Collateral Damage: The Real Impact Of The Democrats’ Bailout Bill
In July 2010, the Democrats rushed through a massive 2300 page bill that failed to address the real causes of the financial crisis. For example, a key reform missing in the Act was an exit strategy from Fannie Mae and Freddie Mac. Instead, the Democrats used the crisis to pursue their long-term goals of a government managed economy.
In an attempt to meet an arbitrary deadline tied to an upcoming G-20 meeting, the Democrats engaged in a headlong rush to complete a conference committee established to reconcile competing House and Senate regulatory reform bills in a mere two weeks. Even before the bill was signed into law, the Democrats acknowledged there would need to be a “technical corrections” package to address drafting errors and unintended consequences.
Within days of the bill becoming law, their predictions were borne out, as the consequences of a poorly drafted bill began to become evident. The credit rating agency liability provisions nearly shut down the bond market. This forced the Securities and Exchange Commission to step in and issue temporary guidance.
Additionally, provisions that were added to the bill without public discussion about came to light. For example, the Securities and Exchange Commission was given broad exemption from the Freedom of Information Act. This led to a correction bill removing this exemption.
The 2300 page bill mandated approximately 240 rulemakings, and the Committee will have an enormous task in overseeing the implementation of the new law to make sure that the same regulators who helped cause the crisis and have been given enormous authority to write the new rules don't make a hash of things this time around.
Following is an overview of the unintended consequences thus far from passing the Dodd-Frank Act.
Credit Rating Agencies: A Hastily Drafted Liability Standard Forces the SEC to Step in to Prevent a Bond Market Shut Down
- Wall Street Journal: “Bond Sale? Don't Quote Us, Request Credit Firms…The odd plea is emerging as the first consequence of the financial overhaul that is to be signed into law by President Obama on Wednesday. And it already is creating havoc in the bond markets, parts of which are shutting down in response to the request. Standard & Poor's, Moody's Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales, each said in statements in recent days. Each says it fears being exposed to new legal liability created by the landmark Dodd-Frank financial reform law.The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately. The companies say that, until they get a better understanding of their legal exposure, they are refusing to let bond issuers use their ratings….The change caught the ratings agencies by surprise. The original Senate version of the bill didn't include the provision. It was only on June 30, when the Dodd-Frank bill was passed, that the exemption was removed. The Senate passed the amended version on July 15. The offices of Sen. Christopher Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.) didn't immediately respond to a request for comment.” (July 21, 2010)
A Hidden Provision Exempting The SEC From The Freedom Of Information Act Leads Congress To Remove This Provision After Bill Becomes Law
- Fox Business: “SEC Says New FinReg Law Exempts It From Public Disclosure…So much for transparency. Under a little-noticed provision of the recently passed financial-reform legislation, the Securities and Exchange Commission no longer has to comply with virtually all requests for information releases from the public, including those filed under the Freedom of Information Act. The law, signed last week by President Obama, exempts the SEC from disclosing records or information derived from "surveillance, risk assessments, or other regulatory and oversight activities." Given that the SEC is a regulatory body, the provision covers almost every action by the agency, lawyers say. Congress and federal agencies can request information, but the public cannot. (July 28, 2010)
IMF Warns That Despite Regulatory Reform Bill, The Lack of Regulatory Consolidation Places Financial System At Risk
- Wall Street Journal: “U.S. Financial System Still at Risk, Says IMF…The International Monetary Fund says the U.S. financial system is "slowly recovering," but remains vulnerable to crisis, in part because Congress and the administration have failed to streamline a regulatory system marked by turf battles and overlapping responsibilities. "We asked many times why bolder action could not be undertaken," said the IMF's Christopher Towe, who oversaw the agency's first broad review of the U.S. financial sector. Administration officials have argued that proposals to eliminate regulatory agencies would have become bogged down in Congress, saying higher priorities included a procedure to shut systemically important institutions that run into deep trouble.The IMF said the U.S. system, where the Federal Reserve, Federal Deposit Insurance Corp., and state regulators share responsibility for regulating U.S. banks, and where the Commodities Future Trading Commission and Securities and Exchange Commission tussle over regulating futures markets, made coordinating oversight and uncovering new risks difficult.” (July 29, 2010)
- The House Republican Financial Reform Modernized The Regulatory Structure: The Republican plan would ensure consistent enforcement, accountability and transparency by modernizing the current framework of overlapping and redundant Federal financial regulatory agencies and streamlining supervision of deposit-taking entities in one agency while preserving charter choice as well as the dual banking system. The plan combines the Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS) into one agency and shifts the supervisory functions of the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) to that agency, including the responsibility for overseeing bank and financial holding companies. Read about the plan here.
