Dodd-Frank Disaster

In this week's Republican debate, an incredulous Charlie Rose, the moderator, exclaimed, "Clearly, you're not saying they should go to jail!"  He was referring to Newt Gingrich's indictment of Chris Dodd and Barney Frank for the financial meltdown.

And the law bearing their names may be a case of the cure being even worse than the disease.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, regulators have released a draft of the so-called Volker Rule, which runs some 298 pages, with 381 footnotes and 350 questions for public comment.

The rule would limit bank risk in trading for their own accounts, but  American Bank Association President Frank Keating, quoted at Forbes.com, asks how "such a simple idea could become so complex":

Regulators' own estimates indicate banks will have to spend nearly 6.6 million hours to implement the rule, of which more than 1.8 million hours would be required every year in perpetuity. That translates into 3,292 years, or more than 3,000 bank employees whose sole job will be complying with this rule.  They will be transferred to a role that provides no customer service, generates zero revenue and does nothing for the economy.

The cost burden may sink smaller banks, and Forbes also points out that foreign competitors to U.S. banks are "not following suit."

Firms such as Goldman Sachs and Morgan Stanley, which converted to bank holding companies during the bailout era, may consider dropping their bank status to avoid dealing with the Volker Rule.

Former Securities and Exchange Chairman Arthur Levitt, quoted at Bloomberg, observes that "this is going to be a long slog, and much of that rule that you see today is going to go up in smoke."

What you see is a massive exercise in bureaucratic wheel-spinning.

The Volker rule is the result of just one of more than 500 sections in the 849-page Dodd-Frank bill.  The Wall Street Journal has reported that there are 387 sets of rules imposed by the act, and the New York Times further reported last month that "regulators have missed deadlines for 77 percent of the rules so far."  And that was fourteen months after the July 2010 passage of Dodd-Frank.

Highlighting the ridiculous length of bills like ObamaCare and Dodd-Frank, which no one person could possibly read and understand, the Journal observes:

The Dodd-Frank law has 849 pages, compared with 66 pages in the Sarbanes-Oxley Act, a 2002 law that overhauled accounting rules following the Enron scandal. The landmark Glass-Steagall Act, which created the Federal Deposit Insurance Corp. and barriers between commercial and investment banking during the Depression, was a slim 34 pages.

An industry insider calls Dodd-Frank a "full-employment act," as the New York Times reports on the "legions of corporate accountants, financial consultants, risk management advisers, turnaround artists and technology vendors all vying for their cut."

The Times account, appropriately titled "Feasting on Paperwork,"  notes that "the Dodd-Frank Act is quickly becoming such a gold mine that even Wall Street bankers, never ones to undercharge, are complaining that the costs are running amok."

Another Dodd-Frank mandate, the Consumer Financial Protection Bureau, or CFPB, was in the news last week, as the president's latest nominee to head the agency, former Ohio Attorney General Richard Cordray, was approved on party lines by the Senate Banking Committee.

The Los Angeles Times reports, however, that "nearly all Senate Republicans -- enough to mount a successful filibuster -- have vowed to block the confirmation of any nominee to head the agency unless its powers are watered down."

As the law is written, the CFPB is an "independent bureau" within the Federal Reserve System, with the director appointed to a five-year term by the president and removable only for neglect or malfeasance.  The Dodd-Frank law spells out the unchecked nature of the Bureau in Section 1012 (c) (2) and (3):

...the Board of Governors may not...  intervene in any matter or proceeding before the Director...  No rule or order of the Bureau shall be subject to approval or review by the Board of Governors. The Board of Governors may not delay or prevent the issuance of any rule or order of the Bureau.

While the CFPB director is required to appear periodically before Congress, there is no congressional oversight on funding.  The director simply obtains funds from the Federal Reserve Board of Governors as needed, per Section 1017 (a) (1):

... the Board of Governors shall transfer to the Bureau from the combined earnings of the Federal Reserve System, the amount determined by the Director to be reasonably necessary to carry out the authorities of the Bureau[.]

A U.S. Chamber of Commerce officer, quoted by the LA Times, highlights the lack of accountability:

It is neither good public policy nor common sense to suggest no changes to a structure that allows a single, irremovable individual to dictate terms or even ban consumer financial products, have access to more than half a billion dollars in funding per year outside the budget process, and make decisions that could undermine safety and soundness of financial institutions.

The current nomination dispute follows the earlier dustup over the temporary assignment of consumer advocate and Wall Street adversary Elizabeth Warren as the acting director.  Republican senators even went as far as threatening to block adjournment over the Memorial Day recess last year to prevent the president from making Ms. Warren a recess appointment.

Yet another controversial area of Dodd-Frank is the sweeping expansion of the Commodities Futures Trading Commission, or CFTC, which was originally established in 1974 to "regulate commodity futures and options markets."

The CFTC is tasked with writing more than forty sets of new rules under Dodd-Frank, but the commission is behind schedule, and House Republicans have balked at funding increases requested by the Obama administration.

Townhall Finance columnist Jeff Carter details an unintended consequence of the changes in commodity regulations.

Citing a 68-page CFTC rulemaking proposal that calls for, among other things, "creating rigorous recordkeeping and real-time reporting regimes," Carter observes:

What's that verbiage going to cost you? The CFTC estimates that it will be somewhere between $16,750-$61,750 initially, and $12,600 annually once every member has a recording system. That means a farmer in a tractor that is talking to their broker monitoring the market all the way up the food chain to the hot shot trader on a trading desk.

These extra layers of regulation mean that producers will have to charge a higher price for food. The price will be passed down from the field through the elevator, through the trading pits, through the food producers, and greet you at the checkout counter at the grocery.

Newt Gingrich went on in Tuesday's debate to indict "the politicians who were at the heart of the sickness which is weakening this country."  And that "heart of the sickness" is where Dodd-Frank and ObamaCare reside.  A couple of one-page repeal bills, followed by real reforms, will go a long way toward healing the patient.