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OpenMarket: Banking and Finance

  • Liberals and Conservatives Challenge Overreach of Dodd-Frank's FSOC on MetLife

    November 18, 2014 2:18 PM

    As CEI brings suit before the D.C. Circuit Court of Appeals tomorrow challenging the constitutionality of unaccountable bureaucracies created by the Dodd-Frank “financial reform” law of 2010, it looks like we may have some high-profile company in litigation against Dodd-Frank’s Financial Stability Oversight Council (FSOC).

    The FSOC is a secretive, unaccountable task force of financial bureaucrats of various agencies created to designate banks and other financial firms “systemically important,” or too-big-to-fail. In September, the FSOC preliminarily decreed insurer MetLife a “systemically important financial institution,” or SIFI.

    As CEI argues in our legal challenge to the Dodd-Frank Act (including the FSOC’s role of identifying risk), the SIFI designation confers on a firm a strong competitive advantage, as investors and creditors know the government won’t let it fail. That’s why big banks and MetLife competitor American International Group (AIG), which have already received billions in taxpayer bailouts, have eagerly embraced their SIFI status.

    But MetLife, to its credit, has publicly stated that it is not too big to fail and does not want the special privileges that come with SIFI status, nor the regulatory costs. MetLife chairman and CEO Steven A. Kandarian declared last year, “I do not believe that MetLife is a systemically important financial institution.”

    Now, The Wall Street Journal reports that “MetLife Inc. doesn’t want to be tagged as “systemically important” and is preparing to possibly take the U.S. government to court to avoid it, people familiar with the matter said.” The insurance firm has hired Eugene Scalia, attorney with Gibson, Dunn & Crutcher, who has put forth successful suits against other provisions of Dodd-Frank.

  • Crowdfunding Is Entrepreneurship’s History and its Future

    November 18, 2014 9:03 AM

    In America and around the world, aspiring entrepreneurs are meeting their colleagues and their mentors in official and unofficial sessions of Global Entrepreneurship Week. Created in 2007 by the Kansas City-based Kauffman Foundation and British organizations, Global Entrepreneurship Week, as stated on its website, “inspires people everywhere through local, national and global activities designed to help them explore their potential as self-starters and innovators.”

    And this year, enabling entrepreneurship through crowdfunding will be a huge focus. To coincide with Global Entrepreneurship Week’s events, the recently formed Crowdfund Intermediary Regulatory Advocates (CFIRA) is having its 2nd Annual Regulatory and Advocacy Summit on Capitol Hill on Friday, November 21. For more details on the public events, go here.

    And the Competitive Enterprise Institute is celebrating Global Entrepreneurship Week by release a paper by me entitled, “Declaration of Crowdfunding Independence: Finance of the People, by the People, and for the People.”

    Key points of the my report include:

    • Technology did not create crowdfunding, but it has widely broadened the size of the crowds and increased the potential of both charitable and entrepreneurial ventures to find funding.
    • Crowdfunding has positive effects on job growth, revenue for entrepreneurs, and follow-on interest from institutional investors. Firms that met their goals in crowdfunding campaigns hired, on average, two new employees by the end of the campaign. This is all the more remarkable considering that the firms had, on average, only one or two employees before the crowdfunding campaigns began.
    • The most potential comes from equity (ownership interest) and debt (specific rate of return)-based crowdfunding, both of which are either banned or heavily restricted in the United States due to arcane securities laws.
    • Due to fear of running afoul of arcane or vague SEC rules, there is frequently a de facto “millionaires only” rule for investment in new business that limits entrepreneurs’ capital-raising ability and deprives average investors the opportunity to grow wealthy through early-stage investment in a company.
    • While the U.S. leads the world in crowdfunding campaigns on popular sites like Kickstarter and IndieGogo, these campaigns are overwhelmingly donations- and rewards-based. The donors get nothing more than recognition, souvenirs like T-shirts, and or a sample of the product produced.
    • The Jumpstart Our Business Startups (JOBS) Act of 2012 was supposed to alleviate some of those problems, but the SEC has yet to implement provisions to allow crowdfunding offers of $1 million or less.
  • CFPBs Prepaid Debit Card Rules Will Harm Low-Income Consumers

    November 13, 2014 4:07 PM

    Today’s action by the Consumer Financial Protection Bureau to issue unprecedented burdens on providers of prepaid debit cards shows why the bureau needs to be held accountable to our elected representatives. This lack of constitutional accountability is why CEI, in partnership with the 60 Plus  Association seniors group and the tiny Texas community bank the State National Bank of Big Spring, is challenging the structure of the bureau created in the Dodd-Frank legislation of 2010 in a lawsuit to be heard before the D.C. Circuit on November 19.

    Though the CFPB says and many of the fawning headlines say the regulations are simply about consumer disclosure, the CFPB proposal—set to go into effect after a brief 90-day comment period—actually would subject prepaid cards to more stringent rules than checking accounts. It takes the very radical step of treating overdraft features on a prepaid card as an “extension of credit.”

