Dodd’s Main Street Punishment Bill

Dodd’s Main Street Punishment Bill

March 16, 2010
Originally published in Biggovernment.com

With the focus this week on health care’s “home stretch” and concerns about government limiting the ability of ordinary Americans to make choices about medical treatment, another threat to freedom is accelerating that could harm Americans’ abilities to start a business, invest for retirement, and get affordable home and auto insurance policies. On Monday, after abruptly shutting down earnest negotiations between Senate Republicans, Senate Banking Committee Chairman Chris Dodd wannounced a partisan so-called financial regulatory reform bill that he will try to ram through his committee within a week.

And this 1336-page bill will do nothing to put restrictions on two entities that were proximate causes of the housing bubble, the government-sponsored Fannie Mae and Freddie Mac, and instead hit Main Street businesses and entrepreneurial firms that had nothing to do with the crisis. The bill’s specific provisions would  penalize the corporate structure of public companies from Google to Warren Buffett’s Berkshire Hathaway, tax prudent banks stable home and auto insurers and their policy holders to pay for the bailout of the next Lehman or AIG, depress revenues from incorporation fees  in Sen. Harry Reid’s Nevada and Vice President Biden’s Delaware by federalizing corporate governance laws, and put thousands of retailers who issue gift cards or even offer layaway plans under a new Federal Reserve bureaucracy to regulate credit.

Here are the highlights of some of most destructive provisions for the freedom of entrepreneurs, investors and consumers.

1. The shareholder rights jujitsu with “proxy access” and other corporate governance mandates.

According to Politico, so-called “proxy access” language was one of the main issues “not resolved.” There is good reason for it not being resolved. This is because proxy access has nothing to do with complex financial products and everything to do with empowering shareholder groups on the Left, such  as union pension funds and foundations backed by Leftie donors like George Soros,  to pressure public companies to bow to their various agendas.

For more than 150 years, state law has governed the director nomination and election process for corporations and their shareholders. In states such as Delaware and Nevada, where many companies are incorporated, any shareholder can nominate a candidate for the board, but that candidate has to pay for the campaign out of his or her own pocket. Under Dodd’s bill, the federal government would force the companiesand other shareholders to subsidize the campaigns of dissident shareholders and include their candidates in a company’s own proxy materials.

But as I have written in BigGovernment.com, subsidizing certain shareholders to let them run director candidates on the cheap opens the floodgates to special interest agendas that hurt the bottom line for ordinary shareholders. “Groups from unions to animal rights groups could run their own candidate for corporate directors and promote their special interest agendas at the company’s (and ultimately other shareholders) expense,” I wrote.

And leaders of 17 groups representing a broad spectrum of the center-right coalition — from my Competitive Enterprise Institute and Americans for Tax Reform to the Christian Coalition of America – recently sent a letter to members of the Senate Banking Committee pointing out that with proxy access: “Everything on the anti-market political wish list from cap-and-trade carbon restrictions, to animal rights activism, to interfering with defense contractors to advance foreign policy objectives would be possible. These initiatives, whatever their merits, belong in the political arena, not in corporate boardrooms where the focus should be on maximizing shareholder value.”

The bill also takes the unwise step of coercing companies into cookie-cutter corporate governance procedures such as separating the chairman and CEO. Some corporate governance activists have flagged this as a bad practice, but there is no empirical evidence that it harms shareholder returns. In fact, shareholders of Google and Berkshire Hathaway seem quite pleased with their CEOs – Eric Schimidt and Warren Buffett, respectively (both of whom supported Obama) –  also serving as chairmen, and would be quite angry if the government were to penalize this practice that had been so effective for these companies’ growth and profitability.

In the meantime, as I have noted in the New York Daily News, Citigroup’s having a separate chairman and CEO throughout most of the last decade did nothing to prevent that firm’s financial implosion that resulted in taxpayer bailouts. Different governance structures may work better for different firms, as an entrepreneurial startup may opt for a close-knit board and a more established company may want to separate these positions. Regardless, shareholders are perfectly capable of deciding on things like whether the chairman and CEO should be separate, and that these matters shouldn’t be dictated to them by the government.

Finally, the one-size fits all corporate governance procedures would greatly reduce the competitiveness of Delaware and Nevada in attracting firms from all over the world incorporating their because of the variety of corporate structures the states allow that work both for entrepreneurs and investors.

Dodd’s bill does NOT end “Too Big To Fail”; establishes $50 billion permanent bailout fund and taxes the prudent.

“Never again should the American taxpayer be asked to write a check because of an implicit guarantee that the federal government will bail out a company.” Dodd said at a news conference unveiling the bill on Monday. But Dodd’s bill not only doesn’t prevent taxpayer bailouts of failing financial firms, it ensures that they will continue. What the bill’s supporters call a “prefunded resolution authority” can be more simply defined a permanent bailout fund with a specific tax to subsidize the failure of any reckless firm.

Dodd’s bill summary puts great weight on the bailout fund’s “costs to financial firms, not taxpayers.”  As the summary states, the bill “charges the largest financial firms $50 billion for an upfront fund, built up over time, that will be used if needed for any liquidation.” Similar to the Obama administration’s justifications for the bank tax or “financial crisis responsibility fee,” Dodd’s summary explains that “industry, not the taxpayer, will take a hit for liquidating large, interconnected financial companies.

How reassuring, not! Both of the explanations for the Obama bank tax and the Dodd “upfront fund” amount to a distinction without a difference.  Unless taxpayers never open a bank account, borrow money, nor engage in any economic transaction whatsoever, the cost of the tax on financial firms will fall on them. And the failure is still not borne by the imprudent actor, but by the industry as a whole and its customers and shareholders. And an “upfront fund” will encourage more risky behavior, or what economists call “moral hazard,” by forcing prudent firms to set aside billions of dollars to essentially prefund the high-rollers risky bets.

This is particularly true given the fact that this fee will most likely include not just large banks, but home and auto insurers such as Geico (a subsidiary of Buffet’s Berkshire Hathaway holding company), Allstate, and State Farm. These relatively stable firms had virtually nothing to do with risky bets that led to the financial crisis. The one exception among insurers was American International Group, and the major issue there was their exotic financial products, such as mortgage derivatives, not their traditional lines of insurance.

So you, the reader, may be getting an insurance policy hike, higher borrowing costs, and less interest on your bank account to pay for an upfront bailout for the next AIG, Lehman Brothers, or Countrywide (where you may remember, even if the media have forgotten, Dodd got a sweet mortgage deal). And you may also be getting reduced dividends or a lower shareholder return due to the “proxy access” mandates that empower progressive shareholders in the companies in which you invest to build your retirement portfolio.

In part II, we will talk about how the Federal Reserve will provide unlimited funding to a powerful new bureaucracy that will limit your ability to get credit and financing. Aren’t you glad the politicians are finally standing up for you? Or, should that be, standing upon you?!