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Friday, November 9, 2012

Battle plan shifts on Dodd-Frank with emphasis on cost-benefit analysis to neutralize it

The Wall Street Journal and Washington Post ran articles (see here and here) that describe how the battle over implementation of the Dodd-Frank Act is shifting with an emphasis on neutralizing it using cost-benefit analysis.

From the Washington Post,

A battle is brewing in the Senate over a measure that would force independent agencies to more fully consider the costs of new regulations, a plan that critics say is designed to derail key federal initiatives. 
The drama unfolding in the Senate mirrors a similar one taking place in the courts, where regulators face numerous lawsuits alleging that they failed to properly consider the economic impact of rules tied to the landmark Dodd-Frank financial overhaul measure, which was put in place after the 2008 financial crisis..... 
Under the legislation, the president can issue an executive order that would force independent agencies to do additional cost-benefit analyses before finalizing “significant” rules — basically, those with more than a $100 million annual effect on the economy. 
The measure would also subject those rules to review by a unit within the White House called the Office of Information and Regulatory Affairs, or OIRA. That requirement in particular has outraged six senior financial regulators, including Ben S. Bernanke, chairman of the Federal Reserve, and Mary Schapiro, head of the Securities and Exchange Commission.... 
This week, state securities regulators weighed in with a letter urging senators to reject the legislation. They said the bill “messages well” because it seems like a common-sense approach but is really just a tool to derail or delay the Dodd-Frank regulations and others by placing unnecessary burdens on resource-strapped agencies. 
“The additional cost-benefit analysis is not an appropriate method for rulemaking across the board,” said Lisa Gilbert, director of Public Citizen’s Congress Watch. “It’s hard to estimate the true benefits of stopping the economy from a meltdown, for instance.”
Actually, it is very easy to establish what the true benefits are of stopping the economy from a meltdown.  You simply have to look at the costs that have been incurred during the current financial crisis.

The Bank of England's Andrew Haldane did this a couple of years ago and came up with estimates of the cost of the current financial crisis running from a minimum of $4 trillion to $60 trillion.

Where the difficulty comes is tying any portion of this cost to a specific part of the Dodd-Frank Act.  As described in the Wall Street Journal,

Wall Street also has won some victories in court and may redouble its legal challenges now that a legislative rollback has been ruled out. 
More lawsuits are likely, particularly against the Securities and Exchange Commission and the Commodity Futures Trading Commission, where federal courts already have thrown out two rules spawned by the law. 
Business groups have argued successfully in recent cases to overturn SEC rules that regulators failed to properly analyze the costs of their regulations, and the court has been receptive to such arguments. 
"The court has set such a low bar for challenging new regulations in the first couple of months after their adoption that I think it's tempting for industry to challenge regulations whether they're good or bad," said Bruce Kraus, a partner at the law firm Kelley Drye & Warren LLP who was a co-chief counsel in the SEC's risk division. 
Regulators have had their wrists slapped by the courts and now it is up to them to "get it right," said Tom Quaadman, vice president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness.
What helps regulators to get it right is to have them focus on regulation like transparency where it is easy to link the benefits with the costs.


Your humble blogger put together a cost-benefit analysis for bringing transparency to all the opaque corners of the financial system.

Under this analysis, the benefit of providing transparency would be minimizing, if not outright elimination of, the losses on opaque securities like the toxic subprime mortgage backed securities.  The benefit of reducing these losses using transparency is an order of magnitude greater than the cost of providing transparency.

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