Senate Banking Reform - 14 Fatal Flaws

[Foxfyre]

While acknowledging that there are some good provisions in the bill, the Heritage Foundation has identified fourten 'fatal flaws' in the pending legislation. The President and Congressional majority leaders are doing their damndest to ram this one through in a hurry and amongst taunts of "party of no", it looks like the GOP is going to cave and not put up much of a fight to block it.

And assuming the Heritage Foundation analysis is pretty much on target, how much more of this hasty massive legislation can our Republic stand before it collapses under the sheer weight of it?

Link to the Heritage Foundation analysis:
Senator Dodd?s Financial Regulation Plan: 14 Fatal Flaws | The Heritage Foundation

Link to the full text of the bill:
www.senate.gov - This page cannot be found.

The 14 Fatal Flaws:

Among other things, the bill:

1. Creates a protected class of “too big to fail” firms.
Section 113 of the bill establishes a “Financial Stability Oversight Council,” charged with identifying firms that would “pose a threat to the financial security of the United States if they encounter “material financial distress.” These firms would be subject to enhanced regulation. However, such a designation would also signal to the marketplace that these firms are too important to be allowed to fail and, perversely, allow them to take on undue risk. As American Enterprise Institute scholar Peter Wallison wrote, “Designating large non-bank financial companies as too big to fail will be like creating Fannies and Freddies in every area of the economy.”

2. Provides for seizure of private property without meaningful judicial review.
The bill, in Section 203(b), authorizes the Secretary of the Treasury to order the seizure of any financial firm that he finds is “in danger of default” and whose failure would have “serious adverse effects on financial stability.” This determination is subject to review in the courts only on a “substantial evidence” standard of review, meaning that the seizure must be upheld if the government produces any evidence in favor of its action. This makes reversal extremely difficult.


3. Creates permanent bailout authority.
Section 204 of the bill authorizes the Federal Deposit Insurance Corporation (FDIC) to “make available … funds for the orderly liquidation of [a] covered financial institution.” Although no funds could be provided to compensate a firm’s shareholders, the firm’s other creditors would be eligible for a cash bailout. The situation is much like the scheme implemented for AIG in 2008, in which the largest beneficiaries were not stockholders but rather other creditors, such as Deutsche Bank and Goldman Sachs[2]—hardly a model to be emulated.


4. Establishes a $50 billion fund to pay for bailouts.
Funding for bailouts is to come from a $50 billion “Orderly Resolution Fund” created within the U.S. Treasury in Section 210(n)(1), funded by taxes on financial firms. According to the Congressional Budget Office, the ultimate cost of bank taxes will fall on the customers, employees, and investors of each firm.


5. Opens a “line of credit” to the Treasury for additional government funding. Under Section 210(n)(9), the FDIC is effectively granted a line of credit to the Treasury Department that is secured by the value of failing firms in its control, providing another taxpayer financial support.


6. Authorizes regulators to guarantee the debt of solvent banks.
Bailout authority is not limited to debt of failing institutions. Under Section 1155, the FDIC is authorized to guarantee the debt of “solvent depository institutions” if regulators declare that a liquidity crisis (“event”) exists.


7. Limits financial choices of American consumers.
The bill contains a new “Bureau of Consumer Financial Protection” with broad powers to limit what financial products and services can be offered to consumers. The intended purpose is to protect consumers from unfair practices. But the effect would be to reduce available choices, even in cases where a consumer fully understands and accepts the costs and risks. For many consumers, this will make credit more expensive and harder to get.


8. Undermines safety and soundness regulation.
The proposed Bureau of Consumer Financial Protection would nominally be part of the Federal Reserve System, but it would have substantial autonomy. Decisions of the new bureau would not be subject to approval by the Fed. New rules could be stopped only through a cumbersome, after-the-fact review process involving a council of all the major regulatory agencies. This could impede efforts of economic (or “safety and soundness”) regulators to ensure the financial stability of regulated firms, as the new, independent “consumer” regulator would establish rules that conflict with that goal.


