As the US economy sputters through one of its worst recessions, Americans are uneasy about the future, enraged at Wall Street and distrustful of Washington's responses. Sen. Christopher Dodd's financial "regulatory reform" bill is an ambitious attempt to address the first two concerns.
The opening statement of S. 3217, the Restoring American Financial Stability Act of 2010, promises " to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes."
Let's look at how the bill does or does not accomplish what it promises:
Improves accountability and transparency in the financial system -
Much of S. 3217 creates stricter scrutiny of financial advisers, brokers, financial institutions and insurers. Under Title VII, on page 762, the bill addresses Wall Street transparency and specifically derivative "swaps" markets.
Derivatives are an agreement based on future performance. They involve complex bets on the rise or fall of the stock market. In "credit-default swaps," fees are received in exchange for agreements to cover losses or defaults. While derivatives have been used successfully for decades as a hedge against losses, they also contributed to the meltdowns at Enron and AIG. Warren Buffet calls them "time bombs." Under S. 3217, call them "hyper-regulated."
Wall Street firms would be banned from brokering for speculators; and nearly all derivatives would be publicly traded in exchanges shedding more sunlight on the transactions. On page 640, large swaps would be highly regulated and their "books and records shall be open at all times to inspection."
Bottom line: Yes, the bill provides regulation and transparency into transactions of asset-backed securities, hedge funds, mortgage brokers and payday lenders and reduces loopholes in derivatives trading. What is notably missing is any form of additional transparency, accountability or constraints on the newly empowered agencies administering these regulations.
Ends "Too Big To Fail" -
Proponents argue the bill eliminates "too big to fail" since, on page 111, under Title II, an Orderly Liquidation Authority is formed to liquidate failed companies, not bail them out.
But the authority uses hazy terms like "non-bank financial companies," "relevant findings," systemic risk" and "substantial evidence" to decide which companies to seize or ignore. A company need not be "big" or "financial" to be confiscated. For instance, a company leasing equipment to its customers could be considered a non-banking financial institution.
The OLA is granted vast powers. Once a company is targeted for liquidation, its recourse is limited. On page 118, "the determinations of the Panel" shall be final and subject to limited appeal. After the liquidation panel issues its findings, the defendant has 30 days in which to appeal to the Third Circuit Court in DE. The OLA takes precedence over, and is therefore unbound by the constraints of bankruptcy law. Even the defendant's right of appeal to the Supreme Court is strictly limited to whether or not there was "substantial evidence."
The government forms the OLA by allocating itself a $50 billion Orderly Liquidation Fund created by taxing financial firms.
In practice, the authority creates a fertile patch for political favoritism or reprisal. The Obama administration's decision to force Chrysler bondholders to accept 33 cents on the dollar on secured debts while giving the UAW retirees 50 cents was in violation of bankruptcy law. The politically connected UAW folks got preference over the politically unconnected bondholders. S. 3217 would institutionalize this favoritism.
Bottom line: There is nothing in the 184 pages of Title II that forces the Orderly Liquidation Authority to liquidate anything. Since we already have a better defined, well-functioning and less politicized bankruptcy system, the authority would seem to be a step backwards.
Protects American taxpayers by ending bailouts -
Actually, the bill provides a runway for the opposite. On page 22, S. 3217 creates a Financial Stability Oversight Council whose directives are to 1. identify financial risks to US financial stability, 2. eliminate the expectation of a government bailout and, 3. respond to the threat. In other words, bail them out.
The bill hasn't even been signed and there are already bailout exceptions. Fannie Mae and Freddie Mac were key contributors to our financial crises as well as to the administration. Like the UAW, they have a favored status and are not even addressed in the reform bill. Meanwhile, Congress gave them bailouts of $19 billion for the first quarter of 2010 and they are asking for another $19 billion on top of the $145 billion already received.
Bottom line: There is nothing in the 1566 pages of the bill that prevents politicians from providing further bailouts. Let's not overlook the obvious. The only "bailers" are the people writing this bill. It carefully avoids hobbling their latitude for future generosity.
Protects consumers from abusive financial services practices -
The Bureau of Consumer Financial Protection, formed on page 1001, operates within the Federal Reserve System on a budget of $646 million. This is 12% of the Fed's record high 2009 operating budget. By linking the two budgets and using the inflated figures, lawmakers created the highest baseline funding possible for the new agency.
On page 1234, the BCFP monitors financial transactions and holds financial brokers and advisers accountable to comply with consumer financial laws or face penalties. Meanwhile, the bureau grants itself massive rulemaking authority with minimal oversight. While the BCFP must submit rules changes to Consumer Financial Regulators, they are only bound to note regulators' objections, not abide by them.
