The 2,315 page Dodd-Frank financial regulation bill should not be called “financial reform.” Instead, it should be called what for what it is: pages and pages of massively costly, counterproductive and possibly unconstitutional mandates on nearly every type of business—except for those government-sponsored enterprises at the root of the crisis. And while the bill claims to crack down on excesses on Wall Street, its harshest impact will likely be on Main Street businesses that had nothing to do with the crisis.
A front-page Wall Street Journal article this week noted that “far from Wall Street, President Barack Obama’s financial regulatory overhaul … will leave tracks across the wide-open landscape of American industry.” The Journal notes that “the bill will touch storefront check cashiers, city governments, small manufacturers.”
But one thing it will leave totally untouched are the government-sponsored enterprises Fannie Mae and Freddie Mac, which new research by Congress’ Financial Crisis Inquiry Commission and other bodies shows was even more of a prime factor in the subprime boom than originally assumed. The Federal Housing Finance Agency now reports that Fannie and Freddie purchase 40 percent of of all private-label subprime securities in 2003 and 2004. Indeed, according to Edward Pinto, housing scholar and Fannie’s former chief credit officer, millions of mortgages to borrowers with credit scores of less than 660, considered by prominent researchers to be the dividing line for subprime loans, had been labeled by Fannie and Freddie as prime going back as early as 1993.
Rather than wait for Congress’s own Financial Crisis Inquiry Commission to issue its report in December to examine the role of Fannie and other causes, Congress has instead passed a bill that will not prevent future bubbles and imposes untold costs that will put the country in danger of slipping back into a recession.
New collateral requirements on derivatives could cost U.S. companies as much as $1 trillion in lost capital and liquidity, according to the International Swaps and Deriviatives Association. And as the WSJ piece notes, these costs would not just hit big banks, but farmers who use derivatives to hedge the price of their crops and fuel for their tractor. The new Consumer Financial Protection Bureau could also hit retailers that issue credit tangentially related to their business, such as small stores that offer layaway plans.
On the other side of the retail ledger, some of the biggest retailers also got an unjustified mandated benefit with the Durbin amendment that puts price controls on the interchange fees they pay to process credit cards. This corporate welfare for fat cat merchants will mean higher costs to consumers, community banks and credit unions.
In addition, the bill contains provisions that will empower special interests at the expense of ordinary shareholders and that may exceed the limits of the U.S. Constitution. The bill’s “orderly liquidation” authority will allow the Federal Reserve and the Treasury Department not just to bail out firms whose failure is deemed to be a threat to “financial stability,” but to actually seize firms that are not even asking for a bailout. The “proxy access” provisionswould override longstanding state rules in corporate director elections and force companies and their shareholders to subsidize director elections by special interest-shareholder — such as unions, enviromentalists and others. This would give these groups leverage to cut deals with management to push through agenda items, such as the “card check” abolition of secret ballots in labor in labor election and carbon cap-and-tax reductions, that they can’t get through the halls of Congress.
The silver lining is that the more people found out about the potential unintended consequences of this bill, the less popular it became. The bill cleared cloture with the bare minimum 60 votes that it needed. In the House, almost all Republicans , as well as 19 Democrats voted no, on the final bill. As a result of the growing skepticism of the bill, publicized by the Competitive Enterprise Institute and other free-market groups, a few of the most horrific provisions — such as those that would have hurt angel investors and ensnared manufacturers in the definition of “financial companies” — were dropped. And one genuinely pro-growth reform was adopted.
That measure, which was added over Chairman Dodd and Chairman Frank’s objections, helps fix costly and counterproductive provisions of the last “financial reform.”: the Sarbanes-Oxley Act of 2002. This provision will permanently exempt smaller public companies — those with market valuations of $75 million or less — from the law’s section 404(b), the mandate of an audit of a company’s “internal controls.” This requirement and the rest of Sarbox did nothing to stop the accounting schemes at companies like Lehman Brothers and Countrywide, but instead frustrated honest entrepreneurs with audits of trivial items like possession of office keys and number of letters in an employee passwords, and cost the U.S. econ0my $35 billion a year. See my study, “SOXing it to the Little Guy.”
Thanks to this relief, many more smaller companies will be able to afford the cost of going public and get the financing they need to grow into the next Microsoft, Facebook or Google. That is, if they don’t get strangled by the other mounds of red tape in this bill.
In this bill, much arbitrary power is delegated to an army of new regulators. CEI will weigh on the new regulations and educate policy makers to ensure that the true interests of American investors, entrepreneurs and consumers are represented. In addition, fresh from our recent Supreme Court victory in getting part of Sarbox declared unconstitutional, we will review the law’s many constitutional defects.
CEI Research Associate Andrew Kwiatkowski contributed to this post.