9. Enriches trial lawyers by authorizing consumer regulators to ban arbitration agreements.
Section 1028 specifically authorizes the new consumer regulatory agency to ban arbitration agreements between consumers and financial firms. By reducing the use of streamlined dispute resolution procedures, more consumers and businesses would be forced to pay the costs of litigation—to the benefit of trial lawyers.


10. Subjects firms to hundreds of varying state and local rules.
Section 1044 limits pre-emption of state and local rules, subjecting banks and their customers to confusing, costly, and inconsistent red tape imposed by regulators in jurisdictions across the country.


11. Subjects non-financial firms to financial regulation.
Regulation under this legislation would extend far beyond banks. Many firms largely outside the financial industry would find themselves caught in the regulatory net. Section 102(B)(ii) of the bill defines a “nonbank financial company”” as a company “substantially engaged in activities … that are financial in nature.” The phrase “financial in nature” is defined in existing law quite broadly. According to former Treasury official Gregory Zerzan, it includes things such as “holding assets of others in trust, investing in securities … or even leasing real estate and offering certain consulting services.”[5] As a result, a broad swath of private industry may find itself ensnared in the financial regulatory net. As Zerzan explains: “An airplane manufacturer that holds customer down payments for future delivery, a large home improvement chain that invests its profits as part of a plan to increase revenues, and an energy firm that makes markets in derivatives are all engaged in ‘financial activities’ and potentially subject to systemic risk regulation.”


12. Imposes one-size-fits-all reform in derivative markets.
The bill would subject derivatives now traded over-the-counter by banks and other financial institutions to regulation by the Commodity Futures Trading Commission and/or the Securities and Exchange Commission (SEC). It would require most derivative contracts to be settled through a clearinghouse rather than directly between the parties. Yet derivatives are already increasingly being traded on clearinghouses thanks to private efforts coordinated by the New York Fed.[6] The Senate’s bill, however, would require virtually all derivatives to be so traded. Applying such ill-designed blanket regulation would make financial derivatives more costly, more difficult to customize, and, consequently, less widely used—which would increase overall risk in the economy.


13. Allows activist groups to use the corporate governance process for issues unrelated to the corporation or its shareholders.
Section 972 of the bill authorizes the SEC to require firms to allow shareholders to nominate directors in proxy statement. Such proxy access turns corporate board elections from a process designed to ensure that each board has a good mix of skills and experience into a popularity contest where the long-term interests of the stockholders become secondary to political agendas or corporate raiders. The process can also be used by labor unions, politicians who manage public pension funds, and others to force corporations to respond to pet social or political causes.


14. Does nothing to address problems at Fannie Mae and Freddie Mac.
These two government-sponsored housing giants helped fuel the housing bubble. When it popped, taxpayers—because of an implicit guarantee by the U.S. Treasury—found themselves on the hook for some $125 billion in bailout money. Not only has little of this amount been paid back, but the Treasury Department recently eliminated the cap on how much more Fannie and Freddie can receive. Yet the bill does nothing to resolve the problem or reform these government-run enterprises.

 

[Foxfyre]

And from CATO, here is why No. 14 on that list up there is so stunning:

Excerpt:

Peter Wallison calls attention to President Obama’s amnesia regarding events that precipitated Fannie Mae and Freddie Mac’s collapse. Writing in the Wall Street Journal, Wallison points out that in 2005 then-Senator Obama joined with his Democratic colleagues in stopping legislation that would have helped rein in the government-sponsored housing duo’s risky behavior:

The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.

These authorities were necessary to control the GSEs’ risk-taking, but opposition by Fannie and Freddie—then the most politically powerful firms in the country—had consistently prevented reform.

The date of the Senate Banking Committee’s action is important. It was in 2005 that the GSEs—which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements—accelerated the purchases that led to their 2008 insolvency. If legislation along the lines of the Senate committee’s bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.

Obama’s Fannie and Freddie Amnesia | Cato @ Liberty

 

[kyzr]

BINGO!!