Though the intent sounds noble, the bureau's powers are alarming. The new agency has the authority to monitor every American's financial patterns. On page 1417, the bill mandates that each branch with an automated teller that accepts deposits for any financial institution, must maintain records of personal and individual transactions for the government to use and share as they deem appropriate. In addition, customer addresses are to be geocoded for data collection based on the census tracts and this information accumulated for sharing to identify purchasing habits on a geographical basis.
The bureau operates on the principle that they can only protect you if they know what companies are doing and how you are responding. Hence they authorized themselves to accumulate your personal information.
Bottom line: The bill provides additional oversight, reporting requirements and transparency for consumers, but at a price of personal freedom and privacy that is out of balance with its limited benefits. It creates a virtually autonomous agency with unprecedented authority to collect and mine personal information, then share that information at their discretion while creating self-regulating rules with minimal oversight.
And other purposes -
Among many other provisions, the bill also:
• Transfers the powers of the current Office of Thrift Supervision to the Board of Governors and within 90 days the office is abolished. The Board of Governors operates within the Federal Reserve, itself under scrutiny for a lack of transparency. In March of 2010, the Fed had to be forced by a District court to reveal information about loans to private banks.
• Establishes an Office of National Insurance to monitor, tax and regulate the insurance industry. • Manages executive compensation.
• Establishes an Office of Financial Research.
Conclusion -
While the intent of the Restoring American Financial Stability Act of 2010 is to restore financial stability, it is unlikely to do so.
Economic stability requires a balance of oversight and freedom. Sufficient oversight to prevent commercial abuse and enough freedom to creatively prosper. If anything has defined America's success it is the ability to find this balance and rebound when it is temporarily lost. S. 3217 is a heavy-handed attempt to legislate both the road to prosperity and its definition.
Americans are seeking protections, but this bill cages the innocent with the guilty as it nourishes a hunger for political ascendency.
Finally, the most fundamental components for success of this bill are character and fiscal responsibility. S. 3217 creates broad, vaguely defined terms and applies minimal constraints affording Olympian powers to masses of newly appointed bureaucrats who will add thousand of lines of regulations that will affect our daily lives. These are the same powers Washington routinely abuses. It took Bernie Madoff a lifetime to pilfer $50 billion of others' money. With our national debt increasing at the rate of $200 million an hour, Congress achieves this same feat every 10 days.
Perhaps in a different time, with different representatives a bill like this would have value. But, today, who is to protect us from the protectors?
The opening statement of S. 3217, the Restoring American Financial Stability Act of 2010, promises " to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes."
Let's look at how the bill does or does not accomplish what it promises:
Improves accountability and transparency in the financial system -
Much of S. 3217 creates stricter scrutiny of financial advisers, brokers, financial institutions and insurers. Under Title VII, on page 762, the bill addresses Wall Street transparency and specifically derivative "swaps" markets.
Derivatives are an agreement based on future performance. They involve complex bets on the rise or fall of the stock market. In "credit-default swaps," fees are received in exchange for agreements to cover losses or defaults. While derivatives have been used successfully for decades as a hedge against losses, they also contributed to the meltdowns at Enron and AIG. Warren Buffet calls them "time bombs." Under S. 3217, call them "hyper-regulated."
Wall Street firms would be banned from brokering for speculators; and nearly all derivatives would be publicly traded in exchanges shedding more sunlight on the transactions. On page 640, large swaps would be highly regulated and their "books and records shall be open at all times to inspection."
Bottom line: Yes, the bill provides regulation and transparency into transactions of asset-backed securities, hedge funds, mortgage brokers and payday lenders and reduces loopholes in derivatives trading. What is notably missing is any form of additional transparency, accountability or constraints on the newly empowered agencies administering these regulations.
Ends "Too Big To Fail" -
Proponents argue the bill eliminates "too big to fail" since, on page 111, under Title II, an Orderly Liquidation Authority is formed to liquidate failed companies, not bail them out.
But the authority uses hazy terms like "non-bank financial companies," "relevant findings," systemic risk" and "substantial evidence" to decide which companies to seize or ignore. A company need not be "big" or "financial" to be confiscated. For instance, a company leasing equipment to its customers could be considered a non-banking financial institution.
The OLA is granted vast powers. Once a company is targeted for liquidation, its recourse is limited. On page 118, "the determinations of the Panel" shall be final and subject to limited appeal. After the liquidation panel issues its findings, the defendant has 30 days in which to appeal to the Third Circuit Court in DE. The OLA takes precedence over, and is therefore unbound by the constraints of bankruptcy law. Even the defendant's right of appeal to the Supreme Court is strictly limited to whether or not there was "substantial evidence."
