SKARBECK: Financial overhaul law leaves much uncertainty

July 24, 2010

Ken Skarbeck InvestingWith Sens. Christopher Dodd and Barney Frank jostling for the prime-picture position behind President Obama as he signed the Financial Regulation Overhaul bill July 21, Americans were left wondering what the bill will mean to them. The 2,300-page “Dodd-Frank” legislation is being hailed as the most sweeping reform of our financial system since the 1930s.

The fine details of the bill are still unknown, since the Dodd-Frank bill established only the framework for reform. Now, regulatory agencies must write the detailed laws that will enforce the rules. For example, 30 groups have been tasked with crafting the new regulatory system for the $615 trillion over-the-counter derivatives market. As one economist described the process, “there is a great amount of ambiguity about how the bill will evolve in practice. It has tremendous promise, but also tremendous scope for disappointment.”

Certainly, this legislation signifies a reversal of the trend toward financial deregulation that accelerated with the repeal of the Glass-Steagall Act in 1999. Many have pointed to the weakening of those banking laws, which had separated the activities of commercial and investment banks, as a key enabler to the leveraged borrowing that nearly broke the system during the credit crisis.

One visible change will be the new rules to be overseen by the newly created Consumer Financial Protection Bureau. These rules will regulate the cost and marketing of consumer financial products, including loans, mortgages and credit cards.

On Wall Street, the “Volcker Rule” would have prohibited or curtailed some of the more aggressive activities at commercial banks. In the end, the bill retained the ban against proprietary trading, but allowed higher levels of hedge-fund and private-equity investing than originally conceived. Former Fed Chairman Paul Volcker told The New Yorker that, while he supports the bill, “we could have done better.”

The public, to no surprise, is skeptical that the new regulations will succeed. A Bloomberg poll shows nearly four out of five Americans have little confidence the measures will prevent a crisis. Almost half of those polled said the bill will do more to protect the financial industry than consumers.

For angry Americans still looking to extract their pound of flesh from Wall Street, this bill was not the avenue to achieve that satisfaction. The United States needs a strong functioning financial system to assist its economic growth. As such, this bill was not written to punish but instead to attempt to protect against future crises and provide for consumer and taxpayer safeguards. That said, SEC and investor lawsuits should continue to be brought against fraudulent investment schemes and in cases where Wall Street breaks laws in their dealings with the public.

Finally, it is also important that the Dodd-Frank bill integrates with regulatory reform of the overall global financial system. Considering the fragile state of the world’s economies, an inconsistent system of global reform may allow firms to conduct banned activities in other countries, thus dodging the purpose of the new regulations. As investor Jeremy Grantham recently commented, if reform leads to reduced growth of the financial sector within our economy, so be it, for much of the recent growth was not healthy growth.•


Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.


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