One of the answers to "what caused the Great Recession". Barry and Dodd fucking-up Fannie & Freddie.

 

[saveliberty]

41 Senators know about these flaws too. The delay tactic was for just these reasons. It is basically a Hail Mary from the Democrats before November. Except they still don't get it.

 

[Toro]

1. We already have a de factor policy of not allowing firms that are too big to fail. At least putting in policies allow us to address issues systematically.

2. Interesting criticism. Might not matter when the derivatives markets are blowing up.

3. We already have a de facto bailout policy. There should be a mechanism for the wind-down of large institutions like there is for small deposit-taking institutions.

4. Its better for the banks to take the first $50 billion hit than the taxpayers. Currently, the banks put up the first $0. This is better. The idea that this creates moral hazard is a canard. We already have moral hazard.

5. Formalizes what already occurs.

6. Formalizes what already occurs.

7. The bill provides additional protection to consumers. Borrowers were lied to and sold fraudulent mortgages. We want to encourage this why?

8. Fair criticism. This is why some Democrats wanted it to be a separate institution unto itself but was watered down by lobbyists for the financial industry.

9. Bad. Shouldn't happen. Payoff to the Democrats largest source of funding.

10. Don't know enough about it to comment. I do know that the OCC overrode state consumer protection laws for exactly the same criticism, invoking an obscure law from the 1860s which prevented or hampered states from enforcing anti-fraud provisions, which ultimately allowed sleazebag mortgage companies to egregiously jam borrowers with fraudulent loans.

11. One of the largest financial companies in the world is GE Capital, which is subject to far less regulation than most financial companies. GE Capital, and thus GE itself, would have collapsed had the government not guaranteed the commercial paper markets, putting taxpayers at huge risks. If GE Capital is going to get a de facto government guarantee, they should be regulated by the government.

12. The derivatives market is opaque and controlled by a handful of firms who skim $20 billion off the financial markets, i.e. you and me, so that derivatives traders can pay themselves multi-million bonuses. Markets work best when they are transparent. Derivatives are anything but. The structured products markets was a big reason why the financial crisis occurred. Forcing daily mark-to-market accounting on an exchange would mean the probability of a similar AIG-like implosion would be far less likely. Stocks, bonds, futures, options, commodities, etc., all trade on exchanges, why not derivatives, a $700,000,000,000,000 market.

13. This criticism makes me wonder if the Heritage Foundation is merely shrilling for managements of big corporations, which is a very different constituency than the owners of big corporations. This is one of the best provisions in the bill. One of the big weaknesses of American corporations is corporate governance at the board level, which is often incestuous and does not work for shareholders. This provision will allow shareholders - the owners of the corporation - to have a greater say on how their company is run. Shareholders are often subordinate to management at the board level. There needs to be more shareholder democracy at US corporations.

14. I agree totally that the GSEs need to be restructured, but this is a criticism of omission. One could find many omissions that this bill does not address.

 

[kyzr]

Very impressive assessment Toro. I'd try for regulations that create good US jobs as opposed to trying to regulate international casinos. I'd prohibit derivatives and short-selling. Only capital raising and job creation should be promoted. Break-up AIG, and make damn sure that no company can "capture" an agency like the SEC. I also like Obama's attempts to nail off-shore tax-evaders, like the 55,000 who have Swiss bank accounts. Its time to make Wall Street help the US instead of being international maggots.

 

[Flopper]

While acknowledging that there are some good provisions in the bill, the Heritage Foundation has identified fourten 'fatal flaws' in the pending legislation. The President and Congressional majority leaders are doing their damndest to ram this one through in a hurry and amongst taunts of "party of no", it looks like the GOP is going to cave and not put up much of a fight to block it.

And assuming the Heritage Foundation analysis is pretty much on target, how much more of this hasty massive legislation can our Republic stand before it collapses under the sheer weight of it?

