Regular readers know that you humble blogger thinks that the only parts of the Dodd-Frank Act worth saving are the Consumer Financial Protection Bureau and the Volcker Rule. As a result, by stalling the implementation of the rest of Dodd-Frank, the banks have done a great service.
Now, in the light of the Libor scandal and the related financial regulator cover-up, everyone can see that the Dodd-Frank Act was written by the banking industry for the banking industry. They can see this because a fully implemented Dodd-Frank would not have prevent the banks from being able to manipulate the Libor interest rate for their own profit or to misrepresent their financial strength.
The next financial reform legislation will do away with the non-CFPB and Volcker Rule portions of Dodd-Frank and substitute requirements that bring transparency to all the opaque corners of the financial system.
These requirements will include:
- Banks will disclose on an on-going basis their current global asset, liability and off-balance sheet exposure details.
- Structured finance securities will report on an observable event basis any activity, like a payment or default, involving the underlying collateral before the beginning of the next business day.
Nearly two years after the signing of the landmark Dodd-Frank legislation, many of the rules meant to restore public trust in the country’s financial institutions have yet to be enacted.
Squads of lobbyists and lawyers have overwhelmed the rule-making process in minutia, blizzards of paper, and hundreds of meetings.
As a result, government regulators have missed more than half of their rule-making deadlines, with just 120 of the 398 regulations enumerated by the law in effect, according to a tally by the Wall Street law firm Davis Polk. Key provisions are still months away, most notably the so-called “Volcker Rule” meant to rein in banks’ appetite for risky investments and prevent a repeat of the 2008 meltdown that led to the public bailout of some of the country’s largest financial institutions.
“The richest industry in the history of the world is using its vast and unlimited resources to slow, delay, gut, and weaken as many of the rules as possible,” said Dennis Kelleher, a former aide to the late Senator Edward Kennedy and the chief executive of Better Markets, a Wall Street watchdog group. “If they don’t get their way, they file suit.”
A year ago, a federal court in Washington sided with the US Chamber of Commerce when the business group challenged the Securities and Exchange Commission on a controversial rule that made it easier for shareholders to replace corporate directors. Although the court did not invalidate the rule, it required the SEC to launch a rigorous — and time-consuming — cost-benefit analysis before finalizing the regulation.
At least two other lawsuits are pending, challenging other aspects of the rule-making process. One was filed by a Texas community bank, and the second by several financial industry associations....If the Opacity Protection Team cannot win with lobbying, well there is always calling in favors from a few friends.
Still, the power dynamics in Congress remain a serious threat, said Representative Barney Frank, a Democrat from Newton. Frank, who is retiring from Congress at the end of the year, will spend his final months in Washington defending his namesake law and protecting funding for those regulatory agencies writing the rules and overseeing the firms.
“There’s this egregious effort to kill it by not funding them,” Frank said, referring in particular to potential cuts to the Commodity Futures Trading Commission and the SEC.
“Republicans don’t want to give enough money to do the job right,” he said. “We are pushing back to get them more money, and we’ll be fighting in the House.”
The Commodity Futures Trading Commission, which will have to enforce dozens of new rules on the $300 trillion derivatives industry, faces uncertainty because House Republicans are seeking to slash its current $205 million budget by $25 million. Senate Democrats have backed President Obama’s request to boost the agency’s funding to $308 million.
“Even if we finish the rules, we won’t have the resources, the people,” said commission chairman Gary Gensler. He likened his challenges to a football game without enough referees. “Without appropriate funding, we can’t truly oversee these markets.”Actually, by requiring transparency the regulators can do their job of overseeing the markets much more cost effectively.
Instead of being the only ones with access to the information needed to oversee the market, now everyone has access to this information.
As a result, regulators can utilize the markets' analytical expertise.
Until its enactment on July 21, 2010, the financial industry had been focused on blocking the overhaul, swarming the nation’s capital with some 600 lobbyists to influence the deliberations.
With such high stakes, industries spent a record $302 million in 2010 for lobbying, according to OpenSecrets.org. That same year, the US Chamber, a fierce critic of Dodd-Frank, spent $157 million for lobbying, also a record.And Dodd-Frank is a testament to the fact that the financial industry got what it paid for. An Act that preserves opacity and lets the banks get away with manipulating benchmark interest rates like Libor.
Industry representatives are unapologetic for their efforts on Capitol Hill....
Tom Quaadman, vice president of the chamber’s center for capital markets and competitiveness, said much of the slowdown naturally arises from the complexities of the law and the issues involved.Remember, complexity creates opacity.
He cites as an example that government regulators, including the Federal Reserve and SEC, asked industry representatives to weigh in on 1,400 questions having to do with the Volcker Rule, a linchpin of Dodd-Frank authored by Paul Volcker, former chairman of the Federal Reserve.
The rule, which would limit high-risk trading by banks, is far from finalized because many of the 17,000 written public comments submitted to the SEC still await review, page by page.Imagine the Volcker Rule combined with banks being required to provide their current exposure details. Implementation of the Volcker Rule would be straightforward as bank disclosure would allow market participants to see any position taken by the bank.
Most of the comments are short, pithy postcards from ordinary Americans, but others are hundreds of pages of dense legalese that require careful reading by staffers.
“Sometimes, regulators don’t understand the markets they regulate, and the regulators themselves don’t even know how to construct a system to enforce a provision of the law,” Quaadman said....This is frequently the case.
Your humble blogger had this experience with numerous regulators including the SEC who had difficulty understanding why valuing the contents of a brown paper bag was harder than valuing the contents of a clear plastic bag.
Derivatives reform, Gensler said, is about “to spring to life,” ordaining the finalized rules on swaps announced last week as a breakthrough that will begin clearing a backlog of other stalled rules meant to bring transparency to markets mostly operating in the shadows....The reason that the Dodd-Frank Act is fatally flawed and the bulk of it should be repealed is that the law does not address the issue of valuation transparency, it only addresses price transparency.
In the absence of valuation transparency (where market participants have access to all the useful, relevant information in an appropriate, timely manner), price transparency is irrelevant.
The way the investment cycle works is that investors are suppose to use valuation transparency to independently assess the risk and value of each investment and then and only then look at the price being shown to them by Wall Street to make a buy, hold or sell decision.
Without valuation transparency, how does an investor know if the price paid by the last buyer reflects a shrewd purchase or the price paid by the biggest fool.
If investors do not have valuation transparency (an example of this is structured finance securities), then they cannot assess the investment and should not buy or sell regardless of the price being shown by Wall Street.
“To the extent that the purpose of this entire exercise is to restore confidence in our financial system, then that objective is far off in the distance,” said Cornelius Hurley, a professor and the director of Boston University’s Morin Center for Banking and Financial Law. “A deeply flawed statute is being implemented haltingly under very difficult circumstances.”Hence, the reason for repealing the vast majority of the Dodd-Frank Act and replacing it with the valuation transparency requirements discussed above that actually would restore confidence in the financial system and prevent future Libor-type scandals.