks.

The bill creates a lot of new regulator agencies, giving them much discretion and little oversight. Among the new agencies are: an Office of Financial Research—in the Treasury—to concentrate on systemic risk, which has been the task of the Fed; a Bureau of Consumer Financial Protection—in, and financed by, the Fed—to write the rules for all types of financial service including some that had no connection to the financial crisis; a Commodities Futures Trading Corporation, calling for higher collateral on risk-reducing instruments even in firms unrelated to the crisis. It and the SEC, together, are to regulate over-the-counter derivatives. Which does what, is unclear.

In the Treasury Department, an agency (perhaps the Office of Financial Research) will monitor the insurance industry.

Surrounded by the new agencies and the old, private firms stand about as much chance for survival as insurance companies under ObamaCare.

What’s in the Bill that’s bad?

The Federal Reserve is given control of the financial system, points out Peter J. Wallison in the March 18 Wall Street Journal, which is perhaps surprising because it “failed to anticipate the financial crisis, missed the significance of the developing housing bubble, and did not prevent our biggest banks from taking excessive risks.”

Within the Fed, the Consumer Financial Protection Bureau is established with authority over banks and some financial firms—authority to enforce regulations for all mortgage-related businesses, banks, and credit unions having assets of over $10 billion. It will write the rules, which will affect even pay-day lenders and check cashers. It has discretion.

The auto industry managed to get itself excluded from the Consumer Protection Financial Bureau, though President Obama particularly wanted the auto industry included.

What’s not in the Bill?

Dropped from the bill is the $19 billion assessment on the biggest banks and on hedge funds to pay costs associated with the bill. Nearly at the last minute Senator Brown from Massachusetts threatened he would vote against the bill in the Senate on that account. It was removed. The problem was where to find the $19 (now reduced to $18) billion. It was decided to take it out of the Troubled Asset Relief Program.

Fannie Mae and Freddie Mac are not mentioned in the bill. Recently nationalized, they were the providers of funds for most home loans and subprime mortgages. Long protected and much praised by Senator Dodd and Representative Frank, they are generous at gift-giving time, with Sen. Dodd and President Obama at the top of the gift lists.

Another interest group that doesn’t appear in the bill is the Office of Women and Minorities. It was to be housed in the Federal Reserve. Its head was to be appointed by President Obama. Its staff, which was to be placed in all twelve regional Federal Reserve Banks, was to be at a high level, perhaps even in decision-making on monetary policy. The Office of Women and Minorities evidently was not approved by the House conferees in the conference committee.

It is useful to compare the U..S. financial experience with that of Canada, which did not encounter a financial crisis. How come? Canada has no subprime mortgage market. Mortgage lending organizations are not allowed to sell the mortgages they initiate. There is no Fannie Mae or Freddie Mac to pass the mortgages to. Home-owners and taxpayers are not allowed to deduct interest on mortgages from their income taxes.

A non-governmental agency should replace Fannie and Freddie, a critic has suggested.

Fannie Mae and Freddie Mac are the kingpins of the subprime mortgage industry. Chairmen Dodd and Frank have long been misstating Fan and Fred’s role and understating their importance. Chairman Frank discourages his committee members from even mentioning their names at hearings. He interrupts, saying he is “working on” it.

It is too bad that Messrs. Dodd and Frank did not await the outcome of the congressionally mandated Financial Crisis Inquiry Commission to ascertain the causes of the financial crisis before they rearrange these deckchairs, which may require another bail-out of another company “too big to fail.”

As the Administration has taken over ObamaCare, the legislature, through massive and complex regulations, is positioning the financial industry for governmental take-over.

By Natalie Sirkin
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