Link to the Heritage Foundation analysis:
Senator Dodd?s Financial Regulation Plan: 14 Fatal Flaws | The Heritage Foundation

Link to the full text of the bill:
www.senate.gov - This page cannot be found.

The 14 Fatal Flaws:

Among other things, the bill:

1. Creates a protected class of “too big to fail” firms.
Section 113 of the bill establishes a “Financial Stability Oversight Council,” charged with identifying firms that would “pose a threat to the financial security of the United States if they encounter “material financial distress.” These firms would be subject to enhanced regulation. However, such a designation would also signal to the marketplace that these firms are too important to be allowed to fail and, perversely, allow them to take on undue risk. As American Enterprise Institute scholar Peter Wallison wrote, “Designating large non-bank financial companies as too big to fail will be like creating Fannies and Freddies in every area of the economy.”

2. Provides for seizure of private property without meaningful judicial review.
The bill, in Section 203(b), authorizes the Secretary of the Treasury to order the seizure of any financial firm that he finds is “in danger of default” and whose failure would have “serious adverse effects on financial stability.” This determination is subject to review in the courts only on a “substantial evidence” standard of review, meaning that the seizure must be upheld if the government produces any evidence in favor of its action. This makes reversal extremely difficult.


3. Creates permanent bailout authority.
Section 204 of the bill authorizes the Federal Deposit Insurance Corporation (FDIC) to “make available … funds for the orderly liquidation of [a] covered financial institution.” Although no funds could be provided to compensate a firm’s shareholders, the firm’s other creditors would be eligible for a cash bailout. The situation is much like the scheme implemented for AIG in 2008, in which the largest beneficiaries were not stockholders but rather other creditors, such as Deutsche Bank and Goldman Sachs[2]—hardly a model to be emulated.


4. Establishes a $50 billion fund to pay for bailouts.
Funding for bailouts is to come from a $50 billion “Orderly Resolution Fund” created within the U.S. Treasury in Section 210(n)(1), funded by taxes on financial firms. According to the Congressional Budget Office, the ultimate cost of bank taxes will fall on the customers, employees, and investors of each firm.


5. Opens a “line of credit” to the Treasury for additional government funding. Under Section 210(n)(9), the FDIC is effectively granted a line of credit to the Treasury Department that is secured by the value of failing firms in its control, providing another taxpayer financial support.


6. Authorizes regulators to guarantee the debt of solvent banks.
Bailout authority is not limited to debt of failing institutions. Under Section 1155, the FDIC is authorized to guarantee the debt of “solvent depository institutions” if regulators declare that a liquidity crisis (“event”) exists.


7. Limits financial choices of American consumers.
The bill contains a new “Bureau of Consumer Financial Protection” with broad powers to limit what financial products and services can be offered to consumers. The intended purpose is to protect consumers from unfair practices. But the effect would be to reduce available choices, even in cases where a consumer fully understands and accepts the costs and risks. For many consumers, this will make credit more expensive and harder to get.


8. Undermines safety and soundness regulation.
The proposed Bureau of Consumer Financial Protection would nominally be part of the Federal Reserve System, but it would have substantial autonomy. Decisions of the new bureau would not be subject to approval by the Fed. New rules could be stopped only through a cumbersome, after-the-fact review process involving a council of all the major regulatory agencies. This could impede efforts of economic (or “safety and soundness”) regulators to ensure the financial stability of regulated firms, as the new, independent “consumer” regulator would establish rules that conflict with that goal.


9. Enriches trial lawyers by authorizing consumer regulators to ban arbitration agreements.
Section 1028 specifically authorizes the new consumer regulatory agency to ban arbitration agreements between consumers and financial firms. By reducing the use of streamlined dispute resolution procedures, more consumers and businesses would be forced to pay the costs of litigation—to the benefit of trial lawyers.


10. Subjects firms to hundreds of varying state and local rules.
Section 1044 limits pre-emption of state and local rules, subjecting banks and their customers to confusing, costly, and inconsistent red tape imposed by regulators in jurisdictions across the country.


