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OpenMarket: Banking and Finance

  • Dodd-Frank Conflict Minerals Rules Cause Smuggling, Starvation, and Harm to U.S. Businesses

    June 19, 2015 12:36 PM

    The 2010 Dodd-Frank Act effectively restricted U.S. business’s ability to obtain minerals from the war-torn nation of the Congo and surrounding countries. That caused massive unemployment and hunger in the Congo, and huge job losses in mining communities. By driving out Western buyers, it gave Chinese firms a virtual monopoly on some Congolese minerals. 

    Dodd-Frank imposed costly auditing and reporting requirements on companies that use minerals such as tin, tungsten and gold, requiring them to report on their use of minerals not just from the Congo, but also peaceful neighboring countries like Tanzania, which are effectively punished merely for being next to the Congo. At least 6,000 companies are affected, including Apple, Ford, and Boeing, costing them billions of dollars.

    African smugglers have benefited from Dodd-Frank, notes a recent article in Politico, as “clean miners” in the Congo, the world’s poorest country, simply can’t afford to comply with Dodd-Frank’s certification requirements.

    As Politico reported,

    the boycott prompted by the Dodd-Frank Act put thousands of eastern Congolese miners out of work. The World Bank has estimated that 16 percent of Congo’s population is directly or indirectly engaged in informal mining; in North Kivu in 2006, mining revenue provided an estimated two-thirds of state income. But revenues to the provincial government’s coffers fell by three-quarters in the four years before 2012, in part because of what officials called the “global criminalization of the mining sector” of eastern Congo, as encapsulated in laws like Dodd-Frank. The state’s loss is the smugglers’ gain: When the official routes are closed, the clandestine trade picks up the slack.. . .

    Despite Dodd-Frank and the spate of efforts to curb conflict mineral violence in the early 2000s, it appears unlikely that the certification schemes will ever reliably cover the whole of eastern Congo’s mining trade. Clean miners have been squeezed, as the retreat of Western buyers has let Chinese comptoirs gain a near-monopoly on Congolese coltan, allowing them to dictate prices.  

    The efforts to impose some control on the mineral trade . . . .does so at the cost of weakening the already precarious livelihoods of eastern Congo’s diggers and porters and their dependents.

    This harm was completely predictable. As Walter Olson noted earlier,

    Economic sanctions, when they have an effect at all, tend to inflict misery on a targeted region’s civilian populace and often drive it further into dependence on violent overlords. That truism will surprise few libertarians, but apparently it still comes as news to many in Washington, to judge from the reaction to this morning’s front-page Washington Post account of the humanitarian fiasco brought about by the 2010 Dodd-Frank law’s “conflict minerals” provisions. According to reporter Sudarsan Raghavan, these provisions “set off a chain of events that has propelled millions of [African] miners and their families deeper into poverty.” As they have lost access to their regular incomes, some of these miners have even enlisted with the warlord militias that were the law’s targets.

  • The Right to Choose Your Investment Partner

    June 8, 2015 2:49 PM

    The following is an abridged and revised version of my keynote address to the FinTech Global Expo at the San Diego Convention Center on May 29, 2015. I was introduced by conference organizer Andrea Downs, President and CEO of Coastal Shows.

    In startup investment, there have almost as many important developments in the past three years as there have been in the past 30. Let me take you on a very short trip on my time machine back to the days just before the passage of the Jumpstart Our Business Startups—or JOBS Act in 2012

    In those days—during the reign of the 80-year-old ban of general solicitation of private stock offerings that the JOBS Act repealed—it wasn’t even clear that you could have a conference, trade show, or expo like this one. That was a concern among angel investors I had spoken to interested in holding a trade show, but uncertain of the legality.

    Maybe we can remember the time in which if you were an entrepreneur and weren’t networked in, and you wanted to find an accredited investor, you had to whisper to someone on the street corner: “Hey, are you rich? Want to invest in my company?”

    And it’s amazing that since the JOBS Act—really since 2013, when the SEC implemented Title II and repealed the general solicitation ban—we’re seeing all these platforms like and the others being discussed. It’s amazing to see how much that has grown and is getting capital to entrepreneurs.