Limited Audits Of The Federal Reserve:
- Fox Business: “Can Anyone Stop the Fed?... Now that the Fed has gained new and expanded powers under financial reform to regulate the banking industry, Congressional Republicans are lashing out, saying greater oversight is needed, and pointing a finger at House Banking Committee chairman Barney Frank for allegedly watering down a proposal from Republican congressman Ron Paul to audit the agency. "There are real-world consequences of the culture of secrecy at the Federal Reserve," Bachus said in statement to FOX Business. "A prime example is the AIG mess in which the Federal Reserve paid a handful of mega banks and foreign counter parties one hundred cents on the dollar, more than $12 billion, while offering small and regional banks thirty percent of what they were owed. "This demonstrated to many of us in Congress that the Federal Reserve was in need of transparency and accountability. Repeated letters and questions in Committee proceedings still have not received answers to some of the most basic questions regarding this disparity in treatment... Allowing the Federal Reserve to continue to operate in secrecy, and with the expanded powers handed to them by the Democrats, fails to protect the interest of taxpayers. I will continue to work towards bringing transparency and accountability to the Federal Reserve." (7/30/3010)
- The Republican plan required more extensive audits of the Federal Reserve by the Government Accountability Office. The plan refocuses the Fed on its core mission of conducting monetary policy by relieving it of current regulatory and supervisory responsibilities and reassigning them to other agencies, and requiring an explicit inflation target. These changes will eliminate the Fed's current incentive to prop up the economy through an accommodative monetary policy to prevent firms from failing.
Derivatives:
- CNBC: Click here to watch a segment on how the Dodd-Frank Act will increase the cost for farmers.
- WSJ: "Finance Overhaul Casts? Long Shadow on the Plains… “[I]t’s the derivatives portion—the part of the bill aimed directly at Wall Street—that might end up touching most lives in rural America. The new law requires most derivatives transactions to be standardized, traded on exchanges, just like corporate stocks, and funneled through clearinghouses to protect against default. The question for these farmers is whether such rules will make hedging more expensive. Some say new requirements on big players will create higher costs for small players, including the cash dealers will have to put aside to enter into private derivatives transactions. Some brokers think restrictions on big-money banks and investors will drain the amount of money available to the everyday deals farmers favor.” (7/13/2010)
- NY Times: "Reap What You Swap… “[I] am stuck in the middle of this financial overhaul. The Dodd-Frank Wall Street Reform and Consumer Protection Act may be targeted at risk-taking bankers, but the regulations have the potential to change the way I do business on the farm....On the purchasing side, I also use derivatives to protect myself from swings in the cost of fertilizer, fuel and other staples. In the past two years, my nitrogen fertilizer has ranged from $435 to $685 per ton, and my fuel bills are giving me whiplash. While reading through the Dodd-Frank act these past few weeks, I’ve been wondering: Will the regulations on swaps make it more difficult for me to hedge against market swings in prices for crops and supplies? These are the markets I rely on for risk management, to smooth the highs and lows of my purchases and sales....I hope the Commodity Futures Trading Commission will resist casting the net so wide that it ensnarls those for whom the markets were created: grain buyers and sellers. As rules are developed to translate the act’s vague wording, I will be watching to ensure that my risk management strategies remain relevant and affordable. I may not be able to manage Mother Nature, but I can manage my risk with derivatives." (8/11/2010)
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