July 16, 2010

"Dodd-Frank is a full-employment act for regulators that addresses everything but the root causes of the financial collapse."

Write James S. Henry and Laurence Kotlikoff in Forbes:
It serves up a dog's breakfast covering proprietary trading, consumer financial protection, derivatives trading, executive pay, credit card fees, whistle-blowers, minority inclusion and Congolese minerals. Dodd-Frank also mandates 68 new studies of carbon markets, Chinese drywalls, and person-to-person lending, and many other irrelevancies.

None of this deals with the central problem--Wall Street's ability to hide behind claims of proprietary information to facilitate the production and sale of trillions of dollars in securities whose true values are almost impossible for outsiders to determine.

This policy of "systematic non-disclosure"--the absence of complete transparency about what financial firms really owe and are owed--left only its CEOs and their top consiglieres in a position to know what their companies really owned and owed. Consequently, the valuation of Wall Street firms came down to trusting the bank's senior executives--those who often had the greatest stakes in the non-disclosure system.

All this malfeasance was no organized conspiracy, but a self-organizing, automatically expanding gravy train. Its participants included many of the world's largest and most prestigious banks, insurance companies, hedge funds, credit raters, law firms and accounting firms.
Read the whole thing.

45 comments:

sonicfrog said...

It's back-door stimulus.... And I don't mean that in a good way.

knox said...

Sounds like Obamacare! Fixing everything except what needs to be fixed, and creating a labyrinth of regulations in the process.

Sounds like every government "fix" actually. The opposite of efficiency and sense.

PoNyman said...

Its participants included many of the world's largest and most prestigious banks, insurance companies, hedge funds, credit raters, law firms and accounting firms.

Prestige alone doesn't pass laws so the author forgot to include an important group of people in that self-organizing gravy train.

Hagar said...

And the toxic mortgages which were to be bought up with the TARP funds are still out there under the astroturf and as toxic as ever!

Big Mike said...

People expected what besides a "dog's breakfast"? The only thing Democrats know about business and finance is how to twist arms for large donations.

(Great phrase, BTW, given what I've seen dogs eat.)

edutcher said...

Quotes from Christopher Dodd:

"By opposing the spread of Communism in Africa, we may be on the wrong side of history".

"It will take the next economic crisis ... to determine whether or not the provisions of this bill will actually ... minimize the effects of that crisis when it happens."

I wonder, by opposing the spread of Communism in the United States, are we on the wrong side of history?

sonicfrog said...

It's back-door stimulus

Designed by Congwethman Fwank.

MadisonMan said...

I'd never heard the phrase dog's breakfast before.

My own dog eats the same thing for breakfast day in and day out: 1 c of dry dog food. About as palatable as what this bill includes, as far as I can tell, but he likes it. What do dogs know?

Dust Bunny Queen said...

I want to know more about the regulation of person to person lending.

Just how in the world do they think they can possibly regulate that?

MadisonMan said...

DBQ, the story just says they're going to study person-to-person lending.

How worthwhile.

GMay said...

Ok, raise your hand if you're shocked by this news.

Can we hit the accelerator please? If there's no way to avoid driving over the edge of the cliff, I want to get it over with.

Cash in your mattress? At least you'll be able to use it for starting fires.

Gold? It won't put food on the table.

Guns and ammo baby, guns and ammo.

PatCA said...

Utterly heartbreaking.

People wonder why Obama is so chipper even with his falling polls. This bill and Obamacare and their legions of regulators and investigators and inspectors ensure that his breed of nanny tyrants will rule America forever.

"I won" is truer than ever today.

HDHouse said...

Let's line up all the republicans on here..that's it, just form a line way over there on the far right..now take a deep breath and forget everything you every knew about policy and government action in this area from say, the time of Newt Gingrich, and write "blame the demoncrats" on the palm of your hand so you won't forget who you are to say made you into walking and gurgling zombies.

AJ Lynch said...

It seems legislator lawyers may be the basic problem. Too many laws, regulations, and bills, bills and more bills churned out by state and fed legislatures.

So I call for a bill that calls for a moraturium on new bills.

wv = squat [I don't know ...]

Dust Bunny Queen said...

the story just says they're going to study person-to-person lending.

How will they know if I am lending money to someone? Do they think that people are seriously going to report this?

What a colossal waste of time. These morons can't be voted out of office soon enough.

If someone would run on the platform of repeal EVERYTHING that has been instituted in the last 20 years (or longer), and start over with some common sense....one item at a time and screw this comprehensive (dog's breakfast) approach, they would win in a landslide.

Original Mike said...

