The quantity and complexity of financial reform into the Dodd-Frank bill simply is not necessary. Two years after the bill was signed into law, regulators have written only 185 of 400 new rules totaling 5,320 pages. The subcommittee on financial institutions and consumer credit predicts it will take the private sector some 24 million hours every year to comply with this first batch alone. It took a mere 20 million man hours to build the entire Panama Canal.
The only purpose of writing a 10,000 page bill is to create exemptions and loopholes and work-arounds for the important players in this sector. You can be sure that the real losers of this regulation will be the institutions in this sector that are not the important players as well as the average American citizen. The objective of the legislation is completely lost and we are left with expensive and useless regulations for the businesses that aren’t the problem in our economy while not affecting business-as-usual for the institutions that take home their winnings and leave us with their losses.
Why were investment institutions (not commercial banks) like Goldman Sachs and Morgan Stanley saved by us instead of going through bankruptcy? Supposedly they were deemed so big that the impact of their failure would destroy our economy. If so, then the next logical step would be to prevent this from happening in the future. Why were these institutions not wound down to a small-enough-to-fail size? Four years later, the size of investment institutions still is not limited and the responsibility of bailing them out is still in the taxpayers’ hands. This is a blatant anti-capitalist, anti-free market policy.
The other TBTF institutions are hybrid commercial banks with trading platforms. The federally insured deposits are used as collateral for higher credit ratings to maximize profits of trades. The deregulation of leverage has been a long slippery slope that has ultimately resulted in this tangled web of lies that we now live. Why is the taxpayer guaranteeing the collateral for these institutions to yield better returns? This is our money and we do not want to fund these businesses. We are not shareholders or investors and we do not have the opportunity to benefit from the better returns of these businesses. Therefore, remove the taxpayer guarantee and let them fail just like every other financial institution in our economy.
This is precisely the prescription presented last week to the Senate Banking committee By Thomas Hoenig, a director of the Federal Deposit Insurance Corp. and former president of the Kansas City Fed. He wants to limit activities at institutions that take insured deposits to consumer and commercial banking, underwriting, advisory and wealth management. These hybrid commercial banks would have to hive off brokerage, trading, market-making and investing activities.
The FDIC was busy last week. Martin J. Gruenberg, Acting Chairman of the Federal Deposit Insurance Corporation (FDIC), gave a speech on the “resolution authority” by FDIC to oversee the failure and unwinding of a Too Big To Fail financial firm. We discovered in 2008 that the mechanism we have for corporations to fail in this country, chapter 11 bankruptcy, is not sufficient for a shadow-bank financial firm. It became evident that a successful resolution program must include a robust detection system and hard-lined deterrence. The only way to detect problems before they happen on the books of a Goldman Sachs is to implement derivatives reform and off balance sheet reform.
Last week Mr. Volcker also spoke on the Volcker Rule which would prohibit commercial banks from trading stocks and derivatives with their own money and significantly limit banks’ investments in hedge funds and private-equity funds. As a response, Federal Reserve Governor Daniel Tarullo suggested that firms and regulators may have a difficult time differentiating between legitimate market-making actions and prohibited, speculative transactions. This is a perfect example of why the Dodd-Frank bill is so lengthy and complicated. The Volcker Rule essentially still allows these institutions to mix their commercial and trading behaviors, but attempts to limit the risk. Because this causes confusion, more regulations will be written to define with specificity the high risk behavior to such a point as to allow many exemptions. In addition, Regulatory observers expect big banks to sue to block the adoption of the Volcker rule arguing that the government failed to conduct an adequate cost-benefit analysis when developing the regulations.
There is no need for such micro managing of minutia and constant dog-chasing-its-tail regulatory nonsense followed by years of judicial wrangling in the courts, when in the end there are so many loopholes that the regulation is worthless anyways. Does it occur to anyone besides me that possibly the legislators and the regulators really don’t want to succeed at this in the first place? We are being played. This is our taxpayer money as well as our nation’s economy and we must demand a solution by our elected officials.
Our political system with the current campaign finance structure manipulates our economic system of free-market capitalism into an aristocracy. The motivation for any elected official is to get enough money to run a winning election campaign. We cannot motivate someone to bow to Wall Street for campaign donations and then expect them to behave against the interests of Wall Street. By changing the system, we can at least eliminate the need of our representatives to sell out our economy for campaign donations, thereby motivating them to behave in the best interest of us.