Ok, so a crowd-sourcing request. There’s a lot of coverage on the new Chris Dodd financial reform bill, and most of it is trying to find good things to say about the bill. Trying very hard in fact, with varying degrees of success.
I want to approach it from a different angle: What would an investment bank hate about this bill, and lobby hard to change? I actually read this bill as if I was a Goldman Sachs lobbyist, looking for all the sections that I hated and made a list of what items I needed to lobby hard on to kill or modify.
My final verdict, by the time I got to the end? If I was a Goldman lobbyist, I’d probably shrug and go “eh, pass it.”
What’s there to object to? More practically, what’s this bill really going to do? I really couldn’t find anything outside of two items that nobody expects to be effective anyway, and one I’m doubting will get passed. I’d love all of your help to think of ways in which the current system of financial “rip our clients’ face off and drink the real economy’s milkshake” capitalism would be worried that this would disrupt the new post-bailout status quo, but I can’t find it.
Let’s go through some specifics, from the point of view of a Goldman lobbyist:
1) The Federal Reserve is now your regulator, regardless of what kind of charter you have as long as you remain a big company. The bill has a lot of regulations that look like the following (page 95, my bold):
(2) LIMITATION ON CREDIT EXPOSURE.—The regulations prescribed by the Board of Governors under paragraph (1) shall prohibit each nonbank financial company supervised by the Board of Governors and bank holding company described in subsection (a) from having credit exposure to any unaffiliated company that exceeds 25 percent of the capital stock and surplus (or such lower amount as the Board of Governors may determine by regulation to be necessary to mitigate risks to the financial stability of the United States) of the company.
25% of the capital stock&surplus to one company is not a huge requirement and would probably do little to make firms less interconnected. But at a lower level, it would be, and from the bold above, the smart technocrats at the Federal Reserve could make it lower if needed. So the Federal Reserve can make firms less interconnected. Or it could choose not to. And I’m sure there’s a way to not even do the 25% if they didn’t want to that I didn’t catch or that they could make up on the spot. The Federal Reserve – it’s a place where regulators can hang out, and do like, whatever.
There’s a lot of that kind of language in the bill.
At MMBM, Richard Carnell gave a presentation about how it is in the nature of recent financial crisis for regulators who failed in the last one to ask to be given more powers, that are even more vague, so that they can tackle the next crisis. And sure enough, the Federal Reserve is asking for a bunch of vague powers so they can tackle the next crisis. And the Dodd Bill is going to give it to them.
If you are Goldman, the issue here is that the Federal Reserve is on your ass even if you remove your commercial charter. Would they be worse than the SEC? What’s your take?
2) The most important thing for preserving the shadow banking system as unregulated is keeping the regulatory arbitrage going – where investment banks functioning as commercial banks can take on more leverage under riskier low liquidity terms than commercial banks. Page 40 has some stuff: “the Council may make recommendations …. that …. are more stringent than those applicable to other nonbank financial companies and bank holding companies that do not present similar risks to the financial stability of the United States.” But I’m not holding my breath on the Federal Reserve cracking this whip.
There’s a bunch of stuff about liquidity stress tests, but given that the NY Fed juked those statistics with a known troubled firm, I have a hard time thinking that they’ll do well with an unknown troubled firm. So no objections here.
The real threat here is that the idea of resolution authority is so credible here, so daunting to the company, that the cost of funding goes up. Heh. What do you think?
3) Prompt Corrective Action has been replaced with “Early Remediation Requirements” (page 101) – which strikes me as PCA with the ability to drag in liquidity requirements. Here the language is creating “requirements in the initial stages of financial decline…” which strikes me as too late. What the hell can you do with a company in “financial distress” besides sell it or stick cash into it or bankrupt it? Ideally you start PCA with a company that still has positive net worth. The threat from PCA is that regulators will have triggers before your company has actually failed. Again, I have no idea what the Fed will mean by “financial distress”, but I’d advise Goldman not to lose any sleep over this.
4) CFPA at the Federal Reserve doesn’t matter for Goldman. It does for JP Morgan, and I’ll cover it in another entry.
5) The derivatives language isn’t out yet. I’m going to go ahead and assume that Goldman will be classified as an end-user, and that exchanges can be defined with a lack of price transparency, and is thus exempted from the majority of all regulation here. Lobbyists should work here, but really I doubt they’ll need to work very hard to kill this. It got mutilated in the Frank Bill, and that is going to be considered to be the stronger bill by the time this is done.
6) What’s going on with the Volcker Rule here? It’s under study, and can be implemented at a later date. Financial Times and Huffington Post both think that the financial sector isn’t worried. Goldman has a little bit extra to lose if the Volcker Rule goes into play, so they may want to lobby this one harder than I’d recommend. I honestly am not expecting much – Geithner and Bernanke are good bellweathers for how the Federal Reserve will approach regulation, and I know Geithner at least doesn’t like it, and Bernanke doesn’t care.
7) The only actual threat from any of this is the language surrounding “proxy access.” I don’t have a handle on this yet, but I can tell that this might be a problem. I’d kick you over to the WSJ for now. Fighting the good fight, the CFA Institute supports the initiative. The Chamber of Commerce is gunning to kill this, hard.
Can You Find Anything?
So I think I’d recommend that they just send the lobbyists home and tell them to pass the bill. This is why I don’t work on the Street mind you, because I don’t have that go-getter spirit. I’m sure by the time all the banking lobbyists are done the Senate bill will become one of the key primary sources for students 100 years from now on how broken the Senate of the early 21st Century was. But in terms of lobbying there seems to be nothing that needs to move. Which should worry us all.
If I was advising you, as a taxpayer, I’d point out that since we don’t want to shrink the biggest banks, we are going to be putting a lot of stress on unproven and uncertain powers and institutions, particularly the Federal Reserve’s ability to discipline the largest financial firms, and resolution authority’s ability to take on firms whose business model is, in part, to warehouse gigantic derivatives portfolios.
The four big items for detection in Rob Johnson’s MMBM report are off balance sheet reform (none), derivatives reform (gamed), extensive real time examination, and international exposure information. There are living wills, but I imagine in practice they’ll function more like “organ donor cards” – less a map on what to do while the building is burning, and more a bunch of stuff you can harvest if you move fast enough. And, though I may be wrong, I doubt they’ll be credible enough in real-time and on an international basis. So if you think of resolution authority as a process of deterrence -> detection -> resolution, like in Rob’s report and where each step strengthens each other, we are putting a lot on the resolution bucket.
But maybe I’m missing something – what did you catch?