11. Subjects non-financial firms to financial regulation.
Regulation under this legislation would extend far beyond banks. Many firms largely outside the financial industry would find themselves caught in the regulatory net. Section 102(B)(ii) of the bill defines a “nonbank financial company”” as a company “substantially engaged in activities … that are financial in nature.” The phrase “financial in nature” is defined in existing law quite broadly. According to former Treasury official Gregory Zerzan, it includes things such as “holding assets of others in trust, investing in securities … or even leasing real estate and offering certain consulting services.”[5] As a result, a broad swath of private industry may find itself ensnared in the financial regulatory net. As Zerzan explains: “An airplane manufacturer that holds customer down payments for future delivery, a large home improvement chain that invests its profits as part of a plan to increase revenues, and an energy firm that makes markets in derivatives are all engaged in ‘financial activities’ and potentially subject to systemic risk regulation.”


12. Imposes one-size-fits-all reform in derivative markets.
The bill would subject derivatives now traded over-the-counter by banks and other financial institutions to regulation by the Commodity Futures Trading Commission and/or the Securities and Exchange Commission (SEC). It would require most derivative contracts to be settled through a clearinghouse rather than directly between the parties. Yet derivatives are already increasingly being traded on clearinghouses thanks to private efforts coordinated by the New York Fed.[6] The Senate’s bill, however, would require virtually all derivatives to be so traded. Applying such ill-designed blanket regulation would make financial derivatives more costly, more difficult to customize, and, consequently, less widely used—which would increase overall risk in the economy.


13. Allows activist groups to use the corporate governance process for issues unrelated to the corporation or its shareholders.
Section 972 of the bill authorizes the SEC to require firms to allow shareholders to nominate directors in proxy statement. Such proxy access turns corporate board elections from a process designed to ensure that each board has a good mix of skills and experience into a popularity contest where the long-term interests of the stockholders become secondary to political agendas or corporate raiders. The process can also be used by labor unions, politicians who manage public pension funds, and others to force corporations to respond to pet social or political causes.


14. Does nothing to address problems at Fannie Mae and Freddie Mac.
These two government-sponsored housing giants helped fuel the housing bubble. When it popped, taxpayers—because of an implicit guarantee by the U.S. Treasury—found themselves on the hook for some $125 billion in bailout money. Not only has little of this amount been paid back, but the Treasury Department recently eliminated the cap on how much more Fannie and Freddie can receive. Yet the bill does nothing to resolve the problem or reform these government-run enterprises.

Consider the source. The Heritage Foundation is a conservative think tank which has been in bed with the Republican since it was founded in 1977. I think they have a few good points but many of the points are subject to argument.

 

[Foxfyre]

While acknowledging that there are some good provisions in the bill, the Heritage Foundation has identified fourten 'fatal flaws' in the pending legislation. The President and Congressional majority leaders are doing their damndest to ram this one through in a hurry and amongst taunts of "party of no", it looks like the GOP is going to cave and not put up much of a fight to block it.

And assuming the Heritage Foundation analysis is pretty much on target, how much more of this hasty massive legislation can our Republic stand before it collapses under the sheer weight of it?

Link to the Heritage Foundation analysis:
Senator Dodd?s Financial Regulation Plan: 14 Fatal Flaws | The Heritage Foundation

Link to the full text of the bill:
www.senate.gov - This page cannot be found.

The 14 Fatal Flaws:

Among other things, the bill:

1. Creates a protected class of “too big to fail” firms.
Section 113 of the bill establishes a “Financial Stability Oversight Council,” charged with identifying firms that would “pose a threat to the financial security of the United States if they encounter “material financial distress.” These firms would be subject to enhanced regulation. However, such a designation would also signal to the marketplace that these firms are too important to be allowed to fail and, perversely, allow them to take on undue risk. As American Enterprise Institute scholar Peter Wallison wrote, “Designating large non-bank financial companies as too big to fail will be like creating Fannies and Freddies in every area of the economy.”

