Senator Christopher Dodd put out his draft bill which calls for the most significant overhaul in government financial regulation is over a century. The “Restoring American Financial Stability” document has 1,136 pages, but one of the first major statements in the bill should make the balance of the proposal academic. The new legislation, among other things, means to “Enforce Regulations On The Books.” Those who drafted the bill describe this as allowing “regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefit special interests at the expense of American families and businesses.”
What no one who supports the bill has said is that the enforcement of current laws makes reform in large part unnecessary.
Dodd’s bill has several simple components. The first is the creation of a Consumer Financial Protection Agency. This would be formed to prevent citizens from being duped by mortgage and credit card companies who get people to agree to hidden fees through deceptive practices. Dodd may want to turn to several laws already on the books to get a good description of what his new agency will do. Those would include The Truth In Lending Act and many of the provisions of the Consumer Credit Protection Act. Most of the fifty states have similar laws and regulations.
Dodd’s next proposal is to create a safe way to shut down the “too big to fail” banks if they get in real trouble. The senator’s assumption about the motivations of large financial institutions working to get larger is worth examining. He writes “As long as giant firms (and their creditors) believe the government will prop them up if they get into trouble, they only have incentive to get larger and take bigger risks, believing they will reap any rewards and leave taxpayers to foot the bill if things go wrong.” It is hard to imagine that Sandy Weill had the idea of Citigroup eventually being ruined when he created it or that he wanted average citizens to cover the costs of the collapse of the “financial super market” that became Citi. Hank Greenberg was probably not thinking about stiffing the taxpayer either when he built the largest insurance company in the world. The size of the institutions was not the sole or even primary problem or cause of the credit crisis. The fact these firms had inadequate risk monitoring and measurement systems is what nearly destroyed them. That is much more a function of tracking and auditing transactions than it is making financial institutions larger or smaller. All large banks already have risk committees of their boards of directors. The members of those boards seem to have done nothing worthwhile as their companies made more and more complex financial transaction in 2005, 2006, and 2007.
Dodd could cover most of what he proposes in his entire bill by forming a single independent agency he would like to create. Its goal he says would be to “identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the financial system.” There is a real problem in determining how the agency would be able to find risk in a maze of hundreds of financial firms which conduct millions of transactions both in the US and abroad, but tracking risk is the key to any system that is set up to prevent its dangerous side effect. Dodd’s call for an independent agency to do identify and control systemic risk may only be a dream, but it is a good one.
The most difficult to understand part of Dodd’s program is his idea that the four large bank regulators should be rolled into one. Large American companies can hardly manage one merger at a time ever with access to the best consultants and bankers in the world. Washington is and always will be a political mess and the chaos of trying to get four agencies to go through a cooperative merger is beyond comprehension. Just as important, the Dodd bill does not lay out any strong reason combining regulators makes sense. He suggests that the action “eliminates the convoluted system of multiple federal bank regulators to increase accountability and end unnecessary overlap.” The idea of enforcing laws that are already on the books would cover the accountability aspect of this problem. There will always be some level of overlap between and among agencies that regulate industries within the same sector. The airline industry is regulated by more than one agency. The tobacco industry is monitored by several. It would take decades to sort out all the duplication among government agencies and there is no proof that the process would create a better system if laws are not regularly and strictly enforced.
Dodd’s suggestions on executive compensation and board governance are “none-measure measures.” His proposal would give shareholders a say on pay and corporate affairs with a non-binding vote on executive compensation and director nominations.” Boards will take all non-binding votes by shareholders as what they are and that is non-binding.
Dodd’s final big idea is to provide tough new rules for transparency and accountability from investment advisors, financial brokers and credit rating agencies to protect investors and businesses. Credit agencies did apparently “shop” ratings to high bidders who wanted to be get the best grades available even if those grades were misleading. That should be against the law if it is not already. Transparency from investment advisors and brokers is already regulated heavily by the SEC. Whether those regulations are properly enforced is an open matter.
Dodd’s bill will probably be re-written a number of times in committee. The Senate version may be different from the House version. It will not turn out the way its author wrote it or even intended it like almost all complex legislation. The bill or related bills may never be passed at all.
Dodd’s failure of perception and the failure of the financial regulatory community in general is that enforcing the laws that are already on the books would take care of the huge majority of what the Senator is trying to do through new regulation. The alternative, of course, is to pass new laws and neglect to enforce those as well.
Douglas A. McIntyre
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