    We’ve come a long way, yet we have a long way to go. The SEC still hasn’t implemented Title III, so we still don’t have crowdfunded investment for ordinary investors. So ordinary folks can’t share in the dream quite yet.

    But we’re getting there. So much is happening in state legislatures. The Illinois House of Representatives and Senate just passed an equity crowdfunding bill for all in-state residents that’s awaiting the new governor’s signature. Michigan, Texas, Georgia and other states have already enacted similar statutes for their residents.

    One of the reasons I’m so optimistic is that I view the grassroots push to legalize crowdfunded investing for everyone as a freedom movement. Even though the JOBS Act, deregulation, and lifting financial red tape are often associated with Republicans and conservatives, I see this as a broad general freedom movement, similar to the movement for the right to smoke marijuana and to marry your partner of choice.

    My organization, the Competitive Enterprise Institute, looks at Dodd-Frank, Sarbanes-Oxley, and all regulations as a burden to personal rights. After all, what could be more personal than how you invest your money? If you can now choose who your domestic partner is, why in hell shouldn’t you be able to choose who your investment partner is?!

  • Johnson-Crapo's Reemergence Ruins Reg Relief Bill

    May 18, 2015 5:05 PM

    Last year, an overhaul of Fannie Mae and Freddie Mac called Johnson-Crapo—named after then Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho)—went down in flames after observers found that the bill was not reform, but a massive expansion of the government’s role in housing.

    One of the most vocal opponents of Johnson-Crapo was Sen. Richard Shelby (R-Ala.), who voted against the bill in the Senate Banking Committee and blasted it in his statement in committee and it media interviews. “Shelby Opposes Massive New Regulator and Taxpayer Exposure in Housing Regulation Bill,” exclaims the headline of a press release from Shelby’s office on the date of the Senate Committee vote on May 15, 2014.

    Though the bill narrowly passed the committee, support for the bill died on the vine and it was never even brought to the Senate floor for a vote. The bill was torpedoed after vocal opposition from Shelby as well as that from 26 leaders of conservative and free-market groups who signed a letter blasting Johnson-Crapo that was coordinated by the Competitive Enterprise Institute. In addition to CEI, signatories included the Club for Growth, Americans for Tax Reform, Freedom Works, and the American Family Association.

  • Labor Department "Fiduciary Rule" Threatens to Eviscerate JOBS Act Gains for Investors, Entrepreneurs

    May 6, 2015 9:53 AM

    Three years ago, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, modestly but significantly liberalizing securities markets for investors and entrepreneurs. In signing that bill into law on April 5, 2012, Obama paid heed to the wisdom of ordinary American investors and made the case for easing barriers to their investing in startups.

    “Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors—namely, the American people,” Obama proclaimed. “For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”

    But the authors of the Department of Labor’s new proposed “fiduciary rule” don’t seem to share the view President Obama professed on investor choice in signing the JOBS Act. Rather, those who wrote the DOL’s sweeping new seven-part group of regulations that would sharply curtail choices of assets and investment strategies in 401(k)s, IRAs, and other savings plans, appear to share the mindset of Obamacare architect and MIT economist Jonathan Gruber. Gruber has been shunned by former allies since he was caught on camera boasting about how the health care overhaul passed due to the “stupidity of the American voter.”

    By curtailing investment in IRAs, the rule could eviscerate the gains entrepreneurs and savers have made from the JOBS Act in the freedom to raise capital and invest. And the authors of the rule seem to want it that way, for paternalistic Gruberesque reasons. Again and again in the rule, DOL expresses the view that American investors must be protected from their own stupidity. According to page 4 of the rule:

    [I]ndividual retirement investors have much greater responsibility for directing their own investments, but they seldom have the training or specialized expertise necessary to prudently manage retirement assets on their own.

    Therefore, they “need guidance on how to manage their savings to achieve a secure retirement.”

    Can’t savers who feel they need this guidance seek it out from a variety of investment professionals under a system with strong disclosure and anti-fraud rules? Absolutely not, says the Obama administration.

    “Disclosure alone has proven ineffective,” states the rule. “Most consumers generally cannot distinguish good advice, or even good investment results, from bad” (page 36). In fact, proclaims the DOL, “recent research suggests that even if disclosure about conflicts could be made simple and clear, it would be ineffective — or even harmful.”