2. Provides for seizure of private property without meaningful judicial review.
The bill, in Section 203(b), authorizes the Secretary of the Treasury to order the seizure of any financial firm that he finds is “in danger of default” and whose failure would have “serious adverse effects on financial stability.” This determination is subject to review in the courts only on a “substantial evidence” standard of review, meaning that the seizure must be upheld if the government produces any evidence in favor of its action. This makes reversal extremely difficult.


3. Creates permanent bailout authority.
Section 204 of the bill authorizes the Federal Deposit Insurance Corporation (FDIC) to “make available … funds for the orderly liquidation of [a] covered financial institution.” Although no funds could be provided to compensate a firm’s shareholders, the firm’s other creditors would be eligible for a cash bailout. The situation is much like the scheme implemented for AIG in 2008, in which the largest beneficiaries were not stockholders but rather other creditors, such as Deutsche Bank and Goldman Sachs[2]—hardly a model to be emulated.


4. Establishes a $50 billion fund to pay for bailouts.
Funding for bailouts is to come from a $50 billion “Orderly Resolution Fund” created within the U.S. Treasury in Section 210(n)(1), funded by taxes on financial firms. According to the Congressional Budget Office, the ultimate cost of bank taxes will fall on the customers, employees, and investors of each firm.


5. Opens a “line of credit” to the Treasury for additional government funding. Under Section 210(n)(9), the FDIC is effectively granted a line of credit to the Treasury Department that is secured by the value of failing firms in its control, providing another taxpayer financial support.


6. Authorizes regulators to guarantee the debt of solvent banks.
Bailout authority is not limited to debt of failing institutions. Under Section 1155, the FDIC is authorized to guarantee the debt of “solvent depository institutions” if regulators declare that a liquidity crisis (“event”) exists.


7. Limits financial choices of American consumers.
The bill contains a new “Bureau of Consumer Financial Protection” with broad powers to limit what financial products and services can be offered to consumers. The intended purpose is to protect consumers from unfair practices. But the effect would be to reduce available choices, even in cases where a consumer fully understands and accepts the costs and risks. For many consumers, this will make credit more expensive and harder to get.


8. Undermines safety and soundness regulation.
The proposed Bureau of Consumer Financial Protection would nominally be part of the Federal Reserve System, but it would have substantial autonomy. Decisions of the new bureau would not be subject to approval by the Fed. New rules could be stopped only through a cumbersome, after-the-fact review process involving a council of all the major regulatory agencies. This could impede efforts of economic (or “safety and soundness”) regulators to ensure the financial stability of regulated firms, as the new, independent “consumer” regulator would establish rules that conflict with that goal.


9. Enriches trial lawyers by authorizing consumer regulators to ban arbitration agreements.
Section 1028 specifically authorizes the new consumer regulatory agency to ban arbitration agreements between consumers and financial firms. By reducing the use of streamlined dispute resolution procedures, more consumers and businesses would be forced to pay the costs of litigation—to the benefit of trial lawyers.


10. Subjects firms to hundreds of varying state and local rules.
Section 1044 limits pre-emption of state and local rules, subjecting banks and their customers to confusing, costly, and inconsistent red tape imposed by regulators in jurisdictions across the country.


11. Subjects non-financial firms to financial regulation.
Regulation under this legislation would extend far beyond banks. Many firms largely outside the financial industry would find themselves caught in the regulatory net. Section 102(B)(ii) of the bill defines a “nonbank financial company”” as a company “substantially engaged in activities … that are financial in nature.” The phrase “financial in nature” is defined in existing law quite broadly. According to former Treasury official Gregory Zerzan, it includes things such as “holding assets of others in trust, investing in securities … or even leasing real estate and offering certain consulting services.”[5] As a result, a broad swath of private industry may find itself ensnared in the financial regulatory net. As Zerzan explains: “An airplane manufacturer that holds customer down payments for future delivery, a large home improvement chain that invests its profits as part of a plan to increase revenues, and an energy firm that makes markets in derivatives are all engaged in ‘financial activities’ and potentially subject to systemic risk regulation.”


