The ChamberPost

Dodd-Frank: Some Progress on the Big 5, Sequel Already on Tap

by Tom Quaadman

As we noted at the start of the Senate debate on financial regulatory reform, the Chamber listed 5 areas of the financial regulatory reform bill that needed to be fixed for a bill to be effective. With the Dodd-Frank Bill passing 60-39 earlier this afternoon, where do the big 5 stand and what does the future hold?

1. Consumer Protection: The Chamber was concerned about a new agency with unchecked powers that can regulate Main Street businesses. A critical win was spearheaded by Senator Snowe exempting small businesses from the jurisdiction of the new regulator. An important change, but the concerns remain.
2. Derivatives: The Chamber supported more clearing with allowance for flexibility for corporate end-users to use derivatives to bring low-cost products to market for consumers. The result, so much confusion surrounding corporate end-users that Rep. Barney Frank has already promised a second bill to try and come up with a workable system.
3. Ending “Too Big to Fail”: The $150 billion pre-paid was removed and the impact upon non-financial companies was significantly narrowed. However, the new Financial Information Office is a half a billion dollar agency with broad subpoena powers. Stay tuned.
4. Corporate Governance: Many of the measures pass, but with potential exemptions for small businesses and some degree of flexibility. However, these provisions look like Sarbanes-Oxley on steroids.
5. Volcker Rule: Dodd-Frank imposes a tough version of the Volcker Rule. The silver lining—it may take 10 years to implement.

What does the future hold?

Senator Dodd: "No one will know until this is actually in place how it works."

Representative Frank: Promised a second bill to correct flaws before Dodd-Frank even passed.

Next steps: by our own analysis 520 rulemakings, 81 studies and 93 reports*. By contrast Sarbanes-Oxley had 16 new rule makings and 6 studies.

In short, the intent of the bill was to create a 21st century regulatory system, eliminate uncertainty and allow credit to flow so businesses can expand and create jobs. The end result: no real reform just much more of the same, increased uncertainty, and businesses hunkering down because there are no clear rules of the road. Hardly a recipe for success.

If anyone tells you financial regulatory reform is over, tell them as we say in New York—fuhgetaboutit!  There is round 2 to come – the regulations; then round 3 – fixing the clear mistakes; then round 4 – addressing the unintended consequences; and then round 5, fingers crossed, the realization in the future that we need a complete overhaul of the system. Nothing ended today, in fact the fight for financial regulatory reform has barely begun.

*Updated 21 July 2010 from 533-60-94.

Financial Regulatory Reform - Uncertainty Grows

by Tom Quaadman

One of the selling points used by the Administration and Congressional leadership in pushing the Dodd-Frank bill is that financial regulatory reform is needed to do away with the uncertainty that has plagued the economy since the financial crisis erupted in 2008. The pitch goes that business needs clear rules of the road in order to access capital and the uncertainty in the marketplace has frozen monies that could otherwise be used to fund business expansion and job creation.

There is a lot of truth to this argument and as the Senate moves to pass the bill later this week the question is, how does the Dodd-Frank bill do in removing uncertainty? You don’t have to look further than the work that will go into implementing the bill to see that it misses the mark.

The final bill leaves the regulators with quite some work to do -- 520 rulemakings, 81 studies and 93 reports*. To put this into perspective, Sarbanes-Oxley required 16 new regulations and 6 studies. That’s right, the Dodd-Frank bill is over 30 times the size of SOX.

Trying to write and implement these new regulations and the litigation that follows will take years to do. In fact some have speculated that the Volcker rule itself may take up to 10 years to fully put in place. That means an extended period of confusion and lack of clarity as to what the rules are. This is bad because confusion leads to hesitancy to deploy capital, reducing economic growth and job creation.

The Chamber has long-called for updating our Depression-era regulatory system to match a 21st century economy. Instead it looks like Congress wants to add more rooms onto the building that sits on a crumpling foundation.

Not the way to get rid of uncertainty or grow jobs, unless you are a bureaucrat or a lawyer, in which case, this is the bill for you.

*Updated 21 July 2010 from 533-60-94.

