Wednesday, July 21, 2010

FinReg: Best and Worst Parts

By Eric Jackson07/21/10 - 05:59 AM EDT

Stock quotes in this article: FNM , FMCC , MCO , MHP

There has been a lot of complaining about the new Dodd-Frank financial regulation reform bill -- or FinReg -- by bloggers and politicians. However, most critics (and supporters) haven't read the 2,200+ pages of the bill. The reactions are driven more by pre-existing politics and shorthand biases for the general concept of governmental regulation.

If you think market actors are greedy and that the government keeps everyone honest, you support FinReg. If you think the government is made up of incompetent bureaucrats who get in the way of efficient markets and choice, then you think FinReg is terrible.

It's easy to be cynical about a big reform bill like this (and I am about a number of points in the bill). However, there is some good here. I believe that the politicians have used this bill as an opportunity to move a lot of little balls forward.

Critics trot out phrases like "this bill will do nothing to stop the next crisis." On one hand, they're right that it's hard for traders (let alone politicians) to predict the future. On the other hand, do they seriously think it's best to sit back after 2008 and do nothing?

In my view, here are the best parts of FinReg:

Derivatives OTC clearinghouses

Some estimate that the global market for derivatives is more than $700 trillion. Yet, a large part of it has operated between parties rather than through a clearinghouse. Now, it will and bank profits will go down. I think the system is better off and safer with this change.

Resolution authority

Former Treasury Secretary Paulson argued that he never had the "authority" to take over Lehman Brothers. Barney Frank has backed up Paulson's explanation, which is why he strongly supported the creation of this authority process to specifically deal with that one challenge.

Proxy access

This bill punted the idea to the SEC to define. Proxy access will determine whether shareholders can nominate directors to appear on the company's proxy statement for all shareholders to vote on at the annual meeting. This is good though. At the last minute, Chuck Schumer, Chris Dodd, and Evan Bayh (all Democrats) tried to water down proxy access by stating that shareholders should have to own 5% of the company's stock for over 3 years before being allowed to make a nomination -- thereby making 99% of shareholders ineligible. I'm grateful that Barney Frank pushed back.

A watered down version of Volcker Rule

I supported the Volcker Rule because I saw its intent was to lower the risk of financial institutions by getting them out of proprietary trading with assets that they would not have if not for the depositors' money sitting in "safe" bank accounts. Critics again howled that it wasn't part of the 2008 meltdown. This is one of those issues where I would ask the banks if they want to be short-term rich or long-term rich. Separating the trading from banking will allow all these banks to prosper in the long-term, even if they lose a few pennies in EPS over the next couple of quarters. It's discouraging that the bill version of this rule got watered down.


[** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

Sphere: Related Content
blog comments powered by Disqus