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Saturday, June 26, 2010

The Nightmare Financial Regulatory Scheme

I thought I was having a nightmare, but unfortunately it was reality. Senator Dodd (D- CT) revealed his plan for financial reform. All quotes below are from "Summary: Restoring American Financial Stability".

Lucky us, we get some new bureaucracies to protect us! Starting with the Consumer Financial Protection Bureau. Here are some of its powers:

Independent Rule Writing: Able to autonomously write rules for consumer protections governing all entities – banks and non-banks – offering consumer financial services or products.

Examination and Enforcement: Authority to examine and enforce regulations for banks and credit unions with assets of over $10 billion and all mortgage-related businesses (lenders, servicers, mortgage brokers, and foreclosure scam operators) and large non-bank financial companies, such as large payday lenders, debt collectors, and consumer reporting agencies. Banks with assets of $10 billion or less will be examined by the appropriate bank regulator.

Consumer Protections: Consolidates and strengthens consumer protection responsibilities currently handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Federal Reserve, National Credit Union Administration, and Federal Trade Commission.

Able to Act Fast: With this bureau on the lookout for bad deals and schemes, consumers won’t have to wait for Congress to pass a law to be protected from bad business practices.
Not only that, it gets a propaganda arm, the new Office of Financial Literacy.

Hold on, because they're not done protecting us yet. To oversee the overall financial situation we get the Financial Stability Oversight Council. It will be comprised of regulators from various agencies. Its powers include:

Tough to Get Too Big: Makes recommendations to the Federal Reserve for increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system.

Regulates Nonbank Financial Companies: Authorized to require, with a 2/3 vote, nonbank financial companies that would pose a risk to the financial stability of the US if they failed be regulated by the Federal Reserve. With this provision the next AIG would be regulated by the Federal Reserve.

Break Up Large, Complex Companies: Able to approve, with a 2/3 vote, a Federal Reserve decision to require a large, complex company, to divest some of its holdings if it poses a grave threat to the financial stability of the United States – but only as a last resort.
Orderly Shutdown: Creates an orderly liquidation mechanism for the FDIC to unwind failing systemically significant financial companies. Shareholders and unsecured creditors will bear losses and management will be removed.

Liquidation Procedure: Requires Treasury, FDIC and the Federal Reserve all agree to put a company into the orderly liquidation process. A panel of 3 bankruptcy judges must convene and agree - within 24 hours - that a company is insolvent.

Costs to Financial Firms, Not Taxpayers: Charges the largest financial firms $50 billion for an upfront fund, built up over time, that will be used if needed for any liquidation. Industry, not the taxpayers, will take a hit for liquidating large, interconnected financial companies. Allows FDIC to borrow from the Treasury only for working capital that it expects to be repaid from the assets of the company being liquidated. The government will be first in line for repayment.
That last one's a good one. $50 billion in new pork to pass around.

Part of this deal is that the Treasury Department gets a new Office of Financial Research which will:
Make Risks Transparent: Through the Office of Financial Research and member agencies the council will collect and analyze data to identify and monitor emerging risks to the economy and make this information public in periodic reports and testimony to Congress every year.
Of course, we have to be protected from the insurance industry too:
Office of National Insurance: Creates a new office within the Treasury Department to monitor the insurance industry, coordinate international insurance issues, and requires a study on ways to modernize insurance regulation and provide Congress with recommendations.
Those evil credit rating agencies need watching. The Securities and Exchange Commission gets a new Office of Credit Rating Agencies "with its own compliance staff and the authority to fine agencies" and "the authority to deregister an agency for providing bad ratings over time".

Last, and perhaps most evil, is the granting of new powers to the Board of Governors of the Federal Reserve. They will "have a formal responsibility to identify, measure, monitor, and mitigate risks to U.S. financial stability" this through a newly created office the Vice Chairman for Supervision.

This is a great time to look back at the warnings put forth by this author about financial reform. On April 16, 2009 in "How Dare You Want To Know What "Your" Government Is Doing!" I wrote about Sen. Schumer's (D-NY) plans for financial reform. At that time he advocated the kind of regulatory dictatorship that Sen. Dodd is now proposing.

The nightmare is now close to becoming reality.


  1. The most important systemic risk driver, that of different arbitrarily set capital requirements for different assets, that which drove the banks towards the AAAs since there they could leverage themselves 62.5 times to 1 and, if they made a half percent spread on it, make a whopping 32 percent yearly return on capital on what was supposed to be the least risky; that which led the banks to abandon the small businesses and entrepreneurs because with them they could only leverage 12.5 to 1.. Well that was not even discussed.

    Have you ever heard of a bank crisis that arose in AAA land, from what was perceived as having lower risk? Yes they all have.

    Have you ever heard of a bank crisis that arose from lending to risky small businesses and entrepreneurs? No there’s never been on.

    Does this not tell you something about how faulty our current regulations really are?

    In the 3000 pages of financial regulatory reform discussed, the Basel Committee, the entity that sets capital requirements, was not mentioned even once. Does this not tell you something about how crazy it all has become?

  2. Per,

    Gracias por tu comentario, chamo. :-)

    Of course, the whole thing seems crazy if you listen to their stated goals. That's the problem, what they say & what they are doing are 2 different things. This reform is all about helping their buddies in the financial sector at the people's expense. We need to start getting this straight, regulation is there to protect the special interests, period. It serves no other purpose.

    If Dodd & Frank really wanted to help they'd be pushing a bill to end the Federal Reserve & go over to privately issued money. It was monetary pumping more than anything that set the stage for the crisis by creating the boom. When the Fed had to cut back on the money flow by raising interest rates the bust started. Since these boneheads think that the artificial boom is a healthy economy they try to restore it, distorting the economy even more & setting the stage for the next bust.