This kind of crap is exactly what's wrong with "regulation". Regulation, of course, is essential. But we don't get thoughtful, meaningful regulation. We get these steaming piles of shit that do much more harm than good. Bastards.

Calypso Facto said...

Hard to find a good summary of the Act, so I guess like healthcare we'll have to wait until the regulators start crafting rules to see "what's in it". But "12 new regulatory agencies" doesn't sound like a good start and the list of supporters isn't encouraging (and makes me think that scoring public relations points while ladling out more government gravy is the legislation's true purpose).

Richard Dolan said...

This article accurately describes the Dodd-Frank bill as a boondoggle for lawyers and regulators. But beyond that, I'm not convinced.

The authors think a lack of transparency was the cause of the problem, and offer a solution: "Were we really serious about fixing our financial system, there's a very simple alternative--Limited Purpose Banking. LPB would transform all financial intermediaries with limited liability into mutual fund companies. Under LPB a single regulatory agency--the "Federal Financial Authority"--would organize the independent rating, verification, custody and full disclosure of all securities held by the mutual funds."

I'm skeptical about their diagnosis and proffered cure. Complete transparency -- i.e., perfect knowledge -- is unobtainable, and thus some lack of transparency is unavoidable. But investing is about risk/reward, and if risk is an unknown, that's an excellent reason not to buy. Buyers of CDOs, etc. in 2005-2007 were well aware of the limitations of their knowledge, and so relied on surrogates (rating agencies, etc.) and insurance (swaps, CDOs, etc.) to cover the downside. The bottom fell out when potential buyers no longer believed that the surrogate measures accurately reflected the real risks or offered sufficient protection on the downside. The underlying assets were never worthless, but could not be priced (the unmeasureable risk factor being a huge component of accurate pricing).

You can describe that as a 'lack of transparency' -- the concept is vague enough to fit -- but it's also too general to be much help in dealing with the problem.

Their solution -- a new federal agency that will take over the rating/risk measuring functions -- is at odds with their diagnosis of the problem. Throughout the lead-up to the crash, the regulators (state and federal) always had enormously broad regulatory powers over the banks and quasi-banks. The authors' solution is to turn "all financial intermediaties with limited liability" -- that's the investment banks, hedge funds, a good bit of the insurance industry, GMAC-type financing companies, etc. -- into regulated mutual funds. But a major cause of the meltdown was that the same regulators were pushing the financial markets to engage in uneconomic lending practices, and at the same time, the feds were effectively insuring a good bit of the market (through FNMA and Freddie). Once the players in the banks and "financial intermediaries" figured out how to do it and turn a short-term profit, they went along with the govt's program with gusto. And more regulators are now the solution?

What the proffered "solution" ignores is that any governmental regulator always responds to, and seeks to advance, political/social objectives at least as much as sound economic or financial ones. Not only do the regulators typically have to answer to politically appointed commmissioners, but they are acutely sensitive to the prevailing winds coming from Congress or the President's team. And, over time, regulatory bureuacracies develop a culture of their own, in part informed by the 'revolving door' that always forms between regulator and regulated industry. Thus, the authors' proposal for a new federal regulator suffers from the same 'lack of transparency' -- in the sense that it does not deal with the bureaucratic reality of any regulatory system -- that they say caused the crisis in the first place.

More fundamentally, their "solution" doesn't advance the fundamental objectives of having a financial system or financial intermediaries -- providing credit efficiently (in the economic sense). That requires reducing transactions costs, rewarding efficiency and punishing (again, in the economic sense) inefficiency. I don't see how a new federal agency will ever deliver what's needed.

LarsPorsena said...

"...But "12 new regulatory agencies" doesn't sound like a good start and the list of supporters isn't encouraging .."

Hey, if it's fine with La Raza, AARP, and the SEIU what could be wrong with it?

Bob_R said...

So the null hypothesis is that the left's only reason for existence is to provide more power and money to the nomenclature. It is not refuted by anything that Dodd, Frank, or Obama have done in their lives.

AJ Lynch said...

DBQ - I agree we should repeal most laws enacted in the last 30 years by the baby boomers idiots [and I am one].

Lars:
Mentioned "12 new federal agencies"!

Yikes yes that is just what we need.

Quayle said...

At this point, I can only quote one of the Mormon leaders ( and former associate general counsel for NationsBank and volunteer chairman of Affordable Housing of Nashville),

“Policemen and laws can never replace customs, traditions and moral values as a means for regulating human behavior."

"At best, the police and criminal justice system are the last desperate line of defense for a civilized society."

"Our increased reliance on laws to regulate behavior is a measure of how uncivilized we’ve become.”

