The financial services 'reform' mess

Posted by on Jul 25th, 2010 and filed under Congress, Economy, Politics, Regulation. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry from your site

By J.C. Watts

During my service in Congress, whenever legislation was dubbed “reform” it was especially necessary to analyze the details and consequences. So it is with congressional passage of President Barack Obama’s financial services “reform”– the biggest expansion of government power over banks and private markets since the Great Depression.

The Wall Street Journal reports that the 2,300-page law– crafted by Sen. Christopher Dodd, D-Conn., and Rep. Barney Frank, D-Mass.– requires no fewer than 243 new rules by 11 federal agencies. “A general attack on our free enterprise system,” is how a frustrated U.S. Chamber of Commerce describes the law that will make it tougher for consumers and small businesses to borrow money.

Critics have focused on the bill’s costs and how it may affect access to credit. They warned that forcing banks to raise more capital will crimp their ability to advance loans, or raise the cost of doing so; tougher derivatives rules could raise the cost of hedging for companies that use these instruments in daily operations. Again, as The Wall Street Journal reports, tougher consumer rules could further pinch credit — especially for people with lower incomes.

Harvey Pitt, a former head of the Securities and Exchange Commission, is especially blunt. He says this so-called reform is “likely to take a badly broken regulatory system and make it worse. This legislation fixes nothing, accomplishes nothing, yet promises everything.

“Legal and consulting fees will skyrocket. This bill is truly the ‘Lawyers and Consultants’ Full Employment Act of 2010. Most of the attempted reforms are poorly drafted or contain loopholes so large that a fleet of trucks could get past the supposed barriers. Where the bill accomplishes something it is likely to harm competition …. and boost the performance of commercial and investment banks outside the U.S.,” Pitt says.

Will this bill prevent another crisis like the one that erupted in October of 2008? Absolutely not. The biggest financial players of 2008 that caused and contributed to the economic meltdown with reckless and criminal conduct aren’t being punished or controlled. The Wall Street Journal editorially notes, “(I)nstead of immediately assessing a tax on large financial companies to pay for future bailouts, the final version simply authorizes the bailouts to occur first. The money to pay for them will then be collected via a tax on the remaining firms.” This is no different than having your neighbor go bankrupt and you have to pay his debt.

Perhaps most infuriating is this financial overhaul ignores the fate of the mortgage-finance giants that fueled the housing bubble that led to the 2008 meltdown — Fannie Mae and Freddie Mac, which own or guarantee over $5 trillion of the nation’s $10 trillion of mortgages.

Dodd says this legislation ends the “too big to fail” debate. Not so.

Freddie Mac lost another $6.7 billion the first quarter of 2010 and therefore needs another big cash infusion from taxpayers. Combined with Fannie Mae’s gouging of the taxpayers, the Congressional Budget Office estimates the American people will spend $389 billion bailing out these two misfits by 2019. And Dodd continues to claim that taxpayers are no longer exposed to “too big to fail.”

These two government entities were created to make it easier for Americans to buy more expensive housing. In 1993 the Clinton administration pushed Fannie and Freddie to loosen once-strict purchasing requirements.

By 1996, regulations required that a whopping 40 percent of all loans bought by these two entities come from people with below-median incomes. They even began buying subprime securities — which turbocharged America down the path of an economic meltdown. I also might add that the Bush administration pushed Fannie and Freddie to participate in their housing initiative. Both the Clinton and Bush administrations were guilty of creating home ownership with bad foundations.

The Democrats say they will deal with the housing finance restructuring next year. Taxpayers can only hope the Democrats are no longer in power to do more damage in that area, because they still want taxpayers to front the government money if Fannie and Freddie are neutered.

Congress could have strengthened the existing bankruptcy system, and actually allowed firms “too big to fail” to go under. But the Democrat leadership would never allow it. That, you see, would defeat the goal of this latest “reform”– to transfer even more power to the federal government.

Furthermore, Washington hopes taxpayers won’t remember that these are the same government agencies which failed to foresee the 2008 crisis until it was too late.


This article was originally written by J.C. Watts at

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