The Dodd-Frank Act (DFA) financial reform bill was signed earlier this month and stretches over 2300 pages long, but no where does it spend a sentence to regulate two of the major players in the financial meltdown- government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Both are exempted. The bill means very little if a primary cause of the 2008 crisis was ignored.
What's in the bill? Full disclosure- I have not read it- but apparently DFA has a goal of monitoring systemic risk, regulating certain derivatives contracts, raising FDIC levels, forcing large hedge funds to register with the SEC, barring banks from proprietary trading (the so-called "Volcker Rule") and creating a new consumer protection regulator (CFPA) and a panel for risk detection. See the legislation's highlights plus a longer version of a summary.
Before we go further, let's ask a question. Was the problem that led to the financial meltdown that the federal government did not have enough control over the financial industry? In other words, if you have a heart attack, does the doctor provide a lobotomy?
At the signing, Obama stated "Because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more taxpayer-funded bailouts. Period.” I like the tenacity, but fear it cannot be true (and I would ask Mr Obama a follow up question whether we will be asked to foot the bill for K-street's mistakes). A continuing problem is that the new bill does not address the giant elephant in the room and assumes incorrect causal factors for the financial crisis of 2008.
The problems. Industry commentators seem ok with DFA because it alters the landscape but does not fundamentally change it. However the Washington Post called it "the most ambitious overhaul of financial regulation in generations"- pretty standard stuff.
Fannie and Freddie currently own or guarantee about $5.5 trillion in mortgages- more than half the residential market. How can a financial markets reform bill ignore this? A primary cause of the financial mess was very low rates for a period of time and F&F's efforts to get unworthy borrowers into loans (easy money + subprime lending). Any gains by these GSEs are privatized, but the public foots any losses- a bad combination. No other company would not have been permitted to borrow to the degree the GSEs did- simply, they were given a much longer leash because of an implicit (and later explicit) guarantee by the Federal Government on their bad bets.
Misplaced concern becomes the Consumer Financial Protection Agency (CFPA). One general problem is the drafter's apparent view that credit prior to the bubble was too expensive and predatory, thus a need for new consumer protections. The artificial boom and bust cycle is the problem here- not the bursting of a bubble because consumers were tricked into bad mortgages. Credit was too cheap, and too many un-creditworthy consumers were getting loans because of skewed market incentives.
Instead of speaking about this, the new CFPA nominee Ms. Elizabeth Warren gave us a glimpse into her dreams.... “I would like to see a world with two-page mortgage disclosures, two page credit card agreements, and two pages over draft contracts.” HA! Aren't those lyrics to a John Lennon song? The reason we have 45 page credit card forms and 55 signature pages at my 6 hr home closing is because of the Truth in Lending Act, the Patriot Act, and other federal legislation.
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