"In most of the world, we have been experiencing an extended and devastating economic recession. It was brought on by multiple causes, but one of the major causes was widespread dishonest and unethical conduct, particularly in the U.S. housing and financial markets."

"Reactions have focused on enacting more and stronger regulation. Perhaps that may dissuade some from unprincipled conduct, but others will simply get more creative in their circumvention."

"There could never be enough rules so finely crafted as to anticipate and cover every situation, and even if there were, enforcement would be impossibly expensive and burdensome. "

"This approach leads to diminished freedom for everyone. In the memorable phrase of Bishop Fulton J. Sheen, “We would not accept the yoke of Christ; so now we must tremble at the yoke of Caesar."

Big Mike said...

@HD, you object to our blaming Democrats? Considering that we Republicans have been standing on the tables to say that cap-and-trade is a very bad idea, that Obamacare represents a very bad legislative "solution" to a real problem, that the stimulus package would not stimulate hiring, and that Dodd-Frank is a bad bill, my friend you own the consequences.

And if you believe that the consequences will be positive for the United States, then, friend, you are a fool.

AprilApple said...

"All this malfeasance was no organized conspiracy, but a self-organizing, automatically expanding gravy train. Its participants included many of the world's largest and most prestigious banks, insurance companies, hedge funds, credit raters, law firms and accounting firms."

(AKA, major campaign donors.)

The Frank/Dodd bill opens the door to endless tax payer bailouts for the list above. Thanks, geniuses!


I'll repeat myself: Democrats falling out of favor with Americans? "It's the bad legislation, stupid."

AJ Lynch said...

Quayle:

There is a much shorter way of putting it:

Locks are meant for honest people.

The Drill SGT said...

Hagar said...
And the toxic mortgages which were to be bought up with the TARP funds are still out there under the astroturf and as toxic as ever!


Nor do the regulations do anything about regulating the folks creating more of those toxic assets:

Fannie, Freddie and now the FHA.

The Drill SGT said...

HDHouse,

I didn't comment in that long Polanski thread, but I note you were on the right side of that argument (for a change :)

edutcher said...

Some of the things Republicans may have done to fix the problem may not have worked as well as they hoped, but the root causes go back to FDR, JFK, LBJ, and Willie, so, YES, we DO BLAME the Democrats.

Repeal is the only acceptable answer. And, if the new crowd won't do it, throw them out and try again.

Lucien said...

Dog's breakfast is best served on a mare's nest, with a side of kerfuffle.

JayC said...

For those of you worried about the impending financial catastrophe, here's an important tip:

Don't put your money in your mattress.

Put your money in a diversified portfolio of mattresses.

Diversification is important in times like this.

ricpic said...

It's all about control, as usual. Business be damned, ordinary people be damned as long as They Who Know Best are in charge.

Trooper York said...

You would have to look long and hard to find a more courrpt piece of crap than Chris Dodd.

So you know that this legislation is a Christmas tree for the people that have paid him off.

I bet he will get two or three new mortgages out of it at the very least.

Bruce Hayden said...

I still find it hilarious that the bill to clean up the financial mess was principally sponsored by the two men in Congress who were probably most responsible for causing it through their push for community lending (i.e. lending to people who couldn't afford their mortgages). No wonder it fails to address the stated problem, but does impose massive regulation over much of the rest of the financial community.

compact said...

Why do they need to spend money to create jobs? Just stop outsourcing. Even with the bank bailouts, it is still impossible for homeowners to refinance. Well hello? Directing those greedy bankers to refinance/modify double digit interest rates to the low 5% or 4% puts extra money into consumer pockets to spend. Why does it have to be be complicatedly dumb? Ive been in other blogs tpix.net and news discussions its all the same issue.

kimsch said...

I think "Frank-n-Dodd" should be the name of this bill. It is a monster after all.

wv: ambrib

Dust Bunny Queen said...

You think this is stupid. How about the 1099 debacle that was hidden in the Obama Care Bill.

In 2012, if I buy more than $600 of goods from a vendor...any vendor, I'm supposed to send them a 1099.

That means if I buy over $600 in toner, paper, equipment,software, toilet paper, soap, soft drinks for the office, advertising or anything else from Best Buy, Office Depot, Costco, Safeway etc, I have to get THEIR tax id and mailing address and send a 1099 to Best Buy. I bet they can hardly wait to get thousands and thousands of 1099's to deal with.

Not such a big deal for me because I'll just switch my purchasing from one company to another at $550 or so and screw sending the 1099's

However, for many other businesses (retail stores, hardware store, contstruction firms, larger companies) and guys like my husband who routinely buy parts and supplies throughout the year from many vendors that total more than $600, this means thousands of small transactions will have to be recorded and HUNDREDS of 1099's have to be researched and sent out by the small business owner.

