Dodd bill’s unintended consequences for Main Street

Today, after hours of delay, Congress still couldn’t get  on the “Restoring American Financial Stability Act,” a bill that supporters sayis needed to prevent the next financial crisis and rein in Wall Street. For various reasons, members of Congress though the bill would either “get tough” on the wrong actors or not tackle the real problems  And many investors, entrepreneurs and consumers on Main Street are also pointing to the bill’s omissions and possible unintended consequences of regulation that’s rammed through. 

Here are areas where a wide variety of experts think the bill falls short:

Angel investors:

 One unintended consequence the Senate already fixed was a measure that would have been devastating to venture capital, angle investors, and numerous entrepreneurs. CEI and other free-market policy groups, as well as organizations representing the angel investors that put money innovative entrepreneurial startups, decried the rules that would have more than doubled the threshold for “accredited investor” from $1 million to $2.5 million in net worth — using the ridiculous rationale that “poor millionaires” needed to shielded from startup risk. According to the Angel Capital Association in Kansas City, these provisions would have reduced the number of eligible angel investors by more than two-thirds and made private placements of securities nearly as cumbersome as going public.

Democrats and Republicans in the Senate should be commended for fixing these provisions of the financial regulation bill  by voice vote on Monday. But it still leaves regulators with too much power to arbitrarily cut off investors for angel capital. And these provisions should serve as a warning about other pitfalls in the bill. Senate Banking Committee Chairman Chris Dodd said he never intended for these provisions to punish angel investors and startups. It is likely that when other provisions of this bill hit Main Street, we will also hear claims that this was not what was indended.

But whatever Senators’ intentions, they can’t say they weren’t warned. Here are other likely consequences of this bill’s problematic provisions.

1. Broad definition of “financial companies” and lack of judicial review to challenge seizures of firms

Various provisions broadly define a “financial company” as any business “substantially engaged” or “significantly engaged”  in manufacturing. And if your business happens to fall in such a category, it could be subject to a bailout “assessment” tax to bail out a high rolling financial firm, intrusive regulation by a banking agency or the new Bureau of Consumer Financial Protection, or even outright seizure if the troika of the Federal Reserve, Treasury Secretary, and Federal Deposit Insurance Corporation decide your firm is a threat to “financial stability.” And if a business meeting the definition of “financial company” is taken over by the “orderly liquidation authority,” the bill cuts off avenues of legal and constitutional review from the courts.


The amendment from David Vitter (R-La.) narrowing the definition of “financial company” would help remedy this flaw.


2. Debit card rewards may disappear because of interchange fee price controls.


The Durbin amendment — which passed with a mishmash of 10 nay from Democrats and 17 yays from Republicans — orders the Federal Reserve to set price controls for the debit cards that businesses pay to merchants. This will shift costs to consumers and experts say debit card rewards may disappear.