I like a very great deal of Chris Dodd’s proposed regulatory reforms, and overall the Dodd bill is I think a significant improvement on Treasury’s proposals. A good place to start is the discussion draft, but there’s a great deal going on here (the full bill is 1,136 pages), so expect lots more details to emerge in the coming days and weeks. In general I’m a fan of it, although I have reservations about the new Agency for Financial Stability, and the reduced powers at the Fed.
The heart of the Dodd bill involves setting up three new agencies: the Financial Institutions Regulatory Administration, the Agency for Financial Stability, and the Consumer Financial Protection Agency. The last — the CFPA — is if anything a beefed-up version of the agency envisaged in Treasury’s proposal, and it’s a very good idea. But the first two are new.
The Agency for Financial Stability is the agency charged with monitoring systemic risk — a job which under Treasury’s proposal would be given to the Federal Reserve. On this I think I have sympathy with Treasury: the Fed in general, and the New York Fed in particular, is better placed to monitor these risks than a brand-new agency with no direct ability to supervise banks or to break them up. A giveaway appears on page 3 of the discussion draft:
The Agency for Financial Stability will identify systemically important clearing, payments, and settlements systems to be regulated by the Federal Reserve.
Clearly, the Fed is going to play a necessary role here, and it’s not exactly rocket science to identify key clearing and settlement systems. So why take that job from the Fed and give it to powerless technocrats in Washington? Similarly, on page 5, the discussion draft says that
The Federal Reserve will continue to play a key role in assessing financial stability and have guaranteed access to financial institutions and any needed information.
That does seem to me to be somewhat duplicative in terms of what the Agency for Financial Stability is meant to be doing.
The Dodd bill is also big on trendy concepts like contingent capital and living wills, none of which have ever been shown to work in practice. It’s so sure, in fact, that it can mandate a way in which the FDIC can “unwind failing systemically significant financial companies through receivership” that at the same time it places an outright ban on the Fed stepping in to bail out a failing institution.
I fear this is dangerous. Yes, it would be great if all of this worked as planned. But that never happens, in the heat of a crisis, and I’m not a huge fan of cutting off the optionality we currently have at the Fed. By all means put in place the contingent capital and the living wills and the FDIC as the first best option for resolving a bank in crisis. But there’s no harm in keeping the Fed as a backstop if none of that works.
The Financial Institutions Regulatory Administration, on the other hand — the new single bank regulator — is a great idea. As the discussion draft says, it
combines the functions of the Office of the Comptroller of the Currency and the Office of Thrift Savings, the state bank supervisory functions of the Federal Deposit Insurance Corporation and the Federal Reserve, and the bank holding company supervision authority from the Federal Reserve.
About time too. For political reasons, the state banking system, governing community banks, will remain in place; I also note that the discussion draft says nothing about the NCUA, and I wonder whether that too is somehow politically impossible to fold into the new agency.
The Dodd bill is great on derivatives regulation, giving the SEC and CFTC broad powers to force markets onto exchanges where they can pose less systemic risk. Any trades not taking place on an exchange will be penalized with margin and capital requirements: a very good idea.
I also like the way that the Dodd bill forces hedge funds with more than $100 million in assets — the potentially dangerous ones — to register with the SEC. Investment advisers looking after less than that will be left to state supervision, which is also a good idea, in terms of not stretching the SEC too far.
There will also, finally, be an Office of National Insurance, within Treasury. About time too!
The Dodd bill is good on regulating credit rating agencies, and also on executive compensation, although I worry a bit about the way that companies will be asked to compare executive pay to stock performance. Executives have control over how their companies perform internally, not over how much outside investors are willing to pay for their stock. But that’s a niggle: over a five-year time period, you’d expect a company which had shown significant improvements internally to also have done well in the stock market.
I’m a big fan, too, of eliminating different standards for broker"dealers and investment advisers, and holding any broker who gives investment advice to the same fiduciary standard as investment advisers. Makes perfect sense to me.
Banks who securitize loans are going to be forced “to retain at least 10% of the credit risk”; I haven’t looked at the full bill to see what exactly that means, but it’s good in principle. And there will also be lots more regulation of the municipal-bond market, which is long overdue.
The worry, of course, is that if the Senate ends up passing anything like this, it’s going to be very hard to reconcile with something more along Treasury’s lines coming out of the House. But even the vague possibility that Treasury’s plans will end up being strengthened rather than weakened has to be heartening.
I am chagrined to see this hypocrit who takess from the rich and keeps go on TV and espouse the virtues of a new structure that is meant to watch over the financial systems, especially the banks. I hope this baboon gets what is coming to him, by preaching that this is to protect the people, from whom, from him and his chorts who can stare you right in the eyes and lie. What is becoming of us all, when greed overtakes the will of man, and the value of respect is measured by how much you can get away with. This power hungry Senator needs to be put out to pasture, and I hope that the good and fair people of connecticut can see their way clear in doing just that.
I don;t think Dodd personally wants more power. His species of politician is more interested in maintaining power.
And your worry about the “greed of man” is too little too late.
Anyways, the bill is still a step in the right direction. However, the people doing the monitoring should NEVER BE ALLOWED TO BE ex-employees of ANY type of financial services firm or law firm. Ideal candidates will be schooled in law enforcement or psychology. Even those with economics backgrounds should be held to great suspicion when applying. I would hire the meanest, nastiest, hungriest do-gooders I could find.
Felix, you seem to treat the issue of Fed powers and abilities as obvious, whereas it is not the case.
Fed in particular, is better placed to monitor these risks than a brand-new agency with no direct ability to supervise banks or to break them up.
The Fed did not see this crisis at the macro level, nor did it see problems with specific institutions like Bear or Goldman. So it is not at all clear if the Fed is better placed than anybody else.
The ability to look deep inside trading books does not necessarily translate into the ability to identify problems (heck, banks themselves did not see any problems!).
Any meaningful reform has to be built under assumption that the information will always be incomplete and distorted.
So why take that job from the Fed and give it to powerless technocrats in Washington?
Technocrats will have precisely as much power as the law will give them and as they themselves will be willing to exercise.
For all complaints and weeps, the Fed simply chose not to wind down Lehman. It moved very forcefully to act on AIG where its power was a lot more dubious, it created all kinds facilities that in Fed’s mind were needed. The Fed simply did not want to interfere in the case of Lehman, or maybe it did not have enough bandwidth for that.
At the same, one clearly has to deal with the issue of regulatory capture, and the Fed has yet to demonstrate that (a) is it aware of this problem and (b) it can deal with it. Starting form a clean slate seems like a better option.
Dodd was navigating the Senate Banking Committee through all the legislation that allowed the banks to sodomize us. He willingly and knowingly championed laws that he knew were constructed solely to allow bank execs big bonuses and inflated share prices. He’s the last person to trust to get us off this reef.
He should be sharing a cell with Bernie Madoff.
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