12. Imposes one-size-fits-all reform in derivative markets.
The bill would subject derivatives now traded over-the-counter by banks and other financial institutions to regulation by the Commodity Futures Trading Commission and/or the Securities and Exchange Commission (SEC). It would require most derivative contracts to be settled through a clearinghouse rather than directly between the parties. Yet derivatives are already increasingly being traded on clearinghouses thanks to private efforts coordinated by the New York Fed.[6] The Senate’s bill, however, would require virtually all derivatives to be so traded. Applying such ill-designed blanket regulation would make financial derivatives more costly, more difficult to customize, and, consequently, less widely used—which would increase overall risk in the economy.


13. Allows activist groups to use the corporate governance process for issues unrelated to the corporation or its shareholders.
Section 972 of the bill authorizes the SEC to require firms to allow shareholders to nominate directors in proxy statement. Such proxy access turns corporate board elections from a process designed to ensure that each board has a good mix of skills and experience into a popularity contest where the long-term interests of the stockholders become secondary to political agendas or corporate raiders. The process can also be used by labor unions, politicians who manage public pension funds, and others to force corporations to respond to pet social or political causes.


14. Does nothing to address problems at Fannie Mae and Freddie Mac.
These two government-sponsored housing giants helped fuel the housing bubble. When it popped, taxpayers—because of an implicit guarantee by the U.S. Treasury—found themselves on the hook for some $125 billion in bailout money. Not only has little of this amount been paid back, but the Treasury Department recently eliminated the cap on how much more Fannie and Freddie can receive. Yet the bill does nothing to resolve the problem or reform these government-run enterprises.

Consider the source. The Heritage Foundation is a conservative think tank which has been in bed with the Republican since it was founded in 1977. I think they have a few good points but many of the points are subject to argument.

I think you should take another look at the Heritage Foundation history. They were scathingly critical of the snafus, ommissions, and boondoggles created by the Bush administration. They are absolutely NOT in bed with the Republicans. They ARE in bed with solid conservative principles.

 

[Xenophon]

Just wasn't isn't needed, more bad law.

 

[Foxfyre]

Just wasn't isn't needed, more bad law.

Some of the stuff in the bill was needed, and, the Heritage Foundation analysts have noted those. These are the 14 points of the bill they do believe are fatally flawed and should be reworked or removed from the bill.

Nobody--certainly not the Heritage Foundation--is saying that no new rules or regulation is needed.

The quarrel is in what rules and what sort of regulation is needed to accomplish reform while not creating a lot of unintended bad consequences.

 

[Foxfyre]

Okay, Toro, I gave you props yesterday for the effort you put into this good post, but I didn't have time to fully comment on it or figure out where, if anywhere, I wanted to pick a friendly fight.

This bill, like the healthcare reform bill already is and the Cap & Trade legislation almost certainly will be, is billed to address issues that need to be addressed. But sometimes they always seem to saw off the wrong leg or redo something that was working fine to begin with or paint every room but the one that was damaged.

1. We already have a de factor policy of not allowing firms that are too big to fail. At least putting in policies allow us to address issues systematically.

This is true. The problem is that the legislation makes it law. Makes it official, and just encourages more irresponsible behavior in the market because the government is pledging ahead of time to fix any problems that develop.

2. Interesting criticism. Might not matter when the derivatives markets are blowing up.

Not only interesting, but is putting into law the ominous Marxist trend of this Administration to slowly but surely nationalize the means of production until the government has enough control over all of it to call all the shots.

3. We already have a de facto bailout policy. There should be a mechanism for the wind-down of large institutions like there is for small deposit-taking institutions.

This ones makes the bailout process permanent. And like #1 up there it just begs irresponsible and/or unethical behavior of those who will almost certainly capitalize on the policy for their own benefit.

4. Its better for the banks to take the first $50 billion hit than the taxpayers. Currently, the banks put up the first $0. This is better. The idea that this creates moral hazard is a canard. We already have moral hazard.