Financial Regulatory Reform: A Spaghetti Western?

By Tom Quaadman

The House of Representatives yesterday passed, by a vote of 237-192,  H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act. Senate action on the Dodd-Frank bill is not expected until after the July 4th recess in mid-July. 

In the upcoming days we will post on the bill, its impacts and how the “big five” issues were addressed during the debate and legislative wrangling that have gone on these past few months. In fact, a very good synopsis of the problems with the bill is contained in an op-ed in today’s Wall Street Journal, by Stanford University Professor John Taylor titled The Dodd-Frank Financial Fiasco.   

But there are two quotes that have stood out in recent days that I would like to highlight. As the Conference Committee was wrapping up its work late last week, Senate Banking Committee Chairman Chris Dodd said: “No one will know until this is actually in place how it works.” Granted, there are times in life when you have to take a roll of the dice. But I don’t think you would step on a plane if the pilot made that announcement to the passengers before boarding a flight. Are we comfortable with leaving our job creation engine to the same uncertainty?

The other is from House Financial Services Committee Ranking Member Spencer Bachus, who said in the debate yesterday that “the bad and the ugly far outweigh the good elements of the bill.” This bill is a collection of the good, the bad and the ugly. Some of the issues that have led to the financial crisis are addressed, but often in manners that greatly expand the role of government, with a chilling effect on the ability of the free enterprise system to work.

Wild swings in stoking or reigning in the economy have been tried before, namely in the sixties and seventies with bad results. Creating a nimble forward-looking regulatory system for the 21st century economy is what we need, and what the Dodd-Frank bill fails to do. 

It seems that uncertainty is not leaving the scene any time soon. Where is Clint Eastwood when you need him?

One More Vote, But Any Movement on the Big 5?

by Tom Quaadman

The Senate is scheduled to have another vote on a motion to proceed on the Dodd financial regulatory reform bill shortly. Thus, it appears that the efforts to ram through a bill continue.

Several Senators, have called for the bi-partisan negotiations to be broken off and the bill brought to the floor. They have stated that the amendment process will correct any problems in the bill. That’s akin to asking a shipbuilder to ignore a leaky hull and go forward with building the rest of the ship, rather than fixing the core problem.

As I mentioned yesterday, 90% of the legislation that passes through the Banking Committee is bi-partisan.

Furthermore, using a flawed base bill to move forward leaves open the possibility that unintended consequences are not fixed and that our capital markets will be left at risk, harming the economic growth and job creation in the process.

As I wrote last week, these are the 5 flaws that should be fixed:

1. Consumer Protection: The current bill still allows for a bureau that has overly broad powers to regulate Main Street, with an unaccountable director. Increased consumer protections are needed and the Chamber has proposed a plan to get there. But ask yourself, do we really need an economic J. Edgar Hoover regulating the orthodontist?
2. Derivatives: More clearing and transparency, no argument. However, corporate end-users need flexibility to use derivatives to bring low-cost products to market for consumers. Check out this article about how derivatives are used to bring Beer to the market.
3. Ending “Too Big to Fail”: The Federal Government needs authority to unwind interconnected firms that pose a risk to the financial system during a crisis. However, implied government back-stops, pre-paid bailout funds and pre-emptive break-up authorities will increase risk and perpetuate moral hazard.
4. Corporate Governance: Federalizing state corporate law to benefit a few large union pension funds and activist investor’s smacks of pay-back rather than a sound regulatory response to the crisis. Bogging down management with annual shareholder fights and disenfranchising retail shareholders just isn’t the way to go.
5. Volcker Rule: Imposing the Volcker Rule will place the American financial services at a competitive disadvantage. Who says so? Our international competitors. There are other pro-growth tools such as capital and liquidity requirements to achieve the intent of the rule.

While the Senate has been busy holding cloture votes, it is unclear what progress if any is being made to fix these flaws.

What do the American people think?

In polls released last week, clear majorities of likely voters in Arkansas, Massachusetts, Montana Nebraska, Ohio and Tennessee were concerned that Congress will try and rush through a bill rather than reach a bipartisan agreement and fix the problems.

