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First take on Dodd’s financial regulations

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Senator Chris Dodd on new financial regulations legislationEver since Sen. Dodd announced his financial reform plan, I’ve been waiting for a good analysis of it. Steven Pearlstein, of the Washington Post, wrote a scathing article today on the bill.

Wading through the 1,336-page “chairman’s mark” of the Senate’s financial regulatory reform bill, my initial reaction was the same as the Senate Republican leader’s response to any Democratic initiative: Put this sucker aside and start over.

Don’t get me wrong — I’m all for clever compromise, but this one looks like the proverbial camel concocted by a committee that set out to design a horse.

Unfortunately, Mr. Pearlstein’s story on the bill fell short of any real analysis. Not being satisfied and wanting to know what actually was in the bill, I downloaded the Reform Summary: FinancialReformSummary231510FINAL.

Overall it sounded pretty good which caused me to wonder why Pearlstein was against it. So, I wandered around to all of my favorite economists websites, hoping for a better analysis. Financial Times explains it, from the perspective of the Fed’s role.

The Fed would lose oversight of banks with less than $50bn in assets in a bill by Chris Dodd, chairman of the Senate banking committee, which was introduced this week and will go to a mark-up next week.

“It makes us essentially the ‘too-big-to-fail’ regulator,” Mr Bernanke told a congressional hearing. “We don’t want that responsibility. We want to have a connection to Main Street, as well as to Wall Street.”

The $50bn threshold is a compromise from Mr Dodd, offered after his earlier proposal to remove all of the Fed’s bank supervision was roundly rejected by the Treasury, the Fed and some senators.

Paul Volcker, the former Fed chairman, appeared alongside Mr Bernanke to describe the idea of hiving off all of the bank’s oversight as a “grievous mistake” that would harm the conduct of monetary policy and financial stability by limiting the Fed’s understanding of the financial system.

In another article, FT reports on the objection by the U.S. Chamber of Commerce and big banks against the Consumer Financial Protection Bureau (CFPB) which, under the current proposal, will be housed in the Fed with independent powers to protect consumers and investors and with a permanent budget.

“In every case consumer protection has the edge and will trump safety and soundness and I think that is backwards,” said John Dugan, the comptroller of the currency, at an American Bankers Association conference.

Mr Dugan, whose office regulates national banks, said a Consumer Financial Protection Bureau proposed in Mr Dodd’s financial regulation bill, which was published on Monday and is to be revised next week, was too strong.

However, Mike Konczal has a good start analysis of the bill on his website, Rortybomb, in his analysis of the resolution authority.

Resolution prevention

Think of resolution authority as a relationship between deterrence, detection and resolution.

Ideally we’d like to be able to detect firms that are going to fail beforehand, and use the financial sector’s regulatory powers to push them back on a stable path. So resolution isn’t just about failing a firm, it’s about taking steps to tell a firm that they must take action to become safer before they are resolved. This is what regulation at commercial banks do all the time – they create limits and caps and explicit capital ratios. The fact that if they fail, the government will detect it and force changes acts as a deterrence – if they are going to get caught, why even bother?

This was the argument between bankruptcy and resolution authority – Republicans thought that if you just made the resolution above painful enough, through an ugly bankruptcy, that would be enough to force deterrence, and we wouldn’t even really have to bother with detection. The problem is that financial bankruptcies have externalities for banks that have no problems, as well as crushing the lending channels our real economy needs to grow and survive. And the parachutes are so golden, reputation incentives don’t see to do the trick. And the payoffs are so asymmetric and the books are so easily cooked, shareholders can’t bring disclipine. And so on. This is why we need regulation, specifically regulation to expand this pattern from commercial banks to the largest financial firms.

Of particular interest – and somewhat cynical humor – is Konczal’s What would Goldman Lobbyists Hate About the Financial Reform Bill?

I want to approach it from a different angle: What would an investment bank hate about this bill, and lobby hard to change? I actually read this bill as if I was a Goldman Sachs lobbyist, looking for all the sections that I hated and made a list of what items I needed to lobby hard on to kill or modify.

My final verdict, by the time I got to the end? If I was a Goldman lobbyist, I’d probably shrug and go “eh, pass it.”

What’s there to object to? More practically, what’s this bill really going to do? I really couldn’t find anything outside of two items that nobody expects to be effective anyway, and one I’m doubting will get passed.

Overall, the bill, so far, sounds pretty meek and makes only weak reforms of a financial system that nearly brought down the world economy. Some of the reforms, which the Chamber of Commerce and Banks really hate, deal with shareholder rights to vote on compensation and election to the board of directors as well as the CFPB. I can understand why big banks, like Goldman, Chase, Citi, and BofA, would hate these regulations, but why does the Chamber of Commerce hate them? After all, most of these regulations not only help consumers in general, they help to protect small to mid-sized businesses. But maybe small to mid-sized businesses are less important to the Chamber than big banks.

Of course, Senate Republicans are already on the attack, wanting to weaken even further or defeat Dodd’s bill entirely. I understand that Republican objections are politically motivated – how can they win back Congress and the White House if Democrats successfully pass legislation that protects consumers and investors? – but here’s the big question: how do they dare put party politics ahead of the health of our financial system and the well-being of every business and American family in the United States?

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End. Corporate Welfare. Now!

