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Financial Reform: A Band-Aid for a Bullet Hole

|Includes:SPDR S&P 500 Trust ETF (SPY)

Yesterday marked the passing of one of the more important regulatory reform acts in our nation’s history.  Trust in financial markets is near an all-time low and the complexities of today’s Wall Street have far outgrown the oversights of the past.  At the beginning of the Obama era, today was expected to be met with enthusiasm and far reaching support.  However, Mr. Obama is struggling mightily to keep his head above oily water and markets are skittish; in short, there will be no parade at this time. 

The problem with financial reform, as I have stated previously, is that it is written by people that don't understand the game.  It would be like a banker trying to practice law, or a 5’ 4” medical doctor taking the tip off at Madison Square Garden.  This latest piece of legislation has taken the expansion of government to new levels.  Despite the best intentions this will do nothing to restore confidence in our financial system.  

Here are some of the gems from legislative floor.

All we can do is create the structures and hope that good people will be appointed who will attract other good people.”  Taken in the context, this could be a pretty funny joke.  It is less comical when you realize that legislators are building our financial system on “hope.”  The problem does not lie in whether there are good people in the system, the problem lies in incentives people have to perform specific actions and the consequences that come as a result of those actions.  Good people will make risky choices if the payoff for them is high enough.

There is simply no accountability for taking on abhorrent levels of risk and cashing out.  Short term profit fixation tied to executive bonuses spells a recipe for disaster, and the executives that take these risks and jump ship do not face any consequences.  More regulators will not convince the markets to act rationally.  The reality is that regulators will cover the financial system like a blanket of soot (smothering and crippling free markets) without any way to punish those people they find breaking the rules (if they ever manage to find anyone).

Mr. Shelby, a Republican was quoted as saying we have a bill “before us that expands the scope and the power of ineffective bureaucracies.  It creates vast new bureaucracies with little accountability and seriously…undermines the competitiveness of the American economy.” Take these words with a grain of salt, since this is the same Sen. Shelby who receives the majority of his funding from financial institutions.  

Regardless of his affiliations with Wall Street, his statement is spot on. Making something bigger does not make it better.  Expanding ineffective bureaucracies will not make them more effective.  If a boat cannot float, making it bigger will not help.  The correct approach would be to plug the holes in that boat (read: inefficiencies in the Fed, SEC and government as a whole).

Even Mr. Obama said that “unless your business model depends on cutting corners or bilking your customers, you have nothing to fear.”  Well, nothing to fear except for more paperwork, visitors from hapless government officials and rules that could be simple but furiously refuse to be so (see IRS).

Finally, Senator Dodd said of the American people; “They are asking that we do our best. They don’t ask for perfection. They know we have not solved every problem and that we are not going to bring back their homes and their jobs; but they expect us to respond to the situation that brought us to the brink of financial disaster. This is our best effort to do so.”

This is a telling statement.  It is almost as if Dodd is apologizing for pushing through an insufficient bill with the caveat that they did the best they could. The “best” they could have done would’ve been to cross party lines and build a lean bill without the unfettered expansion of bureaucracy.  Instead, they decided to restrict some trading, create another consumer protection agency and add more offices to the Fed.  Very forward looking, don’t you think?

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Stocks: SPY