The American people understand that the stakes are high and that it is more important to get a good bill rather than ram through any bill. Hopefully, in the haze of cloture votes, that plain common sense can also filter its way into the Capitol.

The Game of Playing Chicken with Job Creation Continues

by Tom Quaadman

As I wrote last week, it appeared that the President’s Cooper Union speech was setting up a game of chicken on financial regulatory reform.

Yesterday, the Senate had a vote on cloture to bring the Dodd bill to the floor. That motion failed with a bi-partisan group of 41 Senators voting against it. A second vote on cloture is expected this afternoon and it appears that a third one will be scheduled for tomorrow morning if it is needed. So far neither side has blinked.

To show how serious the game has turned, AFL-CIO President Richard Trumka is trudging up to the Capitol to twist some arms ahead of today’s vote.

One would hope that Senators Dodd and Shelby will continue to ignore the theatrics and negotiate a bill despite the political fireworks show going on around them. Since Senator Dodd assumed its Chairmanship, 90% of the legislation passing the Banking Committee has been bi-partisan. It just proves the point that financial regulation is not a Democratic issue or a Republican issue.

Rather, capital markets provide the fuel for the job creation engine to operate. How those markets are regulated has been out of date for some time and the economy is now paying the consequences. We have a choice to let the negotiations continue and let a bi-partisan bill develop, or we can let the gamesmanship proceed and allow the economy continue to limp along.

It’s like having a choice of being constructive or fiddling like Nero as Rome burns.

To the person looking for a job the choice should be obvious. Unfortunately, having to call out the Union bosses to keep Senators in line seems like the game of chicken will just continue.

Let’s take the time to get a good bill to the floor and enacted into law this year. The next generation of entrepreneurs, business owners and workers deserve it.

Playing Chicken with Jobs After Cooper Union

by Tom Quaadman

In delivering his address today, President Obama left much of the red-meat populist rhetoric in Washington. That may be a good thing because you catch more flies with honey, than with vinegar. However, the President didn’t give ground on his positions, calling for a stand-alone consumer protection regulator, derivatives regulation without end-user flexibility, proxy access, the Volcker Rule and even used the speech to call for the Bank Tax. No evidence, publicly at least, to fix the five flaws I outlined earlier. 

Back inside the Beltway, Senate Majority Leader Reid filed a cloture motion and called for a vote on it for Monday at 5:00 pm. Meanwhile, Senate Minority Leader Mitch McConnell issued a tough statement calling for proof that the bill will end bailouts and later said that bi-partisan talks should continue.

So while the rhetoric has cooled, it appears that the Administration and the Senate leadership, on both sides of the aisle, are locked into their positions and are setting a short deadline on achieving a bi-partisan deal setting up the stage for an attempt to ram a partisan bill through the Senate.

So it looks like the clock is ticking, can Senator Dodd and Shelby reach a deal? That remains to be seen, but a good bill is needed while just any bill is not worth the effort.

A bipartisan deal that allows American workers, entrepreneurs and businesses to have access to capital and succeed or fail on their own will help propel the free enterprise system into creating jobs and economic growth for the next generation. A partisan approach that extends government regulatory power into Main Street and places businesses at a competitive disadvantage is a formula for stagnation.

What the speech and all of the post-speech press missed is that capital markets are the fuel that allows the engines of job creation to operate. A burdensome regulatory structure will act as a governor on the engine, while an imbalanced regulatory structure can allow the engine to burn itself out. Playing chicken can be fun, but not when it comes to job creation. In the end that’s what this debate is all about.

Financial Regulatory Reform - Getting It Right

by Tom Quaadman

In conjunction with President Obama’s speech today on financial regulatory reform the Chamber has published this open letter in the New York Times.

The Chamber agrees with the President that there needs to be financial regulatory reform and that it has to happen this year. However, the aim of a financial regulatory reform bill should be to allow a system of capital formation that provides for sustained economic growth and the creation of more than 20 million jobs over the next ten years. Trying to ram through a bill to score political points or salve populist urges won’t solve the problems, or allow businesses to expand and create jobs.

