Dodd/Frank financial reform…haste makes confusion

The recently enacted Financial Reform bill, brought to us chiefly through the efforts of Senator Dodd (D. Ct.) and Congressman Frank (D. Ma.), was, like much of the handiwork of this Congress, passed in haste. Remember, something had to be done immediately so that we never have another financial meltdown like we just had?  This bill, too, was ponderous, consuming 2300 plus pages, and, like Obamacare, probably wasn’t read by anyone who voted for it.  Well, as Speaker of the House Pelosi (D. Ca.) would have said, now that the bill has passed, we can see what is in it. 

Within days, what we saw was problematical, and, I’m guessing this is the tip of the iceberg.  Here are just two of the issues.

The first involved the $1.4 trillion asset-backed securities market.  This is the market where corporations and municipalities sell bonds to raise funds for certain specific projects.  As an example, your town might issue bonds to cover the cost of a new police and fire station. 

What happened here was that under SEC regulations, any bond issue sold must have a rating from a “credit rating” firm, such as Moody’s or Standard & Poor’s.  The Dodd/Frank bill, however increased the legal liability of these credit rating agencies (a lawyer’s relief act), so the companies refused to provide ratings in bond deals.  The bond market screeched to a halt.  After a few days, the SEC had to “suspend” its long standing regulation of requiring credit ratings, and allow the bond deals to proceed without a credit rating.

The second involves the process by which the FDIC gauges the soundness of banks.

Banking regulators were “weeks away” from finalizing a long-running effort to set risk-based capital standards for smaller, less-complex banks, say people familiar with the matter.

But now, thanks to the Dodd/Frank Bill, it is anyone’s guess when that will happen.  Bank regulators had planned to use credit ratings as part of that process, but the bill bans the use of credit ratings in setting those standards. 

As Comptroller of the Currency John Dugan, an FDIC board member said,

I do worry about there is a little bit of throwing out the baby with the bath water. It might be worth Congress taking a second look at.  [emphasis supplied]

Anyone think Senator Dodd and Congressman Frank will do so?