    So, in the DOL’s view, the only solution is to tax these dim-witted investors—for their own good, of course—and expose financial professionals to a flurry of lawsuits and penalties if administration officials deem their advice not to be in savers’ “best interests.”

  • Gruber's Disciples Gunning for Your IRA and 401(k)

    April 21, 2015 11:32 AM

    Is Jonathan Gruber, the MIT economist who seemingly dropped out of public view after he was caught on camera bragging how he and other Obamacare architects misled the American public, now advising the Department of Labor?

    No evidence indicates that he is, but the authors of sweeping new 444-page DOL regulation that would sharply curtail choices of assets and investment strategies in 401(k)s, IRAs and other savings plans appear to share Gruber’s mindset on the “stupidity of the American voter” (a revelation National Review editor Rich Lowry aptly described as “us an unvarnished look into the progressive mind, which … favors indirect taxes and impositions on the American public so their costs can be hidden, and has a dim view of the average American”).

    Now, President Obama and Secretary of Labor Tom Perez are advancing a new regulatory and hidden-tax scheme while claiming to protect average Americans’ retirement savings from unscrupulous financial professionals. The proposed “fiduciary rule” would restrict the investment choices of holders of 401(k)s, IRAs, health savings accounts, and Coverdell education accounts.

    In a speech to AARP, Obama proclaimed:

    If you are working hard, if you're putting away money, if you’re sacrificing that new car or that vacation so that you can build a nest egg for later, you should have the peace of mind of knowing that the advice you’re getting for investing those dollars is sound, that your investments are protected.

    Similarly, a DOL “fact sheet” describes the rule as “protecting investors from backdoor payments and hidden fees in retirement investment advice.”

    Yet in practice, the rule seems premised on the Gruberite notion that American investors need protection from is their own stupidity. According to the DOL rule:

    [I]ndividual retirement investors have much greater responsibility for directing their own investments, but they seldom have the training or specialized expertise necessary to prudently manage retirement assets on their own. (page 8)

    Therefore, they “need guidance on how to manage their savings to achieve a secure retirement.”

    Can’t savers who feel they need this guidance seek it out under a variety of investment professionals under a system with strong disclosure and anti-fraud rules? Absolutely not, says the Obama administration.

    “Disclosure alone has proven ineffective,” states the rule. “Most consumers generally cannot distinguish good advice, or even good investment results, from bad” (page 91). In fact, proclaims the DOL, “recent research suggests that even if disclosure about conflicts could be made simple and clear, it would be ineffective—or even harmful.”

    So, in the administration’s view, the only solution is to tax these dimwitted investors—for their own good, of course—and expose financial professionals to a flurry of lawsuits and penalties, if administration officials deem their advice not to be in savers’ “best interests.”

  • UK Banks End Reward Programs in Anticipation of Interchange Fee Caps

    April 13, 2015 4:17 PM

    File this one under “we told you so.” The Independent reports a scale-back in credit card reward programs in the United Kingdom:

    The UK’s largest credit card provider has announced that it will no longer offer cashback rewards, labelling them “unsustainable”, after a new EU law was passed last month.

    It is thought that other companies may follow Capital One’s decision, significantly curtailing customers’ air miles and cash bonuses in response to legislation from Brussels.

    The European ruling will cap so-called ‘interchange fees,’ charged by card issuers to retailers when a debit or credit card is used as payment.

    Money reaped by the companies – such as Capital One – under this system allow them to offer customers savings or discounts.

    This is exactly what the International Alliance for Electronic Payments , a coalition that includes CEI, warned about in our letter to EU officials in December:

    Capping interchange fees has been tried in some countries around the world.  Despite claims that these efforts were for the benefit of consumers, the real world results have shown the opposite to be true. In every instance, consumers faced higher fees for banking services, a reduction in benefits and services and saw no return in the form of lower prices from merchants despite promises by merchants and policy makers to pass savings to consumers.

