The Blog Of The Securities Industry Professional Association

Financial Reform Or Fairy Tale?

Sen. Dodd’s plan is for make believe world

Lame duck Senator Dodd yesterday unveiled the long awaited financial reform bill to much hoopla and a yawn from most of Wall Street. The plan revealed what has long been expected, A greater role for the Fed to intervene in a crisis situations and assess credit risk across a broad base of financial institutions. Perhaps congress can get together and grant the Fed the right to control interest rates while they are at it? Maybe Congress could give the SEC the power to curb or eliminate things like naked short selling, buying mutual funds yesterday with today’s news and cracking down on illegal ponzi schemes?

Seriously, is this the best our Government can come up with after 3 years of financial meltdowns and beat downs? I thought one of the primary jobs of the Fed was to assess economic conditions and asses the risk to the country of inflation or deflation? The Fed is supposed to watch for the next big bubble that could blow up the stock markets, the banks and the country and is supposed to constrict the economy by using his ‘magic interest rate wand’ like the fairy God mother to always provide steady growth and smooth landings. Throughout the 1990’s we had to listen to Greenspan and his obsession with the stock market as a way of measuring whether interest rates should be higher or lower. Greenie brought the rates down so low that buying a house with no money down in the early part of this decade was easier then buying a $20,000 Honda in the 1990’s. This common sense cultural change should have been a giant red flag for Greenie and Bernie over the last ten years but instead they buried their heads in the sand. In fact, it wasn’t until the largest institutions in America started to collapse that Bernie took his head out of the sand long enough to realize a problem existed.

So now comes Lame Duck Dodd who is going to give the fed the power to do what they basically failed to do in the past. This continues a Government and Regulatory policy of the last 20 years in which sweeping changes are approved and rolled out on the regulatory red carpet only to be thrown aside and not enforced. Think about how many regulatory rules were and are still being violated yet the prevailing theme on Wall Street is that any violations and accompanying fine is merely a cost of doing business. Bear Sterns made almost a billion dollars doing illegal mutual fund trades yet they paid a mere fraction of that amount in a fine. Recently Bank America and Merrill Lynch conspired to defraud shareholders out of almost 4.5 billion, yet the SEC initially tried to fine them a scant 33 million dollars. Imagine walking into a bank and holding it up and walking out with 1 million dollars and then a few months later the Prosecutor makes a deal with you in which you get no jail time and have to return about $30,000 of the one million you stole. Would that deter or increase robberies in the country?

The sad truth is that there are enough regulatory rules across the board to ensure a safe and stable market yet these rules are only enforced for the small mom and pop operations not the behemoths on Wall Street. Imagine the fear on Wall Street today had Dodd come out with legislation that recidivist firms with repeat violations regardless of size must be suspended from any and all activity for a period of time? Wall Street Firms would be in a race to hire Compliance officers, assess their own risk and POLICE THEMSELVES for fear of losing market share due to greed and non compliance. CEO bonuses would no longer be driven solely on profits from risky and often illegal activities but would probably be based on Compliance with all applicable Securities rules while conducting a good clean business.

The one interesting part of Dodd’s reform is the power by the Fed to ‘break up and or consolidate” institutions that pose a risk or have gotten too big. I call this part of the proposal the “Goldman Clause”. There is no doubt in my mind that many smaller rivals will suddenly be deemed a ‘huge risk to our economy and financial system”….and Goldman will do the honorable and ethical thing and absorb these smaller companies into their rank and file as a favor to the Fed. Thank goodness we have Goldman there to help! If I was the CEO of some of the rivals of Goldman I would be shaking in my boots right now and would be divesting of all margin accounts lest The Fed and the Goldman Alumni at the Treasury deem you a risk and turn you over to their buddies. Under this scenario the Fairy tale of Dodd can quickly become a nightmare and if you don’t think it could happen just take a look at AIG and how Goldman was able to not only avoid bankruptcy but get paid 100% on the dollar for their bad investments with tax payer money.

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March 16th, 2010


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