As you are watching the President’s speech today, keep a checklist handy to see if these flaws are being tackled:

1. Consumer Protection: The current bill still allows for a bureau that has overly broad powers to regulate Main Street, with an unaccountable director. Increased consumer protections are needed and the Chamber has proposed a plan to get there. But ask yourself, do we really need an economic J. Edgar Hoover regulating the orthodontist?
    
2. Derivatives: More clearing and transparency, no argument. However, corporate end-users need flexibility to use derivatives to bring low-cost products to market for consumers. Check out this article about how derivatives are used to bring beer to the market.
    
3. Ending “Too Big to Fail”: The Federal Government needs authority to unwind interconnected firms that pose a risk to the financial system during a crisis. However, implied government back-stops, pre-paid bailout funds and pre-emptive break-up authorities will increase risk and perpetuate moral hazard.
    
4. Corporate Governance: Federalizing state corporate law to benefit a few large union pension funds and activist investor’s smacks of pay-back rather than a sound regulatory response to the crisis. Bogging down management with annual shareholder fights and disenfranchising retail shareholders just isn’t the way to go.
    
5. Volcker Rule: Imposing the Volcker Rule will place the American financial services at a competitive disadvantage. Who says so? Our international competitors. There are other pro-growth tools such as capital and liquidity requirements to achieve the intent of the rule.

In 1860, Abraham Lincoln gave a speech at Cooper Union that propelled him to the Presidency. Lincoln’s speech was entitled "Right Makes Might". Clearly, President Obama is using today’s speech at Cooper Union to propel the financial regulatory reform bill to passage. Hopefully the title is "Getting It Right."

Financial Regulatory Reform: Fixing the Big 4

by Tom Quaadman

Yesterday, Senate Minority Leader Mitch McConnell stated that the Dodd Bill was fixable, Senator Bob Corker said that a bi-partisan deal could yield 70 votes by Memorial Day and reports abound that Senator Dodd and the Senate majority leadership are targeting moderate Republicans such as Senator Collins to rush a bill to the floor.

The Chamber has been working for effective coherent financial regulatory reform since well before the financial crisis, prior to it becoming such a sexy issue. Why? Because business and entrepreneurs need access to capital in order to expand or attempt to bring the next big idea to market. Capital will flow to appropriately regulated markets; it will flee from markets that lack certainty. This has become more of an imperative with over 8 million jobs lost and the need to create more than 20 million jobs over the next 10 years.

Yesterday, the Chamber sent this this letter to all members of the Senate outlining the portions of the Dodd bill that need to be fixed. Basically it comes down to four big areas of concern:

1. Consumer Protection: Yes we need increased consumer protection, but a new bureaucracy led by an unaccountable director and empowering over 50 state and territorial regulators is more about creating a Tower of Babel for trial lawyers than helping the average consumer. A novel approach- empowering existing regulators, having them talking amongst each other and coordinating action through a Council is a better way to go in our view.
    
2. Derivatives: An appropriate balance must be struck to increase transparency and allowing end-users to use derivatives to operate in a 21st century economy. Getting this wrong will ship derivatives business to Singapore and drive costs up for businesses and ultimately consumers.
    
3. Ending “Too Big To Fail”: Permanent pre-paid bail-out funds, using systemic risk and resolution authority to regulate non-financial companies, placing companies at a competitive disadvantage and designating some companies as systemically risky are not the ways to end too big to fail. These are recipes to perpetuate moral hazard, on a scale that dwarfs the pre-financial crisis era. Furthermore, adding a bank tax is wolf in sheep’s clothing.
    
4. Corporate Governance: Over 98% of the public companies in the United States are non-financial and are governed under a system of state law. The Dodd Bill would create a one size fits all approach that increases the role of activist investors and even disenfranchises retail investors. Creating regulatory schemes to advance special interest agendas unrelated to the financial crisis is downright dangerous for the job creators in the economy.

These are the issues that need to be fixed before the Senate can achieve financial regulatory reform that creates a more secure environment for economic growth and job creation. The actions taken over the next several days and weeks will determine how our capital markets, businesses and workers can operate over the next generation. Getting it right is more important than getting it done.   

