Thursday, July 8, 2010

A Study on Studies

In yesterday's post, I discussed a study that the Dodd Frank Wall Street Reform Act calls for regarding appraisal methods and processes to determine whether the appraisal methods being used led to speculation during the housing boom. As I thought about this study, it occurred to me that as I have read through the Act, there appear to be an inordinate number of studies built into the new law. So tonight I looked through the table of contents and I counted them. I came up with over 27.

Title I on the subject of Financial Stability calls for a study of the effects of the size and complexity of financial institutions on capital market efficiency and economic growth. It also calls for studies and reports on holding company capital requirements. Title II, which addresses the Orderly Liquidation Authority, calls for a study on bankruptcy process for financial and nonbank financial institutions. It also calls for a study on "secured creditor haircuts," and a study on international coordination relating to bankruptcy process for nonbank financial institutions.

Title IV--Regulation of Advisers to Hedge Funds and Others--calls for a study and report on accredited advisors and a study on self-regulatory organization for private funds.

Title V--Insurance--calls for a study of the nonadmitted insurance market.

Title VI--Improvements to Regulation of Bank and Savings Association Holding Companies and Depistory institions--calls for a study of bank investment activities.

Title VII--Wall Street Transparency and Accountability--Part I calls for "Studies." The table of contents does not specify the purpose of the studies.

Title IX--The Investor Protections and Improvements to the Regulations of Securities--calls for 13 separate studies. Among these is a government accounting office study of "person to person lending", a study and rulemaking on assigned credit ratings, and a study regarding financial literacy among investors. Subtitle G calls for a study and report on credit scores.

Title XIV--Mortgage Reform and Anti-Predatory Lending Act, calls for multiple studies including a study of defaults and foreclosures, a study of the effect of drywall on foreclosures, and a study of the effectiveness and impact of various appraisal methods, valuation models and distribution channels and on the Home Valuation Code of conduct and Appraisal Subcommittee. (This one was discussed in yesterday's post.)

When I was growing up, my father equated anything particularly wasteful to a government study on the mating habits of the tsetse fly. Whether there ever was such a study I do not know, but this was the standard by which he judged bureaucratic nonsense. The numerous studies mandated by the Dodd Frank act will probably be about as helpful as a study on the mating habits of the tsetse fly, partially because rather than fixing problems that the legislators knew, or had good reason to suspect, were major issues for Americans, the Congress and the Senate merely called for a study. Rather than setting up a time frame to dismantle Fannie Mae or Freddie Mac, which the bill itself acknowledges may cost tax payers over $5 trillion dollars, the Dodd Frank bill calls for a study of the problem. In spite of industry concerns regarding HVCC and circulated petitions with over 100,000 signatures requesting that it be over turned, and in spite of the obvious legal problems with an attorney general from one state being allowed to strong arm Fannie Mae and Freddie Mac into setting a policy that affects the entire country, the bill calls for study of its effects. Why do we need so many studies?

The new bill calls for so many studies partially because the authors want to know about the personal financial habits of Americans. Where do we spend money, how do we invest, how financially savvy are we? That gives them a benchmark for how we need to be further regulated.

For example, Title IX--Investor Protections and Improvements to the Regulations of Securities--which may be referred to as "Investor Protection and Securities Reform Act of 2010," calls for a study regarding financial literacy among investors. The Act states that The Commission shall conduct a study to identify "the existing level of financial literacy among retail investors, including subgroups of investors identified by the commission, methods to improve the timing, content and format of disclosures to investors with respect to financial intermediaries, investment products and investment services, the most useful and understandable relevant information that retail investors need to make informed financial decisions before engaging a financial intermediary or purchasing an investment product or service that is typically sold to retail investors, including shares of open-end companies...methods to increase the transparency of expenses and conflicts of interests in transactions involving investment services and products...the most effective existing private and public efforts to educate investors, and in consultation with the Financial Literacy and Education Commission a strategy (including, to the extent practicable, measurable goals and objectives) to increase the financial literacy of investors in order to bring about a positive change in investor behavior."

Retail investors--that's you and me. The government is authorizing a study of how much we know so as to affect a "positive change" in our behavior. This study is important because the newly established investor advisory committee, which the act creates within the SEC, shall advise and consult with the SEC on matters relating to investors. The Committee shall be people who are knowledgeable about investment matters, and they shall include a representative on behalf of senior citizens. They and the SEC will work together to "gather information from and communicate with investors or other members of the public, engage in such temporary investor testing programs as the Commission determines are in the public interest or would protect investors, and consult with academics and consultants as necessary to carry out this subsection."

What!!! I, the retail investor, will now be studied to find out how financially literate I am and possibly subjected to a test before I can invest my money? Seriously? This is my own money, which I earned myself, but some government bureaucrat who can't work together with a bunch of other bureaucrats to get the budget balanced and the deficit under control is going to study me like a lab rat in an effort to affect a "positive change" in my behavior. And I am supposed to be glad because it is for my own protection.

Come to think of it, I think they should stick studying the tsetse fly and leave the rest of us alone.

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