It’s deja vu all over again: the Obama administration and Congressional Democrats are trying to rush a 1,400-page financial regulation bill through Congress before anyone finds out what is in it. As Paul noted yesterday, the issue polls well and the Dems are desperate for a winning campaign theme.
The financial services industry is already heavily regulated; some would say that is more the problem than the solution. What would the Democrats’ new layer of regulation accomplish? Republicans charge that the bill institutionalizes federal bailouts, making them a permanent feature of the regulatory landscape. Economist Larry Linsdey explains in a memo to John Boehner:
To date, public attention has focused on whether the bill is a “bailout” bill that will keep “too big to fail” alive. You be the judge. First, the bill contains a $50 billion fund for resolution of systemically risky institutions. The bill allows a 2/3 vote of the Financial Stability Oversight Council to deem any firm (financial or non-financial) as coming under its rubric and then authorizes the FDIC and Treasury Secretary to treat each of the firm’s shareholders and creditors as they choose, without regard to bankruptcy law. Second, the bill gives the Treasury and the FDIC authority to grant an unlimited number of loan guarantees to systemically risky institutions. No Congressional authorization or appropriation is required. Third, the bill gives the Fed the authority to fund any “program” to assist these institutions accepting as collateral anything it deems appropriate. So perhaps too big to fail is dead. How could any firm actually fail when all of its debt could be guaranteed by the Treasury, the Fed could print money to assist it, and just in case, there was $50 billion sitting around to reassure nervous creditors that they would be repaid regardless what contract or bankruptcy law said? Needless to say, the large Wall Street firms aren’t complaining; they will permanently benefit from having lower borrowing costs thanks to these provisions, the same way Fannie Mae and Freddie Mac enjoyed implicit guarantees.
Wall Street has supported Democrats two-to-one over Republicans in recent campaign cycles. This, perhaps, is the payoff the Street has been waiting for.
It is also worth noting that the bailout bill, like the health care takeover and other Obama-era legislation, is national socialist in nature. The banks remain nominally private, but will be controlled by, and gradually turned into instruments of, the national government.
UPDATE: A reader adds:
I have spent the last 15 years of my life in a senior position in the financial services industry. It is indeed a highly regulated industry.
Some of that regulation is necessary and effective. Much of it is not. Regulation has managed to all but destroy the sub $1B IPO market that was the life blood of innovation, capital access and venture capital returns. As a result, Silicon Valley has become Death Valley and the venture industry is scrambling to even justify itself. AOL, Intel, and Apple are just a few of the names that started life as scrappy, shaky efforts holding on by their fingernails and looking to hopeful, risk-taking money in the public markets. None of those companies could be built today.
Why didn’t the dot com bust of 2001 bring down the whole economy? Because there WERE consequences in failure and there was no bailout.
Instead of addressing real problems like the death of venture industry at the hands of Elliot Spitzer and Sarbanes Oxley, the Dodd financial reform package embraces one of the self-serving myths of the financial crises.
Hank Paulson and Timothy Geithner were convinced they “didn’t have enough tools” to deal with financial crisis. The Dodd package is designed to “provide them tools”. As we know, Washington is like the proverbial hammer for which every problem is a nail. See a problem? Throw “regulation”, however misguided, at it. Now they have just added hard cold cash to the equation. And of course you can always trust Washington with a check book.
The real problem was that Paulson and Geithner were simply too incompetent to use the tools at their disposal and too conceited and arrogant to recognize that thousands of highly professional and highly capable financial services executives could and did do just fine without them. The vast majority of banks and brokerages in the country were perfectly healthy. An excellent study by the Minneapolis Fed confirmed that. The investment bank I worked for split itself into “bad bank” and “good bank” a year before the crisis after it saw Fannie Mae and Freddie Mac start to pull back from the sub-prime market. Did our firm get a bailout? No. Bad bank sucked wind. Good bank prospered. End of story. Risk contained.
The crisis was first and foremost a political crisis driven by opportunists and ignorami. The problem was simple: $2T of over-rated and mis-priced AAA mortgage backed securities has been pumped in to the financial system. Much of the blame for that fakery rested on the government itself. Instead of laser focusing on that problem (which Ben Bernanke eventually took care of by monetizing $1T of long dated securities in February of 2009), the Dodd Frank Pelosi Reid crowd launched into pure ignorant hysteria. This confidence-rattling hysteria, Hank Paulson’s wheeler dealer approach to the problem, and confusion around the application of Basel II accounting rules on valuing balance sheets, did as much to shake the markets as any “greed” on Wall Street.