    Under the new rules, as described by the CFPB proposal, ”prepaid cards that access overdraft services or credit features for a fee would generally be credit cards.” But, as noted in news articles on the proposal, most of the lower-income consumers are getting prepaid credit cards in place of debit cards and checking accounts. As Time notes, “almost 80% of unbanked households with prepaid cards used them to make everyday purchases, pay bills, or receive payments.”

    But under the CFPB, an express “ability to pay” rule would be added that is absent from checking accounts with overdraft features. This means another option lost by many of the unbanked.

  • The Long National Nightmare of Dodd-Frank Is Almost Over

    November 10, 2014 3:14 PM

    One of the prime reasons for the continuing economic uncertainty that bedevils so many ordinary Americans is the presence in law of the Dodd-Frank Act of 2010, which was meant to solve the problems of the financial crisis. In fact, by giving unelected bureaucrats Czar-like power over the financial system, it has caused the stagnation of that system, reducing the free flow of money through the economy and stopping businesses and citizens getting access to the credit that they desperately need.

    On November 19, however, a three-judge panel of the D.C. Circuit will hear arguments in a case brought by CEI and others challenging the constitutionality of this new bureaucracy. If the judges rule in our favor, Main Street and Wall Street should both breathe a sigh of relief.

    The grounds for our case are simple. CEI and our co-plaintiffs believe that the Consumer Financial Protection Board (CFPB) and the Financial Stability Oversight Council (FSOC) violate the Constitution in a number of ways. Most importantly, the CFPB has no checks or balances to its power, making it unaccountable to Congress, the Administration, the courts, or the people in general:

    • Congress exercises no “power of the purse” over the CFPB, because the agency’s budget – administered essentially by one person – comes from the Federal Reserve, amounting to approximately $400 million that Congress cannot touch or regulate.
    • The President cannot carry out his constitutional obligation to “take care that the laws be faithfully executed,” because the President cannot remove the CFPB Director except under limited circumstances. It is probable that neither the current President nor his successor will be able to remove Director Cordray until his term ends in 2018. Dodd-Frank goes beyond the "for cause" standard for removal from most independent agencies, and says the president may only remove the director "for inefficiency, neglect of duty, or malfeasance in office."
    • Judicial review of the CFPB’s actions is limited, because Dodd-Frank requires the courts to give extra deference to the CFPB’s legal interpretations.

    Our basic claim is that Dodd-Frank gives an agency of unelected government bureaucrats unrestrained power. We argue this unaccountable power over the daily lives of the American people results in a lack of public accountability, creating a power grab over every U.S. citizen.

  • The Economist: Interchange Fee Caps Benefit Large Retailers at Consumer Expense

    October 9, 2014 11:52 AM

    Surprise! Price controls lead to unintended consequences—including transfers of wealth to parties who lobbied for those controls.

    That’s the actual – and unsurprising – result of the an amendment to the 2010 Dodd-Frank financial reform bill, sponsored by Sen. Richard Durbin (D-Ill.) that caps fees charged by banks for payment cards, mainly debit and credit cards. As The Economist reports:

    [T]he limits on “interchange fees”, as the financial jargon has it, have not worked out as planned. They have resulted, by one calculation, in the transfer of between $1 billion and $3 billion annually from poor households to big retailers and their shareholders. These were not the beneficiaries Mr Durbin had in mind when the amendment came into effect three years ago this week.

    Or are they? This result is exactly what I said would happen. And as I noted at the time, Sen. Durbin was quite open about whose interests he had in mind.

  • See Me at San Francisco Crowdfund Banking and Lending Summit

    October 8, 2014 2:05 PM

    My colleague Wayne Crews’ Forbes column Monday explained “How Entrepreneurs Can Speak Out About the Cost of Regulation,” but noted sadly that “businesses that never form in the first place because of regulation never get a chance to talk.”

    But there may be at least one exception. Next week in San Francisco, a conference will bring together entrepreneurs and investors to discuss, in part, businesses that can’t form because of the thicket of red tape.

    Coastal Shows, producer of the annual Crowdfund Global Expo (CFGE), will host the CFGE Crowdfund Banking and Lending Summit at San Francisco’s Grand Hyatt on October 16 and 17. A bevy of prominent speakers, including yours truly, will talk about crowdfunding as a new frontier that could open up opportunities in investing and lending, if only some of the antiquated securities regulations could be trimmed.

    When most folks hear the word “crowdfunding,” they think of sites like Kickstarter and IndieGogo in which fans can fund a new project and get souvenirs such as T-shirts. These innovations should be applauded, but they only scratch the surface of what crowdfunding could do. Viewed broadly, crowdfunding could bring together investor and entrepreneurs, allowing them to bypass “middle men” such as Wall Street banks.

    But as I wrote recently in Forbes, if one of these crowdfunding projects currently were to offer funders a piece of the potential profits—instead of  T-Shirts and other trinkets—it would run “into a brick wall from 1930s-era Securities and Exchange Commission (SEC) rules that treat a promise of a share of a business’s earnings a ‘securities offering.’”

    As I explained, “this would subject entrepreneurs making a simple pitch for funding movies or music to the panoply of federal securities laws—including the behemoth Sarbanes-Oxley and Dodd-Frank laws—that publicly traded corporations must contend with every day at a cost of millions of dollars per year.”

