The 2,315 page
Dodd-Frank financial regulation bill
that President Obama will sign today should not be called
“financial reform.” Instead the bill, which passed the Senate
60-39 last week when Massachusetts Senator Scott Brown joined
Maine Senators Olympia Snowe and Susan Collins to grant cloture,
should be called what for what it is: pages and pages of
massively costly, counterproductive and possibly unconstitutional
mandates on nearly every type of business except for those
government-sponsored enterprises at the root of the crisis. And
while the bill claims to crack down on excesses on Wall Street,
its harshest impact will likely be on Main Street businesses that
had nothing to do with the meltdown.
A front-page Wall Street Journal
article this week noted that “far
from Wall Street, President Barack Obama’s financial regulatory
overhaul… will leave tracks across the wide-open landscape of
American industry.” The Journal notes that “the bill
will touch storefront check cashiers, city governments, [and]
small manufacturers.”
But one thing it will leave totally untouched is the
government-sponsored enterprises Fannie Mae and Freddie Mac,
which new research by Congress’s Financial Crisis Inquiry
Commission and other bodies shows was even more of a prime factor
in the subprime boom than originally assumed. The Federal Housing
Finance Agency now reports that Fannie and Freddie purchased 40
percent of all private-label subprime securities in 2003 and
2004. Indeed,
according to Edward Pinto, housing
scholar and Fannie’s former chief credit officer, millions of
mortgages to borrowers with credit scores of less than 660,
considered by prominent researchers to be the dividing line for
subprime loans, had been labeled by Fannie and Freddie as prime
going back as early as 1993.
Rather than wait for Congress’s own Financial Crisis
Inquiry Commission to issue its report in December to examine the
role of the GSEs and other causes, Congress passed a bill that
will not prevent future bubbles and imposes untold costs that
will put the country in danger of slipping back into a
recession.
New collateral requirements on derivatives could cost U.S.
companies as much as $1 trillion in lost capital and
liquidity, according
to the International Swaps and Derivatives
Association. And as the WSJ
piece notes, these costs would hit not just big banks, but
farmers who use derivatives to hedge the price of their crops and
fuel for their tractor. The new Consumer Financial Protection
Bureau could also hit retailers that issue credit tangentially
related to their business, such as small stores that offer
layaway plans.
On the other side of the retail ledger, some of the biggest
retailers also got an unjustified mandated benefit with the
Durbin amendment that puts price controls on the interchange fees
they pay to process credit cards. This corporate welfare for fat
cat merchants
will mean higher costs to
consumers, community banks, and credit unions.
In addition, the bill contains provisions that will empower
special interests at the expense of ordinary shareholders and
that may exceed the limits of the U.S. Constitution. The bill’s
“orderly liquidation” authority will allow the Federal Reserve
and the Treasury Department not only to bail out firms whose
failure is deemed to be a threat to “financial stability,” but to
actually
seize firms that are not even
asking for a bailout.
The “proxy
access” provisions would override
longstanding state rules in corporate director elections and
force companies and their shareholders to subsidize director
elections of special-interest shareholders — such as unions,
environmentalists and others. This would give progressive groups
leverage to cut deals with management to push through agenda
items, such as the “card check” abolition of secret ballots in
labor elections and carbon cap-and-tax reductions, that they
can’t get through the halls of Congress.
The silver lining is that the more people found out about
the potential unintended consequences of this bill, the less
popular it became. The bill cleared cloture with the bare minimum
60 votes that it needed. In the House, almost all Republicans, as
well as 19 Democrats, voted no on the final bill.
Brown’s vote was certainly disappointing to those who
supported him and expected him, if not to be conservative on
every issue, at least to be one who doesn’t go along with phony
big-government reform. But other ostensible conservatives in safe
seats who would eventually vote against the bill also share much
of the blame for smoothing passage. Sen. Bob Corker (R-Tenn.) and
retiring Sen. Judd Gregg (R-N.H.) became the media’s favorite
Republicans in the spring by constantly making comments to the
effect that they agreed with “90 percent” of the bill, and it
would take just “5 minutes” for the parties to resolve their
differences.
Their soft-pedaling of the disagreements, rather than
sounding the alarm about the bill’s flaws, made the parties’
differences seem trivial and gave red-state Democrats, as well as
Brown and the “Maine sisters,” cover to offer their support. In
the end, both Corker and Gregg would become more vocal in their
criticisms — Gregg gave a particularly impassioned
floor speech last week calling the
derivatives rules “simply a punitive exercise” that will “make it
harder for Americans to be competitive” — but the damage of
their playing to the cameras had already been done.
Republicans also should have insisted on Fannie and Freddie
reform from the beginning as a precondition to negotiation on any
bill. The bill’s lack of action on the GSEs became a valuable
talking point in the end in communicating to the public that this
bill was anything but “reform.” Given Dodd and Frank’s allegiance
to the GSEs, insistence on action from the beginning may have
stopped the bill in its tracks.
As a result of the growing skepticism of the bill, a few of
the most horrific provisions publicized by the Competitive
Enterprise Institute and other free-market groups — such as
those that would have hurt angel investors and
ensnared manufacturers in the
definition of “financial companies” — were dropped. And one
genuinely pro-growth reform was adopted.
That measure, which was added over Chairman Dodd and
Chairman Frank’s objections, helps fix costly and
counterproductive provisions of the last “financial reform”: the
Sarbanes-Oxley Act of 2002. This provision will permanently
exempt smaller public companies — those with market valuations
of $75 million or less — from the law’s section 404(b), the
mandate of an audit of a company’s “internal controls.” This
requirement and the rest of Sarbox did nothing to stop the
accounting schemes at companies like Lehman Brothers and
Countrywide, but instead frustrated honest entrepreneurs with
audits of trivial items like possession of office keys and number
of letters in employee passwords, and cost the U.S. economy $35
billion a year. (I wrote about Sarbanes-Oxley’s burdens and lack
of investor benefits in my paper, “SOXing
it to the Little Guy.”)
Thanks to this relief, many smaller companies should once
again be able to afford the cost of going public and get the
financing they need to grow into the next Microsoft, Facebook or
Google. That is, if they don’t get strangled by the other mounds
of red tape in this bill.
In this bill, much arbitrary power is delegated to an army
of new regulators. In the end, it was heartening
that many informed citizens and their lawmakers did their own due
diligence on this bill, and weren’t stampeded into supporting a
measure labeled as “getting Wall Street.” They will need to
continue this scrutiny in examining the mounds of regulations to
be implemented under the bill’s authority.