I don't think you read this one carefully. It is not the bank that will take the hit but their employees, customers, and investors.

5. Formalizes what already occurs.

How about formalizing a policy that doesn't give the government more unlimited license for irresponsible behavior.

6. Formalizes what already occurs.

Ditto my response to #5

7. The bill provides additional protection to consumers. Borrowers were lied to and sold fraudulent mortgages. We want to encourage this why?

Rather than correct the problems that led to the fraud, they instead will simply take control of the process and it will be the government who will decide if you get a loan or not. Only the most pro government, anti individual liberties people do not see a problem with that.

8. Fair criticism. This is why some Democrats wanted it to be a separate institution unto itself but was watered down by lobbyists for the financial industry.

We agree here.

9. Bad. Shouldn't happen. Payoff to the Democrats largest source of funding.

We agree here. And I don't care who gets paid off. It shouldn't happen.

10. Don't know enough about it to comment. I do know that the OCC overrode state consumer protection laws for exactly the same criticism, invoking an obscure law from the 1860s which prevented or hampered states from enforcing anti-fraud provisions, which ultimately allowed sleazebag mortgage companies to egregiously jam borrowers with fraudulent loans.

I'm pretty much clueless here too except that I trust the PhD economists at the Heritage Foundation to be able to defend their opinions. If they say that the legislation will create enormous amounts of new red tape, you can be pretty sure that it will.

11. One of the largest financial companies in the world is GE Capital, which is subject to far less regulation than most financial companies. GE Capital, and thus GE itself, would have collapsed had the government not guaranteed the commercial paper markets, putting taxpayers at huge risks. If GE Capital is going to get a de facto government guarantee, they should be regulated by the government.

Probably one of those deals that is well intended but, as explained, will have some unintended negative consequences that should be addressed before the legislation is signed into law.

12. The derivatives market is opaque and controlled by a handful of firms who skim $20 billion off the financial markets, i.e. you and me, so that derivatives traders can pay themselves multi-million bonuses. Markets work best when they are transparent. Derivatives are anything but. The structured products markets was a big reason why the financial crisis occurred. Forcing daily mark-to-market accounting on an exchange would mean the probability of a similar AIG-like implosion would be far less likely. Stocks, bonds, futures, options, commodities, etc., all trade on exchanges, why not derivatives, a $700,000,000,000,000 market.

You obviously know more about the derivative market than I do. But the line I picked up on is the way they're going about this will increase overall risk in the economy. As we have had far too much risk that is not within the control of those who are most hurt by it, that does not sound like a good thing to me.

13. This criticism makes me wonder if the Heritage Foundation is merely shrilling for managements of big corporations, which is a very different constituency than the owners of big corporations. This is one of the best provisions in the bill. One of the big weaknesses of American corporations is corporate governance at the board level, which is often incestuous and does not work for shareholders. This provision will allow shareholders - the owners of the corporation - to have a greater say on how their company is run. Shareholders are often subordinate to management at the board level. There needs to be more shareholder democracy at US corporations.

I don't think that was their point though. Will think about it some more.

14. I agree totally that the GSEs need to be restructured, but this is a criticism of omission. One could find many omissions that this bill does not address.

If they don't START with Freddie and Fannie and the government policy that put those organizations into the deep you know what, I think it's pretty safe to say they have no intention of real financial reform here.

 

[boedicca]

This list was recently posted in another thread. Items 1, 2, and 10 taken together enable the feds to pretty much seize control of any firm they wish without due process.

Happy Happy Joy Joy.

 

[Foxfyre]

This list was recently posted in another thread. Items 1, 2, and 10 taken together enable the feds to pretty much seize control of any firm they wish without due process.

Happy Happy Joy Joy.

The ultimate socialization of the nation does seem to be the overall game plan. It is becoming more and more difficult to see it any other way.

 

[boedicca]

They want a Centralized Planned and Controlled economy in which THEY choose the winners and losers, and reward their cronies.

We Are DEVOing into a Banana Republic.