  • Operation Choke Point: The CFPB Is Now in Charge

    April 9, 2015 3:41 PM

    I suggested at TheBlaze some weeks ago that even as the Federal Deposit Insurance Corporation was stepping back from its involvement in Operation Choke Point, the Consumer Financial Protection Bureau was entering the fray. This now appears to be confirmed, as American Banker reports:

    The Consumer Financial Protection Bureau has filed a massive lawsuit against more than a dozen debt collectors, payment processors and related entities that the agency said failed to stop fraudulent collection tactics…

    But the potentially groundbreaking part of the case is that the CFPB also sued several payment processors, including worldwide processor Global Payments and its contracted parties, because the agency said they "should have known" about the alleged violations.

    The case is one of the CFPB's largest to date that pursues multiple different entities, some of which were not directly involved in the harassment of consumers. In that way, it resembles the Justice Department's controversial "Operation Choke Point," observers said.

    Operation Choke Point operates under the purported principle that if increase regulatory pressure, up to and including subpoenas, on the financial firms that work with suspected fraudsters, then those guilty parties will find their financial oxygen choked off. What happened, of course, was that banks and financial firms that dealt with any industries at supposed “high risk” of fraud were scared off from dealing with those industries as a class. The FDIC wisely saw the error of that approach and made it clear that this was an inappropriate approach by its regulators.

    Now, however, the CFPB is treading down the same road, telling firms that they “should know” about potential fraud from the same broad sweep indicators that Choke Point depended on. Once again, whole classes of industries will be cut off from financial services. Brian Wise of the US Consumers’ Coalition pointed out the problems in a statement:

    “Once [Operation Choke Point] was made public, and victims began coming forward, the Administration had to find a way to protect the program and its ability to prevent lawful industries from operating. Due to the lack of congressional oversight, and the unique funding and leadership structure of the CFPB, the Administration knows that it will make the perfect agency to carry on the legacy of Operation Choke Point. The Administration will continue to remove any obstacles in their way.

    “The U.S. Consumer Coalition has been warning lawmakers and industry leaders about the plan for the CFPB to take over Operation Choke Point since the FDIC took down their list of ‘high-risk’ merchants in 2014. Now everyone can begin to see that the CFPB is the nation’s most dangerous, unaccountable, and out of control agency in the federal government.”

    Brian is right. Choke Point is not over, and the CFPB is less accountable than FDIC. Two things need to happen: Congress needs to act against Choke Point and its new incarnation specifically, and it also needs to move to make the CFPB accountable to Congress, the Executive branch, and the Courts, as CEI recommended in Free to Prosper this year.

  • International Panel Outlines Problems with EU Interchange Fee Regulation

    March 30, 2015 3:49 PM

    On March 17, an international panel of experts gathered in Brussels to discuss the proposed EU interchange fee regulations that are set to be approved by the Council of Ministers in the next few months. Hosted by the International Alliance for Electronic Payments, experts from France, Austria, Lithuania, the UK, and the USA each outlined different objections to the regulations based on the own countries’ experience and situations.

    Interchange fees are the fees levied by banks and payments card networks from merchants and vendors when a consumer uses a payment card to purchase a good or service. The proposed EU regulation will cap these fees at the rate of 0.2 percent of the transaction value for consumer debit cards and at 0.3 percent for consumer credit cards. For consumer debit cards, the regulation also gives flexibility to Member States to define lower percentage caps and impose maximum fee amounts. Payment card networks will also have to separate their operations and infrastructure businesses.

    The panel, chaired by Daniel Hannan MEP (European Conservatives and Reformists) consisted of:

    • Pierre Garello, Professor of Economics at Aix-Marseille University
    • Barbara Kolm, President of the Austrian Economic Center
    • Zilvinas Silenas, President of the Lithuanian Free Market Institute
    • Matthew Sinclair, Senior Consultant, Europe Economics, and
    • Iain Murray, Vice President of the Competitive Enterprise Institute (USA)
  • Least Transparent Administration Closes Records on Fannie and Freddie

    March 19, 2015 10:30 AM

    This Sunshine Week, the administration that swept into office promising to be the “most transparent” in history was just judged by a major news service as least transparent of modern presidencies.