President Gerald Ford was fond of saying that over time one can tell who the show horses and workhorses are in Washington. It is time to end the show, put the headlines aside and produce a bill that everyone can get around and support. The 8 million people who are looking for work deserve no less. 

// Update: David Hirschmann has more:

On Financial Regulatory Reform - Haste Makes...

by Tom Quaadman

Yesterday, Chairman Dodd rammed a financial regulatory bill through the Senate Banking Committee by a straight party line vote of 13-10. The mark-up of the 1,336 page bill lasted 21 minutes. That's less than 1 second per page.

The Dodd bill has a number of very troubling provisions. It creates a consumer financial protection agency with vast powers outside the scope of the normal system of checks and balances, federalizes state corporate law to create a one size fits all system to benefit large activist shareholders, taxes certain companies to the tune of $50 billion dollars and potentially creates a duplicative regulatory scheme in attempting to deal with systemic risk. The Dodd bill goes so far as to implement the Volcker Rule which will place American firms at a competitive disadvantage and even codifies the disenfranchisement of retail shareholders.

That's some kind of reform, which is why the Chamber sent sent this letter, to all Banking Committee members, opposing the Dodd bill.

Any observer of Washington has seen the increase in rancor and partisanship. While those intramural games may have their time and place within the beltway, financial regulatory isn't one of them. Financial regulatory reform is needed to provide our economy with the foundation and fuel to spur economic growth and job creation for the next generation. That's no small task and one that shouldn't be left to checking the win column on one side or the other in the partisan ledger. A partisan bill is not a path to success, and the Chamber for the second time in a week issued a statement calling for a bi-partisan solution to regulatory reform.

Sometimes taking a little longer with some hard work produces an outcome that can stand the test of time. Clearly, yesterday's exercise didn't meet that criterion. Time is short and the clock is running. Hopefully cool heads will prevail and the American people can have the legislation they need to get the Nation back to work.

Three Steps Back Doesn’t Equal Progress

by Tom Quaadman

Last week, as the on-again, off-again bi-partisan negotiations on financial regulatory reform were on again, Senator Bob Corker (R-Tenn) said that they were on the 5 yard line and hoped to put the ball into the end zone for a touchdown. Shortly thereafter Banking Committee Chairman Christopher Dodd (D-Conn) announced that he was going his own way and yesterday unveiled a partisan bill. The Banking Committee said that a mark-up of the Dodd bill will start next week.

The Dodd bill isn’t all that different from his original draft that was released to the public last November. Even though the Consumer Financial Protection Agency will be housed in the Federal Reserve, it will still be an independent agency in all but name with wide sweeping regulatory powers with, as the Washington Post puts it "few checks on that authority." Provisions to federalize corporate governance remain in the Bill, while efforts to address systemic risk will sweep in non-financial companies and create additional layers of regulation. In providing for resolution authority, businesses will be hit with a new $50 billion tax to fund a permanent bailout fund, the systemic risk council and Federal Reserve will have the authority to break-up companies that are deemed too big and the imposition of the Volcker rule will place American firms at a global competitive disadvantage.

In commenting on the bill yesterday David Hirschmann,  president and CEO of the U.S. Chamber’s Center for Capital Markets Competitiveness (CCMC), said “this bill takes three steps backwards with the hope of making future progress.” David Hirschmann will hold a press conference at 12 noon today to discuss the Chamber’s concerns in greater detail.

In going the partisan route Senator Dodd cited the dwindling days left on the legislative calendar. What is being lost in the debate is that the U.S. economy needs to have real regulatory reform to provide businesses and job creators with the capital markets needed to fuel a 21st century economy. Real reform means clear rules of the road, allowing people to succeed or fail on their own and stopping the ingratiation of moral hazard. Real reform will create a system that can fuel prosperity and job growth for the next generation. Reform that misses the mark will breed stagnation and see the economy limp from crisis to crisis.

Putting points on the board, not worrying about the clock is what the American people need and deserve. A humble suggestion—lets everyone roll up their sleeves and work to find the right solutions. Sometimes its grit and determination that gets you into the end-zone, no matter what the clock says.