The government forms the OLA by allocating itself a $50 billion Orderly Liquidation Fund created by taxing financial firms.
In practice, the authority creates a fertile patch for political favoritism or reprisal. The Obama administration's decision to force Chrysler bondholders to accept 33 cents on the dollar on secured debts while giving the UAW retirees 50 cents was in violation of bankruptcy law. The politically connected UAW folks got preference over the politically unconnected bondholders. S. 3217 would institutionalize this favoritism.
Bottom line: There is nothing in the 184 pages of Title II that forces the Orderly Liquidation Authority to liquidate anything. Since we already have a better defined, well-functioning and less politicized bankruptcy system, the authority would seem to be a step backwards.
Protects American taxpayers by ending bailouts -
Actually, the bill provides a runway for the opposite. On page 22, S. 3217 creates a Financial Stability Oversight Council whose directives are to 1. identify financial risks to US financial stability, 2. eliminate the expectation of a government bailout and, 3. respond to the threat. In other words, bail them out.
The bill hasn't even been signed and there are already bailout exceptions. Fannie Mae and Freddie Mac were key contributors to our financial crises as well as to the administration. Like the UAW, they have a favored status and are not even addressed in the reform bill. Meanwhile, Congress gave them bailouts of $19 billion for the first quarter of 2010 and they are asking for another $19 billion on top of the $145 billion already received.
Bottom line: There is nothing in the 1566 pages of the bill that prevents politicians from providing further bailouts. Let's not overlook the obvious. The only "bailers" are the people writing this bill. It carefully avoids hobbling their latitude for future generosity.
Protects consumers from abusive financial services practices -
The Bureau of Consumer Financial Protection, formed on page 1001, operates within the Federal Reserve System on a budget of $646 million. This is 12% of the Fed's record high 2009 operating budget. By linking the two budgets and using the inflated figures, lawmakers created the highest baseline funding possible for the new agency.
On page 1234, the BCFP monitors financial transactions and holds financial brokers and advisers accountable to comply with consumer financial laws or face penalties. Meanwhile, the bureau grants itself massive rulemaking authority with minimal oversight. While the BCFP must submit rules changes to Consumer Financial Regulators, they are only bound to note regulators' objections, not abide by them.
Though the intent sounds noble, the bureau's powers are alarming. The new agency has the authority to monitor every American's financial patterns. On page 1417, the bill mandates that each branch with an automated teller that accepts deposits for any financial institution, must maintain records of personal and individual transactions for the government to use and share as they deem appropriate. In addition, customer addresses are to be geocoded for data collection based on the census tracts and this information accumulated for sharing to identify purchasing habits on a geographical basis.
The bureau operates on the principle that they can only protect you if they know what companies are doing and how you are responding. Hence they authorized themselves to accumulate your personal information.
Bottom line: The bill provides additional oversight, reporting requirements and transparency for consumers, but at a price of personal freedom and privacy that is out of balance with its limited benefits. It creates a virtually autonomous agency with unprecedented authority to collect and mine personal information, then share that information at their discretion while creating self-regulating rules with minimal oversight.
And other purposes -
Among many other provisions, the bill also:
• Transfers the powers of the current Office of Thrift Supervision to the Board of Governors and within 90 days the office is abolished. The Board of Governors operates within the Federal Reserve, itself under scrutiny for a lack of transparency. In March of 2010, the Fed had to be forced by a District court to reveal information about loans to private banks.
• Establishes an Office of National Insurance to monitor, tax and regulate the insurance industry. • Manages executive compensation.
• Establishes an Office of Financial Research.
Conclusion -
While the intent of the Restoring American Financial Stability Act of 2010 is to restore financial stability, it is unlikely to do so.
Economic stability requires a balance of oversight and freedom. Sufficient oversight to prevent commercial abuse and enough freedom to creatively prosper. If anything has defined America's success it is the ability to find this balance and rebound when it is temporarily lost. S. 3217 is a heavy-handed attempt to legislate both the road to prosperity and its definition.
Americans are seeking protections, but this bill cages the innocent with the guilty as it nourishes a hunger for political ascendency.
Finally, the most fundamental components for success of this bill are character and fiscal responsibility. S. 3217 creates broad, vaguely defined terms and applies minimal constraints affording Olympian powers to masses of newly appointed bureaucrats who will add thousand of lines of regulations that will affect our daily lives. These are the same powers Washington routinely abuses. It took Bernie Madoff a lifetime to pilfer $50 billion of others' money. With our national debt increasing at the rate of $200 million an hour, Congress achieves this same feat every 10 days.
Perhaps in a different time, with different representatives a bill like this would have value. But, today, who is to protect us from the protectors?
John Anthony
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