Also the software that we use now to track these types of things, Peachtree and Quickbooks will have to be upgraded because the format of the 1099's in 2012 will be completely different.

Sigh.... at least some accountants and bookkeepers are going to be getting more work.

What a bunch of total asses we have in Congress.

I pray for a meteor to hit the capital building one time when congress is totally in session.

Thank you God.

Alex said...

It's clear that after 30 years of deregulation the country is in a hot mania for re-regulation of everything. Don't you just WUV the American experiment?

Jason said...

Holy crap... I just thought of this: So if I'm an independent insurance agent - say, I own my own S-corp or LLC:

If I buy a new laptop from Best Buy to run my business with, I need to send a f***ing 1099 to them if I spend over 500 dollars?

I have to send a 1099 to my cell phone company?

I have to send a 1099 to the place I buy my printer paper from, and I have to buy printer paper to print out all these 1099s. And I have to mail them, at 42 cents per stamp. Not including the labor it's going to take to sit down and mail them out.

You know, I was planning on going indy and hiring a couple of people soon. You know. Creating jobs. To hell with it. If this is the kind of stupid-ass crap I'll be putting up with from this Congress and this Administration, I can stay with the captive carrier and use their resources, and let THEM worry about this crap.

That's two jobs that won't be created next year. Probably would have hired two single moms, too. One or both of them likely would have been a minority. Sorry. No jobs for you, sweetheart. Thank Obama.

HOPE AND CHANGE, BABY!!!!!

traditionalguy said...

When the Finance Police come around asking what their job is, but fixed upon their power they now have to freeze commerce and take 3 years to do a 3 day review and approval, then we will be no safer from cons than we were before.

EDH said...

If I buy a new laptop from Best Buy to run my business with, I need to send a f***ing 1099 to them if I spend over 500 dollars?

I've heard if you pay with a credit or debit card, no you won't.

I've heard rumblings that banks and credit card companies are gearing-up to reap the benefits of being the middlemen in business vendor payment systems.

Dust Bunny Queen said...

I was planning on going indy and hiring a couple of people soon. You know. Creating jobs. To hell with it. If this is the kind of stupid-ass crap I'll be putting up with from this Congress and this Administration, I can stay with the captive carrier and use their resources, and let THEM worry about this crap.


Yes, Jason. Welcome to my world.

I also heard about the credit card angle (not the ATM/Debit card use though I'll need to check that out), which I suppose I could do to avoid the 1099 problem.

If so, then I, the purchaser, won't have to send a 1099, but the card company will. Do you think that that will be a FREE service?

Think again.

Also, the companies receiving the 1099's will have to hire additional staff to process the damned things. More costs added to the bottom line of operation.

However, using credit cards has its problems. It costs the company that you are buying from a percentage of their sales, so they will raise their prices.... again. It is easy to not pay your card in full every month so the result is that some people will begin carrying balances at high interest rates.

Soooo.. not only will our purchases cost more, the card companies and the banks will charge us more for the 1099 issuance. And many small businesses will raise their prices or costs of service to cover the additional stupidity of costs.

We will all be drowning in a sea of papers and 1099 reporting. (Buy stock in paper companies)

1099 for anything business to business transactions is what I have heard.

I don't know if that includes Cell Phones, or other utilities, but why not. If it moves TAX IT. How about insurance premiums for liability and auto insurance? Lease on my building?

Maybe I should send the State of California a 1099 for my insurance license fees and FINRA for my securities license fees. Gee....I wonder what their Tax ID's might be.


Go Indy anyway. You'll love it.

Deborah said...

I believe this bill is what's know as a FUBAR which means we have been FOBAR

Red A said...

Lawyers create complicated laws, which gives more jobs to lawyers. Must be a nice business to be in.

downtownlad said...

So Ann thinks it is a good thing that Lehman had to declare bankruptcy - thus causing the crisis, rather than having a government authority be able to take over Lehman and shut it down gracefully - similar to the Resolution Trust Corporation?

Um - ok.

In other words - Ann favors more bailouts. This piece of legislation prevents bailouts from ever happening again. The companies will be forced to close shop.

Republicans favoring bailouts. Again.

Nice.

downtownlad said...

So I assume Ann favors the abolition of FDIC insurance as well.

You know if 5000 banks just go belly-up and all of the depositors lose their money.

Well Ann is just a-ok with that.

Because all government regulation is BAAAAAAD.

Ann Althouse said...

@DTL I didn't say what I was for. I only suggested I was against a big, sprawling piece of legislation that *doesn't address the problem* that was used to leverage passage. Why would you be for that? Why did Russ Feingold vote no?