Wednesday, June 30, 2010

What's In (And Out) of the Final Financial Reform bill Part I

Just before 7:00 P.M eastern time, the House of Representatives voted by 237-192 to approve the final version of the financial reform bill. The Senate vote is not coming until the week of July 12, since even after the conference committee reconvened last night Senator Scott Brown is wavering about his final vote.

Still, Senate leaders are confident that when Congress reconvenes after the recess they will have the votes they need to push this bill through and send it on to the President's desk. In fact, Representative Paul Kanjorski offered a motion to change the name of the bill to the Dodd-Frank Act, so that Chris Dodd and Barney Frank will forever be remembered as the authors of this legislation.

I heartily agree--as far as I am concerned the bill should bear their names for all eternity until this new piece of legislation becomes the achievement they are mainly remembered for. For, like Representative Spencer Bachus of Alabama, I believe that most Americans will come to feel that "this bill is a massive intrusion of the federal government into the lives of every American."

So now that all of the wrangling and negotiating is done, what is in the final bill and what was left out? First--a disclaimer. The final financial reform bill is over 2300 pages long and it deals with numerous aspects of stocks, finance, mortgages, banking and regulation. We are concerned in this blog primarily with mortgages and real estate related issues and regulation that affects those issues. So the only items we will be discussing are those which have some bearing on us. However, the bill is comprehensive. A complete copy is posted at, and I encourage everyone to read it this weekend as the Senate will be voting on it during the week of July 12.

Having said that, the Restoring American Financial Stability Act promises to end bailouts and too big to fail firms. But, what the bill really does is to consolidate power into the hands of a few individuals who will have life and death power over private companies. For example, the Federal Reserve can use its emergency lending authority to rescue a troubled firm if it chooses to do so. The new Consumer Financial Protection Bureau which will be housed in the Federal Reserve, will have the authority to write rules and regulations covering banking and mortgage lending,and will take on many of the powers of other existing agencies. Yet, it is autonomous. The Director is appointed by the President of the United States, and the board positions come from other government agencies. Imagine Ben Bernanke with even more power.

The FDIC chairman can choose which creditors to rescue and which ones to punish in cases where risky lending imperils firms. The Secretary of the Treasury can drag a private company in front an orderly liquidation authority if he believes that the company may be in danger of failing and the Orderly Liquidation Authority can liquidate that company. If the Secretary of the Treasury does not make a good enough case for why the company should be liquidated, the Authority can provide him with a list of the areas where he did not make his case and he can then go back and attempt to prove that the company needs to be dissolved. Once the Authority determines that the company must be liquidated, they have no choice but to comply.

What is notably missing from this package is any attempt to dissolve, resolve, or liquidate Fannie Mae or Freddie Mac. Throughout the conference process, there were a number of amendments put forward to begin closing out these companies, but these were denied. And Fannie and Freddie specifically cannot be brought up before the Orderly Liquidation Authority. Even though some experts estimate that the cost to taxpayers of these two entities will eventually top 1 trillion dollars, the new law will call for nothing more than a study of what alternative agencies might be put in place to replace Fannie and Freddie.

The fact that these two red-ink bleeding giants were omitted completely is not accidental,as Barney Frank has been quoted as saying that we need a totally new system for mortgage finance. And we can be certain that the government does have a plan for replacing Fannie and Freddie, but that plan is not in this bill and we are not being told what it is yet.

The Consumer Financial Protection Bureau is a huge part of the new bill. The Bureau will audit and regulate non depository lending institutions as well as banks and it will write new regulations regarding lending and credit. Small businesses will be very much at their mercy as they will have a mandate to turn the IRS loose on any business they perceive might not be paying their income taxes properly. Businesses covered by the Bureau can be certain of audits, fines and possibly criminal penalties, as all statements made to the Bureau for any reason must be made under oath as sworn testimony.

It is one of the great ironies of financial reform that the last minute delay in its passage was caused by a last minute addition to the bill. In the early hours of Friday morning June 25, just before the conference committee ended their work, a $19 billion bank fee was added for banks with more than $50 billion in assets and hedge funds with $10 billion in assets. I have to wonder--did the legislators who added the tax at the eleventh hour think that no one was watching and they could just slip it through? Did they feel confident that they had the votes so it did not matter? If Senator Byrd had not died unexpectedly on Monday morning, would the bill have sailed through with this additional tax unnoticed? What else is lurking in those 2300 pages that we don't know about yet or fully understand the consequences of? We are turning a lot of regulatory power over to an agency headed by non-elected individuals (the Consumer Financial Protection Bureau) housed in another agency headed by non-elected individuals (The Federal Reserve). Where is the accountability? At least when Congress does something we don't like we get to vote out the ones who vote for the laws. But layer upon layer of appointed bureaucracy answerable to no one is tantamount to dictatorship.

The Restoring American Financial Stability Act promises to prevent another financial crisis. I think that this is a vast exaggeration, but even if it were true, at what cost are we preventing it? Ben Franklin once said that those who would trade liberty for security deserve neither. Perhaps he was looking ahead to this generation.

Tomorrow we will look at how the loan originators and appraisers fare in the new bill.

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