Wednesday, July 14, 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act

      The Senate is set to vote on the 2,300 page Dodd-Frank Wall Street Reform and Consumer Protection Act, designed to establish much needed reform in the financial services industry. Supposedly the bill will monitor the types of transactions which led to the recent recession. With the announcement that Republican Senators Collins and Snowe of Maine, and Brown of Massachusetts would support the bill, the required 60 aye votes on Thursday seems assured. But as usual with the Senate, anything can happen.
      The bill establishes a number of new government departments (Surprise! surprise!) to implement and maintain its regulations.
      The new independent Consumer Financial Protection Bureau will be housed at the Federal Reserve, and will be responsible for ensuring that consumers get all pertinent information when shopping for mortgages, credit cards and other financial products. It will protect them from hidden fees and other deceptive practices.
      Also new is the Financial Stability Oversight Council, which will be responsible for identifying, monitoring and addressing systemic risks posed by large, complex financial firms as well as products and activities that spread risk across firms. It will make recommendations to regulators for increasingly stringent rules on companies that grow large and complex enough to pose a threat to the financial stability of the United States. The Council will make recommendations to the Federal Reserve for increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system.
      The bill will replace a hodge-podge system of bank regulators, which has been legislated in a piecemeal fashion over the past sixty years, with clear lines of responsibility.
      A major contributor to the recent financial meltdown was an unregulated system of derivatives, a bundling of securities, primarily mortgages, into packages sold with no regard for their underlying safety. The bill requires data collection and publication through clearing houses or swap repositories to improve market transparency and provide regulators important tools for monitoring and responding to risks.
      Hedge funds and insurance companies also received attention, particularly to insure adequate monitoring and transparency.
      A new Office of Credit Rating Agencies at the Securities and Exchange Commission will establish new rules for internal controls, independence, transparency and penalties for poor performance of credit rating agencies such as Dun and Bradstreet, Standard and Poors, etc.
      As a result of widespread dissatisfaction with executive salaries at major financial firms, the bill gives shareholders the right to a non-binding vote on executive pay. Other standards for the determination of reasonable salaries are also included.
      Finally there are odds and ends which define and strengthen responsibilities of various boards, committees, etc.
      As usual with an undertaking of this magnitude, many compromises were made along the way, and a compromise is not always the best solution to a problem. Not all crises arise from the same beginnings, and it remains to be seen whether the measures taken to eliminate the causes of the current recession will suffice to prevent future economic meltdowns.
      Also, the rules and regulations, the minutiae, have been left up to the various agencies to thrash out. Let the lobbying begin.
      The bill could be on the President’s desk by Friday. He will sign it.
      It was the achievement of Christianity to graft the idea of hope to the one god concept. In particular, Christianity promised hope that the strict Hebraic god would always be available to the worshiper, offer forgiveness of sins instead of stern punishment, and that everlasting life would overcome death.
      Man Takes Control – The Spirit Runs Through It

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