Tuesday, March 16, 2010

Senator Dodd's financial reform bill, in summary

Here's a brief summary of the financial reform bill proposed by Senator Dodd:
  • Consumers: A consumer-protection division would be created within the Federal Reserve, with the ability to write new rules governing the way companies offer financial products such as mortgages and credit cards. It would have authority over any bank with more than $10 billion of assets, and certain nonbank lenders.
  • Banks: The Fed would oversee bank holding companies with more than $50 billion of assets. Regulators would have the discretion to force banks to reduce their risk or halt certain speculative trading practices.
  • Failing companies: The government would be able to seize and break up large failing financial companies. Big companies would have to pay into a $50 billion fund to finance the dissolution of a failing firm.
  • Systemic risk: A new council of regulators would be created to monitor broader risks to the economy. The council could strongly urge individual agencies to take specific actions to curb risk.
  • Corporate governance: The Securities and Exchange Commission would have authority to write rules giving proxy access to shareholders who own a certain amount of stock. Shareholders would have a nonbinding vote on compensation packages for top executives.
  • Hedge funds: Large funds would have to register with the government.
On the surface I don't think it's bad. I don't know much about the details.

I really like the consumer protection part, because a lot of credit card and consumer lending has gotten completely out of control. Will the new regulation result in 20% down payments for houses again? I doubt it. Why would the new regulation result in 20% down payments when the government, via the FHA, is encouraging 3.5% down payments?

I think having a systemic risk regulator is a good idea. I am skeptical about its ability to prevent future financial crises, though. After all, didn't the Fed completely look the other way during the buildup of the housing bubble? When everybody's getting rich, nobody wants to step in and stop the party. I don't see how this changes that innate human tendency.


  1. Yeah, all good ideas in theory but its the execution that matters. They need smart people who are motivated to crack down on risky practices and have the political independence to do so. I wonder how many really bright financial folks are going to want to work in the public sector, regulating instead of the private sector getting rich? And how they plan to keep the Fed from, as James said, looking the other way while people get rich. The political pressure will be immense when/if they really tried to reign in a bubble.

  2. I'm deeply suspicious of anything Dodd would advocate, and this summary implies the legislation is full of holes big enough to drive a truck through.

    First of all, the Federal Reserve has already demonstrated they will always protect banks over consumers and introducing yet another conflict of interest to their mandate is a terrible idea.

    A council of regulators that can "strongly urge" agencies to take action will be less than useless...they will be ignored. And nonbinding votes on executive compensation packages will be similarly ineffective.

    This looks to me like political theater with Dodd protecting the financial industry with a "pretend" reform bill.

  3. I don't like it. Having the Federal Reserve look after consumer interests is a very bad idea. The Fed has had a terrible record monitoring consumer issues. The Fed is consumed with monetary policy. I would like one person to point to a particular action by the Fed before 2005 in which it addressed a consumer protection issue.

  4. I disagree that's its all political theater. It sounds like there's some real powers to regulate here, but like I said above its all in who is using those powers. And of course even if these new reforms are effective today, regulators and congress need to be ready to adapt to whatever "innovations" the financial industry come up with to circumvent risk management and consumer protections.

  5. All this does is help the private individuals who own the World Bank and central banks in most countries worldwide to further consolidate their control. Since our govt is essentially "owned" by the Federal Reserve (a privately-owned central bank), due to the amount of debt interest our govt owes them, the private central bankers will benefit from this bill, and not the US govt or the US taxpayer.

    To close the loop: Be wary of the United Nations, as the World Bank is the UN's financial arm. Lots of UN legislation is in the works that will affect the US in a big way.

  6. Keep in mind the private owners of the World Bank and central banks are notorious for their "grooming" and "molding" of political candidates well before they take office. They do the same to the mainstream media. There's little that money can't buy these days.

    Most of the 2008 presidential candidates were members of thinktanks financially supported by the central bankers, or were receiving money for their campaigns through institutions heavily supported by the central bankers.

    Dodd appears to be simply one of many. As in too many to count or keep track of anymore. Everyone in DC, it seems, is collecting central banker bribes because money is like water to the bankers -- they print the money.

    President Wilson made a huge mistake handing this power to private individuals, back in the day.