Both Democrats and Republicans who voted for the bill say that it is not about "revenge" against Wall Street, but merely about prudent regulation and control. Are they right?In this article, we review the details of the bill that changes everything.
The Good
No Compensation for Lies – Requires public companies to set policies to take back executive compensation based on inaccurate financial statements (if you have been cooking the books, you have to give back the money).
SEC Registration - Hedge Funds that manage over $100 million will now be required to register with the SEC and disclose financial data. This should lesson the amount of false disclosures and scams, common for hedge funds.
Skin in the Game – Requires companies that create securitized investment products (ex. buying crappy mortgages and selling them to others) to keep at least 5% of them on the books. If the product is awful, the company selling them will suffer too, even if just a little.
Consumer Protections – Various excellent amendments for consumers. For example, not allowing credit card companies to increase - without warning - interest rates on those who already carry balances.
Consumer Financial Protection Bureau – A board that watches for consumer scams and abusive financial practices, with the ability to autonomously write new rules and regulations.
UpFront Fund – Large institutions will pay into a fund, similar to deposit insurance, that will pay for the liquidation of a company should it fail (taxpayers will no longer pay). Until now, a financial firm could take out the equivalent of life insurance on a fellow firm, and then short-sell it to death. Now, the firm doing the killing will have to pay for it. Creating the fund will damage profits in the short term, but should enhance stability in the long term.
OTC Derivatives Clearing Houses – Former OTC derivatives will now be cleared on an exchange, similar to futures. That means fewer shady, under-the-table, interconnected deals. It also means fewer cases of institutions falling like dominoes.
Vote on Executive Pay – Gives shareholders a non-binding vote on executive pay, beyond the voting rights that shareholders currently have.
The Bad
SEC Review – Requires companies to provide a chart comparing their executive's compensation to stock performance over a 5-year period. This is a little unfair, since a company that is well run can still have mediocre stock performance. Having said that, I couldn't think of anything better myself.
Federal Reserve Oversight – The Federal Reserve will now oversee companies with assets of over $50 billion. Although the idea sounds good in theory, I’m leery of anything that causes the independent Fed to cozy up to large firms any more than they already do.
Tough to Get Too Big – Larger institutions (whose failure would create more of a threat to the overall system) will have stricter requirements for leverage, capital, and liquidity. This provision somewhat penalizes companies for getting large, which is something I don’t like. Many argue that it is a necessary evil.
The Ugly
Financial Stability Oversight Council – “Make Risks Transparent” mandate. The idea is that the council will identify systematic risks to the system before they occur. Yeah, right. If it were that easy, every financial crisis in history would have been avoided. The true crises are the ones you don’t see coming.
Office of Credit Ratings at the SEC – This office (more bureaucracy) is supposed to regulate the credit ratings agencies, and address poor performance. Good luck with that. No two analysts can look at a company and come to the same conclusion. Interestingly, the council actually has the authority to de-register a ratings agency for continued inaccuracy. Maybe in a few years all of today's ratings agencies will be gone.
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In all, I welcome the Financial Reform Bill. It is what consumers were demanding, much of it makes sense, and it could be a lot worse. Will it prevent another financial collapse? Of course not. But it should make a next one a little less disastrous.
For further information, see:
http://banking.senate.gov/public/_files/FinancialReformSummary231510FINAL.pdf
