The Disaster Implicit in Dodd-Frank
The front page of Sunday’s New York Times featured an article entitled “Too Big to Fail, or Too Trifling for Oversight,” which discussed the ironic fact that large companies are now coming to Washington to tell regulators just how unimportant they are. This is because the Dodd-Frank Act, adopted last July, contains a provision that allows a panel of regulators—called the Financial Stability Oversight Council—to designate some (presumably large) financial companies as “systemically important” and subject them to stringent Federal Reserve regulation. The article noted that these companies are trying to avoid tougher regulation, but it missed entirely what is really going on. I hope I’m not sounding alarmist about this, but to me—an opponent of Dodd-Frank when it was merely a gleam in Barney Frank’s eye—this is the most dangerous provision in this humongous and troubling 2300 page law.
Designating certain financial firms—banks, bank holding companies, insurers, securities firms, finance companies, hedge funds, and holding or operating companies with substantial financial subsidiaries—as requiring special regulation to avoid “financial instability” (the statutory term) is to say that they are too-big-to-fail (TBTF). It is generally acknowledged that the four largest bank holding companies are TBTF, and that has allowed them to raise funds at a cost 78 basis points lower than smaller competitors. If a significant number of other financial firms are so designated, I am concerned that it will change the nature of our competitive system, giving financial advantages to the largest companies that will allow them—Fannie and Freddie-like—to drive their smaller competitors out of business over time.
Some people wonder why, if large firms will have these advantages, they don’t want to be designated as TBTF. The answer is that they are worried about the unknown. What does more stringent regulation mean? How much capital will they be required to hold? The important point is that—if the regulation is more costly than the benefits of being considered TBTF—they will be outcompeted by their smaller and less regulated rivals. In either case, our economy and financial system will be the loser.
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Jun '11
Re: The Disaster Implicit in Dodd-Frank
This sounds very much like FDR and the New Deal's plans to nationalize industries.
Or Hugo Chavez - American style.
May '10
Re: The Disaster Implicit in Dodd-Frank
Two major pieces of legislation, each over 2,000 pages long and each has a provision for an unelected panel that can exempt certain groups from compliance. Equality before the law? HA!
Mar '11
Re: The Disaster Implicit in Dodd-Frank
Far too much room for abuse. The notion of a two-tier economy in which small private corporations must compete against behemoth publicly-subsidized conglomerates is not a free market system. Fanny and Freddy distorted the market. Now Dodd-Frank seeks to capture it.
Which reminds me. I seem to remember in my history books a word for businesses that got Too Big Too Fail and controlled too much of the market. I think they were called Monopolies.
Peter: I don't challenge the idea that some reforms may be necessary in the wake of 2008. But why is existing anti-Monopoly legislation insufficient to deal with TBTF, if a business has really gotten that large?
May '10
Re: The Disaster Implicit in Dodd-Frank
TBTF and anti-monopoly legislation has always been a joke. US v Paramount made the motion picture studios sell their theaters. Now, at least one of those studios own the wires that pump television signals into your home. (Comcast/NBC-Universal: 22.9 m homes. Time-Warner spun-off their cable company but the new entity kept the name.)
The current incarnation of AT&T is really Southwestern Bell (SBC) which was one of the so-called "Baby Bells" created by the original breakup of AT&T in 1982. Other Bell spinoffs, Bell South and Ameritech were also bought by SBC. So at least one third of the old AT&T is in the new company as well.
Edited on Jun 13, 2011 at 2:06pmOct '10
Re: The Disaster Implicit in Dodd-Frank
Oh come on. You're arguing that being designated TBTF is not an advantage (everyone's scared of being labeled so) but it really is (funding costs of four big banks). By no means will Dodd-Frank under-regulated TBTF firms. Far from it. The capital requirements is double for the largest firms--14%, as opposed to 8% for smaller ones.
The problem with Dodd-Frank is the micro-regulation and the wide discretion given to regulators, not the overall structure of the bill. A Republican bill would have the same basic structure, but less micromanaging and less room for corruption (e.g. less discretion for regulators; move the new bankruptcy mechanism into the bankruptcy code, where it belongs; simpler capital rules, etc).
Sep '10
Re: The Disaster Implicit in Dodd-Frank
The wide discretion gives the big firms who sets standards of practice and have teams of lawyers available to them to use that clout where smaller firms cannot. Already a friend of mine in the mortgage business has said that lots of people with good credit cannot get it because there are no clear underwriting standards.