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Dodd-Frank’s Early Returns
Dodd-Frank’s Early Returns
June 07, 2013
Originally published in National Review
‘Admit it . . . you haven’t read it all either.”
Thus said a New York Times op-ed (by Bono, of all people) about the Dodd-Frank Wall Street Reform and Consumer Protection Act, just a couple of months after that law’s passage in 2010. The line reflected a common sentiment toward the 2,600-page law, and things haven’t improved since. Both supporters and opponents of Dodd-Frank will concede that, as with Obamacare, members of Congress passed the law before they — or the public — knew or understood what was in it.
But give Obamacare this much: So far, in digging through its thousands of pages, no one has found any hidden provisions that significantly affect foreign policy, international trade, or energy policy. The same can’t be said for the so-called financial-reform bill.
“Hidden somewhere in the Dodd-Frank financial reform bill,” noted the op-ed, “there is a hugely significant ‘transparency’ amendment. . . . Now energy companies traded on American exchanges will have to reveal every payment they make to government officials.”
Hold on. A provision targeting energy companies — in a banking bill?
In the almost three years since Dodd-Frank was rammed through Congress, Fannie Mae and Freddie Mac — significant players if not the largest culprits in the mortgage crisis — are bigger than ever. The law did not lay a hand on them.
And many on both left and right say Dodd-Frank didn’t make a start on curbing the power of too-big-to-fail banks. In fact, the law’s designation of “systemically important financial institutions” through its Financial Stability Oversight Council enshrines too-big-to-fail by telling creditors which financial firms the government will spare from a normal bankruptcy.
But rest assured that Dodd-Frank is working — at great cost — to force energy companies to tell shareholders each and every payment they make to foreign governments, and all public companies to say whether they have ever used tin or tungsten from the Democratic Republic of the Congo. As explained by Mercatus Center scholars Hester Peirce and James Broughel in their book Dodd-Frank: What It Does and Why It’s Flawed, the law’s “miscellaneous provisions” in Title XV offer “a clear example of how a statute invoked as the answer to the financial crisis is, in reality, an odd conglomeration of responses to issues, many of which had nothing to do with the financial crisis.”
The specific provision championed by Bono ended up as Dodd-Frank’s Section 1504. With the stated aim of combating the use of “dirty money” by U.S. energy companies, it requires firms developing oil, gas, or minerals to disclose payments they make to foreign governments to further their development activities. Section 1502, championed by some of Bono’s fellow celebrities, including Ashley Judd and Ben Affleck, requires all types of firms to disclose their products’ use of five “conflict minerals” — including gold, tin, and tungsten — that can be sourced to war-torn regions of the Congo.
Fighting corruption and violence in the Congo is a laudable goal, but it is a bad idea to pursue foreign-policy objectives through a financial bill. There are a number of reasons for this, the most important being that the government entity charged with enforcing these provisions is neither the State Department nor the Defense Department, but rather the Securities and Exchange Commission — which no one would call an agency well-schooled in the nuances of foreign policy.
Under Dodd-Frank’s Title XV provisions, the SEC requires companies listed on U.S. stock exchanges to disclose these things in the same annual reports in which they disclose financial information to investors. This new mission creep imposed on the SEC could impair its efforts to protect U.S. investors from financial fraud, as Peirce and Broughel warn: “Title XV not only fails to address any issues that arose during the crisis, but it also distracts the SEC from undertaking reforms designed to prevent future crises.”
For Bono and other activists, it’s all worth it to be making a stand against — in the immortal words of musical satirist Tom Lehrer — “poverty, war, and injustice, unlike the rest of you squares.” Bono, who has in the past made thoughtful arguments on the role of trade and development in combating poverty, becomes almost a caricature of the rock-star crusader when he talks about this Dodd-Frank provision, spouting the tired and untrue platitude that “corruption [is] more deadly than the deadliest of diseases.” He concludes that this kind of forced disclosure “is the kind of daylight that makes the cockroaches scurry. . . . And the cost to us is zero, nada.”
In fact, even under the SEC’s constrained cost-benefit analyses, the costs of these rules are far from nada. The SEC has estimated that each provision would costs companies more than $1 billion in initial costs, with annual costs after that in the hundreds of millions. Moreover, U.S. energy companies exploring for resources abroad are now required to disclose to the general public information that fits into the category of trade secrets, by revealing how much they paid for each individual project. This means that the state-owned oil companies in some of the most corrupt regimes — which aren’t subject to Dodd-Frank because they don’t list on U.S. exchanges — now have access to this valuable info, giving them a competitive edge over their U.S. private-sector rivals. As American Petroleum Institute president Jack Gerard points out in a Wall Street Journal op-ed, “the 16 biggest oil companies in the world do not fall under SEC jurisdiction.”
And if the costs of these provisions force U.S. companies to pull out of developing countries, the results will not be pretty for the ordinary citizens of those countries — as has already been shown to a large extent with the “conflict minerals” provision.
Because it is nearly impossible to source many minerals used in manufacturing to their countries of origin — gold has been called “the world’s most recycled material” — many manufacturers have told their suppliers to avoid all regions of the Congo and all nearby nations. Bono and his fellow celebrity activists would do well to read another Times op-ed, in which freelance journalist David Aronson describes how Dodd-Frank’s backdoor tariffs are re-impoverishing Africa. Among the effects Aronson describes: “Mining towns are virtually cut off from the outside world because the planes that once provisioned them no longer land. . . . Villagers who relied on their mining income to buy food when harvests failed are beginning to go hungry.”
Dodd-Frank has already entrenched too-big-to-fail and worsened Third World poverty. That’s some achievement for a law that’s not yet three years old.