  • Lesson from Ex-Im Fight: More Agencies Should Have Sunsets

    September 17, 2014 8:17 AM

    Congress hasn’t voted just yet on the Continuing Resolution that includes the Export-Import Bank’s reauthorization. But we already know that it will pass this week, and Ex-Im will get a new lease on life, probably through June. We’ll have this fight all over again next spring and summer. But the fight has already taught an important lesson: more agencies should have automatically expiring charters. Ending or reforming Ex-Im would never have been a possibility if its charter didn’t have an expiration date. I make that point in a piece in Investor’s Business Daily:

    Institutions matter. The rules of the game have a lot to do with how people play it — imagine what basketball strategy would look like if the three-point shot was changed to five points, or how baseball strategy would change if hitters could strike out on a foul ball.

    The rules an agency issues aren't the only ones that matter. Rules governing the agencies themselves are just as important. If more agencies had a built-in check such as an automatic sunset that forced a periodic congressional reauthorization vote, they would have an incentive to behave better and pursue their missions in a less burdensome way.

    The fight over Ex-Im isn't over. Even with Ex-Im's temporary new lease on life, reformers will still have won an important victory in tamping down its excesses.

  • Dueling Ex-Im Commentary

    September 11, 2014 12:21 PM

    A vote on the Continuing Resolution, which includes the controversial Export-Import Bank reauthorization was originally scheduled for today, but has been pushed back to next week. So the combat continues over how long the Ex-Im reauthorization will last, and what other conditions might included as part of the deal. In today’s Washington Times, National Association of Manufacturers President Jay Timmons and I have dueling op-eds, with Timmons favoring reauthorizing Ex-Im, and me wanting to end it. The Wall Street Journal also weighed in with an editorial this morning, sharing my skepticism of Ex-Im.

    Timmons makes three points in his piece that deserve a response. First, he argues that Ex-Im fills in gaps in private financing:

    Ex-Im Bank provides financing that is critical to fill gaps when private-sector financing for small and large manufacturers is not available.

    If Ex-Im makes a profit, as Timmons argues it does, then surely private banks would welcome an opportunity to make money for themselves by lending to more exporting businesses and their customers. If Ex-Im loses money, as the Congressional Budget Office convincingly argues, then there is no financing gap to be filled, and Ex-Im is financing too many insolvent projects.

    Second, Timmons commits the “but other governments do it, too” fallacy:

  • Don’t Tie Ex-Im Renewal to Government Shutdown

    September 9, 2014 12:29 PM

    It appears Congress will decide the Export-Import Bank’s short-term fate this week. There are several bills with different reauthorization terms, and Rep. Justin Amash and Sen. Mike Lee even have a bill that would shutter the bank altogether. None of the bills have made it out of the House Financial Services Committee, which is chaired by Rep. Jeb Hensarling, who opposes the bank. What will likely happen instead is that Ex-Im reauthorization will be included in a Continuing Resolution (CR), which Congress must pass by September 30 to avoid a government shutdown.

    The current battle isn’t whether Ex-Im will be reauthorized, it is how long the reauthorization will last.  There are two likely options. Ex-Im opponents would prefer a reauthorization through early 2015. Ex-Im opposition is bipartisan, but the GOP has been more vocal about it, and most political observers are expecting Republicans to gain seats this November. Depending on how the numbers play out, when the new Congress convenes in January, it might be possible for Congressional Republicans to either let Ex-Im’s charter expire, or pass a bill similar to Amash and Lee’s to actively kill the bank, even if they can’t get much Democratic support.

    Ex-Im’s defenders would rather keep the shutdown card in their hand; Ex-Im opponents will not risk a shutdown over a program equivalent to less than one percent of the federal budget. That’s why they want Ex-Im’s reauthorization to be the same length of any Continuing Resolution that gets passed, however long that might be. Even though that would be a shorter-term reauthorization, they can continue to renew Ex-Im with each CR that must pass going forward, knowing that it will succeed.

  • Nationalizing Bitcoin?

    September 9, 2014 10:13 AM

    The phrase “if you can’t beat them, join them” seems so applicable in light of the Commonwealth of Dominica announcing plans to distribute bitcoins to all of its citizens. This is a wonderful attempt to integrate people into a burgeoning market. The timing could not have been better, as Ecuador also announced it will introduce its own cryptocurrency. The key difference between Ecuador and Dominica’s plan is that Ecuador plans to implement its currency through its central bank, whereas Dominica plans to disperse bitcoins directly to its citizens. Perhaps fearing competition, Ecuador is also banning Bitcoin, so the central bank’s cryptocurrency will be the only game in town. It’s a fascinating natural experiment in the making.

    Forbidding competition is a mistake on Ecuador’s part because competition is what truly allows the best goods and services to develop, so it looks like Dominica’s experiment will be more successful for it citizens.

    Moreover, Bitcoin was created to resist centralized institutions, according to the original white paper by Satoshi Nakamoto, the currency’s creator. These cryptocurrencies represent the potential for non-fiat currency to be used on a global scale. This potential should be nurtured, not squandered by governments.

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