    An analysis by the Associated Pres found that “the Obama administration set a record again for censoring government files or outright denying access to them last year under the U.S. Freedom of Information Act.” The AP adds that the administration “also acknowledged in nearly 1 in 3 cases that its initial decisions to withhold or censor records were improper under the law - but only when it was challenged.”

    But FOIA requests are just the tip of the iceberg for this administration’s secrecy, much of which has nothing to do with the legitimate exception of national security. In Dodd-Frank, the administration set up the Consumer Financial Protection Bureau and the Financial Stability Oversight Council—the constitutionality of both of which are now subject to a lawsuit from the Competitive Enterprise Institute and other parties—to be exempt from many open meetings and (especially with FSOC) open records requests.

    But probably the most egregious example of this administration’s practicing of secrecy concerns its management of the government-sponsored housing enterprises (GSEs) Fannie Mae and Freddie Mac. In August 2012, then–Treasury Secretary Tim Geithner issued the “Third Amendment” to the GSE conservatorship. The Third Amendment would require all of the GSEs’ profits to be siphoned off to the U.S. Treasury Department in perpetuity—even after the GSEs paid back what they owed to taxpayers.

    This arbitrary action has spawned more than 20 lawsuits from Fannie and Freddie’s private shareholders. The suits charge the administration with everything from violating the Administrative Procedure Act to unconstitutionally taking property without just compensation.

    The Third Amendment has also raised concerns that the profit sweep is leaving Fannie and Freddie with very little capital reserves, furthering the chance for more taxpayer bailouts should something go awry with the housing market again. See this excellent paper by Cato Institute Director of Financial Regulation Studies Mark Calabria and former FDIC General Counsel Michael Krimminger on this point.

  • How Department of Labor's "Fiduciary" Rule Could Cripple IRA Choices

    March 3, 2015 12:38 PM

    Last week, President Obama called on the Department of Labor to “update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests.” At a speech at the American Association of Retired Persons, the president proclaimed, “You want to give financial advice, you’ve got to put your client’s interests first. “

    Yet, if the regulation the DOL is set to introduce at the president’s behest is anything like the “fiduciary” rule it proposed in 2010—and withdrew upon a groundswell of protest the next year—the government’s definition of “best interest” will likely not be in the best interest of individuals who wish to pursue alternative assets from gold to peer-to-peer loans to crowdfunding in their IRAs.

    The last time around, the DOL tried to reclassify a broad swath of financial professionals and business as “fiduciaries” even if they did not provide regular investment advice. Not only were broker-dealers covered, but so were directed custodians of IRAs, even self-directed IRAs in which investors don’t rely on any “fiduciary” advice. Once again, the freedom of self-directed IRA holders to invest in assets of their choosing, including crowdfunding ventures, may be at risk.

    Self-directed IRAs can invest in a wide range of assets. As worries about monetary policy have been on the rise, gold and silver have found popularity as IRA holdings. Real estate has long been a staple as well. The growth of peer-to-peer lending has stemmed in part from the ability to put the loans created by Prosper and Lending Club into IRAs.

    And as CrowdFund Beat and others have reported, self-directed IRAs serving accredited investors now have access to crowdfunded startups available through SEC Rule 506(c), which legalized general advertising of investment of non-public companies in 2013 pursuant to the Jumpstart Our Business Startups (JOBS) Act. When Title III of the JOBS Act or new congressional legislation legalizing equity crowdfunding for ordinary investors is finally implemented—and hopefully that will be soon—there should be no barriers to self-directed IRAs serving the masses providing access to these exciting new investments.

    Yet, much of this progress in lifting barriers to crowdfunding could be short-circuited if a broad, restrictive “fiduciary” rule comes to fruition. Last time, the proposal specifically included “appraisers” in its definition of fiduciaries, a category that included directed custodians of IRAs.

    Tom Anderson, board manager of Pensco Trust, a San Francisco-based IRA custodian that is now one of the leaders in offering crowdfunding options, wrote in comments to the DOL in 2011 that imposing a fiduciary standard “would result in higher costs and potentially fewer service providers to self-directed IRAs,” which “in turn, could result in fewer investment choices.” Anderson’s comments were written on behalf the Retirement Industry Trust Association, a trade group for custodians of self-directed IRAs, who helped successfully shelve the first DOL rule.


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