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The current Senate Financial Reform bill appears not to be reform at all. I’ve been following the negotiations as they continue, and I’m less and less optimistic that any real reform will come out of the Senate. I’m surprised that Senator Dodd, who is leaving the Senate at the end of his term, has become so meek in negotiations with Senator Corker (R-Tenn.) on achieving the kind of reform that will protect the U.S. – as well as the rest of the world – from the kind of massive gambling, lack of corporate oversight, and “get rich quick” schemes that caused the financial crisis.

While the anger at AIG, Fannie and Freddie is justified, few voters really understand how much the government, through Congressional legislation, gives away in corporate welfare in terms of special protections, allowing monopolistic practices, and targeted tax breaks and credits. Trillions of tax dollars are lost through Congressional protections and approved monopolies. Those trillions, in part, are made up by the middle class while the rest goes into the national debt. Meanwhile, voters pay higher prices because protections and monopolies prevent real competition which lower prices…and special regulatory exclusions allow specific industry sectors to gouge American families.

Payday LendersNow, there’s a significant effort under way to exclude various financial companies who make it a practice to prey upon people by charging interest rates so high that, in many cases, the principle can never be paid off. From Wikipedia, “the most frequent rate was $25 per $100, or 650% annual interest rate (APR) [emphasis mine] if the loan is repaid in two weeks.”

Payday lenders, pawnbrokers, car dealers and other companies that make loans but do not hold bank charters would be shielded from the scrutiny of a proposed federal consumer protection regulator under the terms of a tentative compromise between senators who are attempting to craft a bipartisan bill.

Under the proposal, the regulator would hold broad authority to write rules protecting borrowers, but officials would make regular compliance checks only at banks and, for the first time, at mortgage lenders, a step that still would exclude some of the nation’s largest and most controversial lending industries.

The Obama administration has pushed to place nearly all lenders under federal oversight for the first time, but Sen.Senator Bob Corker of TN Bob Corker (R-Tenn.) insisted on limiting the scope of the proposed consumer regulator as a condition of his negotiations over a broader package of regulatory reforms with Sen. Christopher J. Dodd (D-Conn.), the chairman of the banking committee, according to several people familiar with the negotiations.

Republicans argue that there is no reason for increased oversight, at considerable expense, of industries that played no role in the financial crisis.

But the proposed exclusion of those industries has drawn opposition from an unlikely alliance of consumer advocates and banking trade groups, who argue that the government should impose equal stringencies on all lenders, banks and non-banks alike.

“The point of the agency is to provide a cop on the beat that focuses where the problems are, not a cop that’s fenced off from some of the worst actors,” said Elizabeth Warren, a Harvard Law professor who helped to shape the administration’s proposal for the new agency.

Even the Defense Department has chimed in, sending a letter to the Treasury Department urging oversight of auto lenders because of a pattern of abusive lending to military personnel.

“We believe the intervention of the [Consumer Financial Protection Agency] in overseeing auto financing and sales for service members will help protect them and will assist us in reducing the concerns they have over their financial well-being,” Defense Undersecretary Clifford Stanley wrote in a letter dated Feb. 26.

When will Congress choose to stand up for the American people as opposed to protecting businesses who behave badly or engage in monopolistic practices? When will Congress end Corporate Welfare?

Regardless of how much the Republican Party and tea partiers condemn Democrats, it’s the Republican Party which has pushed the hardest to protect corporate interests against the interests of average American people. Worst of all, perhaps, is that the rest of the world, from Europe to Asia and China, are becoming profoundly angry because the U.S. Congress has not only failed to expeditiously resolve the underlying causes that created the global financial collapse but also because they see Congress wavering on doing anything at all that amounts to real reform.

As a side note as to why Sen. Corker may be adverse to extending consumer protections to payday lenders, auto dealers, etc.:

Corker’s state is home to the nation’s third-largest payday lender, Check Into Cash Inc. The company’s chief executive, W. Allan Jones, and his wife have contributed $12,300 to Corker’s Senate campaigns since 2004, $1,000 to Dodd and about $500,000 to federal and state political candidates overall since 1999, the nonpartisan Center for Responsive Politics said.

In addition, Check Into Cash is a member of the Community Financial Services Assn. of America, a trade group for storefront payday lenders. The group formed a political action committee in 2007 that contributed $168,000 to members of Congress during the 2008 election cycle, including $1,000 apiece to Corker and Dodd.</em

Among those benefiting would be a Tennessee-based company whose officers have been generous campaign contributors to their home-state senator, Bob Corker, the leading Republican negotiator on the legislation.

Executives of Jones Management Services LLC, based in Cleveland, Tennessee, and its loan companies contributed $17,325 to Corker’s 2006 and 2012 Senate campaigns, according to the Center for Responsive Politics, a Washington-based research group.

It’s time every member of Congress understood that the voters are sick and tired of corporate giveaways and corporate welfare…and the total failure to protect the American people from usurious practices and overweening greed. If large corporations can’t stand on their own without special tax credits and deductions, perhaps they should change management or rethink their business model. The taxpayers should not be subsidizing them through special tax and regulatory breaks. If companies want to the rights of “people” then they should have to abide the same tax and regulatory rules as the voting public: NO SPECIAL DEALS!

Written by Valerie Curl

March 11, 2010 at 8:45 AM

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