President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Regulation or Fin Reg) this morning. It took us two hours to find a copy of the bill online in its final form. You can access it from the Library of Congress. From this link you can access a pdf file of the complete Act or access parts of the bill by clicking on the heading in the outline.
At the signing ceremony this morning, the president said this law would prevent “breakdown in our financial system.” Michael Steele, Republican Party chairman said the new rules will "saddle the business community with innumerable unintended consequences, tighter credit, and countless job-killing regulations."
According to the Wall Street Journal the bill creates a new consumer protection department in the Federal Reserve, gives regulators the capability to liquidate financial firms outside of bankruptcy, and imposes new capital and leverage requirements on large banks. The bill creates a new ‘council’ to identify systemic risks before they threaten the stability of the economy and provides for a non-binding shareholder vote on executive compensation. The bill creates a new Office of National Insurance in the Treasury Department to monitor the insurance industry.
The Atlantic Monthly has a good article from last week with an explanation of the different components of the bill. We have not read the bill, at 2300 pages, it is not light reading!
It would seem the new law, at 100 times longer than our constitution, creates more bureaucracy to choke business in the financial sector. Were their excesses that led to the credit crisis? Yes. Much of the excess was at Fannie Mae (OTCQB:FNMA) and Freddie Mac (FRE), but they are not mentioned in the Financial Regulation bill. They are exploding their balance sheets again with problem loans. These two entities benefit from the implied backing of the U.S. Treasury, as they are government sponsored entities (GSE). They have already received $145 billion in TARP funds with expectations they will need more, much more. Here is an interesting site that tracks total bailout moneys disbursed and paid back.
These two entities were required to shrink their balance sheets in the original granting of TARP funds. We wrote on 12/30/09, “The U.S. Treasury announced on Christmas Eve, while everyone was sipping eggnog that the backstop limits on Fannie Mae and Freddie Mac (twins) debt would be lifted for three years. As part of last year’s rescue of the ‘twins’, they were limited to $200 billion each and supposed to reduce their balance sheets by 10% every year. That requirement was modified by treasury, allowing them to increase their loan portfolio by an average of 7% in 2009 then start reducing by 10% in the following years. According to the Associated Press, the 'twins' already account for 75% of all new mortgages written in the U.S. The Treasury (administration) was able to sidestep congress by issuing this change before the end of 2009.
The Fin Reg bill reminds your editor of a close up street magician, using sleight of hand to distract America’s attention. While the GSEs are exploding their balance sheets trying to pump air back into the real estate bubble that collapsed in 2008, the government is enacting controls on the rest of the financial sector. And we all cheer. How big will the hangover be for Fannie Mae and Freddie Mac?
Disclosure: No positions