Senator Chris Dodd has shown us what happens when you don’t have to worry about meeting the obligations of your biggest campaign donators. For Dodd, that was the financial services industry. But since he isn’t running for reelection he doesn’t have to worry about that anymore. That’s why he’s putting his name on the biggest financial reform bill since the Great Depression. This bill has support from both sides, so it stands a chance of making it through Congress.

But like any bill it’s filled with way too much crap, and creates so much new government we won’t have to worry about unemployment anymore. It’s over a thousand pages.

But there is good in this thing. There will be a Consumer Financial Protection Bureau. It will have enforcement capabilities for banks larger than $10 billion in assets. They’ll make rules, check for scams, and be able to act fast. To keep them from having any biases, they will be independent from the government. The bad news is that it will be run by The Fed. For one thing The Fed is run by economists, for another, a number of big bank execs sit on the various Fed boards. Being independent means no one can question what they’ll be up to.

Some more good things about the CFPB will be the creation of an Office of Financial Literacy (where do I apply?). I hope they get in contact with the Dept of Education.

Here’s some other highlights of the bill:

The next new governing body is the Financial Stability Oversight Council, which will focus on system wide risks. One of their primary goals will be to keep too many firms from becoming too big to fail. Good luck with that. The council will be headed by regulators from all the big names, SEC, CFTC, FDIC, Treasury, Fed, etc… Their meetings will be based around discussions of the research findings of ANOTHER agency, the Office of Financial Research. An interesting note in here is the requirement of large firms having to submit regular plans for how they’ll wind down their business quickly if they go under. Unlikely to happen or be enforced, but interesting nonetheless.

The legislation goes on to outline new rules and guidelines for what agency is in charge of what. I tried to figure it out but it’s still pretty confusing. I’ll take their word for it that it actually clears up misconceptions over who’s in charge of what.

One big change is formalizing the derivatives market. In other words, a number of financial products (like the dreaded CDOs) were not sold on formal markets. This legislation creates formal markets (clearing houses) that will be regulated by the SEC and the CFTC.

Previously hedge funds had very little regulation around them. You could basically start one yourself if you had enough investors. Now, funds with $100 million or more in investments will have to register as investment advisors and disclose some data. This isn’t going to really do much in my opinion, but it looks good.

ANOTHER new agency will be created within the SEC, known as the Office of Credit Ratings. They will investigate credit agencies such as S&P and Moody’s and keep them in check. Remember the banks that created CDOs and such had to pay these agencies to rate the quality of the product. It was like your insurance company paying your doctor to tell you you’re fine. Now, investors will be able to sue agencies that make bad ratings. Threat of lawsuit is a much better way to enforce a law than just writing the law and issuing fines.

Do you hate how much CEOs make? Say on Pay will give investors power to help control CEO pay. The SEC will also be able to require firms show 5 year charts of executive compensation relative to stock performance.

Companies that sell financial products such as CDOs will be required to keep some of the products on their own books. This will supposedly keep them from selling crap. Doubt it.

The bill includes a bunch of other stuff like increased powers at The Fed, some auditing powers of the Government Accountability Office of The Fed, and some regulation on municipal bonds (local government bonds) and stock brokers.

All in all we’ve got a crapload of new acronyms, more government power, and even more bureaucracy. It’s all in the name of greater oversight and transparency. But I’d be willing to bet that half of this stuff doesn’t make it through Congress, we get at least 20 pieces of unrelated pork, and that there are plenty of loopholes.

Banks and other companies will have to grow their compliance departments, so they’re going to fight this bill tooth and nail.

One huge omission from this bill is any mention of Fannie and Freddie. What is to be done with them? They’re still one of a few 800 pound gorillas in the room.

I think this bill could be a lot more efficient, and it will cause new problems. But it might just keep some of the old problems from happening again. Ask me again in 30 years, if it gets passed.

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categories: banking, business, economics, government, loans, personal finance