The Wall Street Journal made an apt comparison in this morning's paper:
Senator Chris Dodd's bill looks to us like a souped-up version of the Sarbanes-Oxley bill of 2002—that is, a collection of ill-understood reforms whose main achievement will be to make Wall Street even more the vassal of Washington, raise costs across the economy, and do little to reduce financial risks.
Remember that SarBox was passed in the wake of the Enron scandal, but failed as a regulatory device. Not only was it only loosely enforced, it created a false sense of security and allowed major frauds (Madoff) and accounting gimmickry (Lehman) to slip by unnoticed.
The Journal also points out other failures in the Dodd bill, many along the same lines as I've been writing on this blog for a while.
- Too big to fail
WSJ: "The Dodd bill allows too much discretion to federal regulators to determine which firms to regulate and how, which firms to rescue or close down, and which creditors to reward and how."
Washington should be scared when Wall Street jumps up and down at a provision like this. Sure the tax that is going to be extracted because of the resolution authority won't feel good. But the increased ability to get cash from creditors because of the to TBTF perception the Dodd bill creates will feel much better. I don't want the banks chipped away by the tax, and I don't want the banks leaning on a government guarantee for cheaper and more available credit. It's not about regulations to maximize their profit, its about regulations that allow for the free evolution—or dissolution—of banks and other financial institutions based on their abilities, business models, and operational talent.
- Consumer protection agency at the Fed
WSJ: "The bureau would have broad power to set the terms of financial products and services, labeling as abusive whatever officials (or outside allies like Acorn) dislike, and paving the way for large new litigation costs. This bureau would barely touch Wall Street, which doesn't oppose it in any case, but it would slam small banks, car dealers and others that extend credit. The entire point of the bureau is to put politicians in charge of allocating credit."
Wall Street banks won't oppose the CFPA—or in the Dodd bill CFPB, for bureau instead of agency—because it would be politically unpopular for them to do so, because the U.S. Chamber of Commerce is doing all it can anyway to stop it, and because at the end of the day the big ones can learn to live with the restrictions and make money anyway. But that doesn't mean it is okay. That is not a principled approach to regulatory policy, and it will hand new government bureaucrats, who have a stellar reputation at not making mistakes by the way, ever more control in the market. That is pretty much ignoring the most important lesson coming out of this crisis, that regulatory authority (and monetary authority) (and housing policy authority) does not have even knowledge to govern with an even, accurate hand.
- Credit rating
WSJ: "The Dodd bill increases SEC oversight and makes the raters more vulnerable to lawsuits—more power to the plaintiffs bar—but it allows the raters to keep their privileged government position. Believe it or not, Barney Frank's House bill does far better on this by eliminating the laws and rules that anoint the raters as official judges of credit risk. Even Deven Sharma, the president of S&P, has embraced this reform, but Mr. Dodd merely asks for a study."
After talking with a few Congressmen on this issue I'm pretty sure that this part of the Dodd bill will be changed in the end—unless the House just decides to accept whatever the Senate passes for simplicities sake, which isn't outside the realm of possibility. Still, there seems to be enough consensus pushing on this issue that ultimately the ratings agencies will loose their NRSRO status. If Mr. Dodd wants a study he should read a few of the now countless books that have pointed out one aspect of the failed AAA rating system and how it was gamed by perverse accounting rules.
Read the whole WSJ piece here.