Friday, July 27, 2012

Dodd, Frank rush to defend Dodd-Frank Act

To no one's surprise, Christopher Dodd and Barney Frank have rushed to defend (see here and here) the Dodd-Frank Act and its huge expansion of the financial/academic/regulatory complex in the face of the assault by Sandy Weill with his call for 'complete transparency' and 'breaking-up' the Too Big to Fail.
Former Sen. Chris Dodd defended his signature financial services legislation on Thursday, drawing a sharp contrast with former Citigroup Chairman and CEO Sanford I. Weill, who a day earlier called for breaking up large Wall Street banks.... 
The retired senator staked out different territory from Weill, arguing that “it’s not just the size of an institution,” but the amount of risk carried on its books. 
Dodd told CNBC’s “Squawk Box” that forcing all large banks to downsize was “too simplistic,” saying that Citi's former chief was wrong to call for an end to financial supermarkets. 
“Just breaking up the banks is not the solution,” Dodd said, even as he insisted the tools of Dodd-Frank could, in extreme circumstances, force a systemically risky institution to break up. 
Mr. Weill did not just say break up the banks.  He also said that banks should be required to provide complete transparency.

Regular readers know that it only with ultra transparency where banks disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details that market participants can assess the risk carried on bank books and exert discipline to restrain this risk.
"The legislation allows for that Draconian step to be taken if necessary, not just with banks but with institutions that pose substantial risk to the country," Dodd said. "They have the power and authority under this legislation to actually do that."...
Senator Dodd takes the position that the decision to downsize a bank should be made by regulators.  In addition, regulators should decide how the downsizing should be done.

With ultra transparency, both of these decision would be made by the market.  The market would vote by how it valued the bank and its individual businesses before and after downsizing.
Many critics in Congress and Wall Street have complained about the law's burdensome requirements and complexity, and have called to have the legislation undone completely. 
But in his interview with CNBC, Dodd rejected calls to repeal the law, saying that critics should "give this a chance to see if it's doing its job."
Repealing Dodd-Frank and replacing it with transparency would greatly reduce the size of the financial/academic/regulatory complex.

First, it would end the markets dependence on the regulators to craft regulations that can achieve the same outcomes as transparency.

Second, it would end the markets dependence on regulators accurately assessing the risk of the banks and exerting discipline on the banks to reduce their risk.  With ultra transparency, market participants can independently assess the risk of the banks and exert discipline.

Now's not the time to talk about breaking up the banks, Rep. Barney Frank (D-MA), told CNBC’s“Closing Bell” on Thursday.... 
Since the economy is still recovering and Europe is dragging us down, Frank said, “The notion that at this point we would do something drastic to a major part of the U.S. economy is not a very good idea.” 
“You can accomplish much of what Sandy Weill says he’s now for with the Volcker Rule,” Frank said. The Volcker Rule (Volcker Rule explained) says that banks should not be involved in certain trading and other non-lending activities, he said. 
Frank also refuted the notion that it's difficult to discern between proprietary and non-proprietary trading. 
Under the Dodd-Frank Act (Dodd-Frank Explained), regulators can order divestment for particularly institutions so you don’t need to break-up every single institution, Frank said.
Regular readers know that implementation of the Volcker Rule is simple:  require the banks to provide ultra transparency.

With ultra transparency, market participants, including regulators, have the information they need to discern between proprietary trading, which is against the Rule, and non-proprietary trading.  Naturally, market participants will be only to happy to flag for regulators each bank's proprietary trades.

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