Posted by Stephen Taub in sox 404, Say on Pay, Sarbanes-Oxley, ratings, executive compensation, directors, credit-rating agencies, Credit Ratings, Consumer Financial Protection Agency, Christopher Dodd, Chris Dodd, bankruptcy, Banking
You have to hand it to Senator Chris Dodd. For someone who has heavily depended on the generosity of the largest banks and investment firms for his fund-raising, he has proposed a pretty impressive bill for further regulating the financial firms....given the current environment in Washington, of course.
I am not confident it will prevent another AIG, Lehman or Bear Stearns. The current poisoned partisanship in Washington on both sides of the aisle wouldn't support that kind of onerous bill.
And Dodd, and all other legislators, cannot change the culture on Wall Street, which fosters the feeling of entitlement to make extreme bucks in a short period of time taking great risks with other people's money. It's that environment that attracts a certain ilk to major in finance in college. Ask any one of them--they truly believe they will be millionaires by 30, probably younger. That's Wall Street's mentality.
As a result, Wall Streeters will spend an enormous amount of time figuring out how to make huge sums given whatever new regulations are imposed on them.
With these sad, sober short-comings in mind, I think if Dodd's bill is married to the House bill passed in December, we could wind up with a decent set of regulations and rules that may still not prevent a future implosion, but could give some of the players a fighting chance.
I am happy, for example, to see Dodd require stricter capital and leverage requirements for large financial institutions. I especially like the idea that bankruptcy judges will be reviewing large companies to determine whether they should be liquidated.
I think the over-riding goal of financial regulation should be to avoid the too-big-to-fail notion that requires the government to bail out the richest executives and traders, who then flip the finger at the rest of us and award themselves huge bonuses the following year, thinking it was their smarts that turned things around.
I also agree with Dodd that banks should be restricted from proprietary trading if they are using cheap FDIC money. However, I disagreed that banks should be restricted from owning or operating a hedge fund or private equity business.
Afterall, not one hedge fund or PE fund played any role in the financial crisis. Those hedge funds that performed very poorly or closed down altogether dealt with their investors privately. Those that erected gates to prevent massive redemptions irked their investors, who then made free market decisions whether or not to give that manager money again. But, taxpayers were not involved. And that should be the over-riding concern.
This said, I have no problem with the proposal requiring hedge funds with more than $100 million under management to register, as many have already done. Most large hedge fund managers support registration as long as they don't have to disclose their positions publicly, which no regulator thinks they should.
I also am glad Dodd proposed a consumer protection agency. Although ultimately it was the individual who signed on the dotted line for the mortgage they could not afford, I have no doubt that fast-talking used-car salesman types were pushing those mortgages on unsophisticated people.
Now, what I would like to see accompanying this feature are stiffer hurdles and penalties for walking away from mortgage and credit card debt.
Dodd also wants to crack down on derivatives, which is a good thing, by requiring all OTC derivatives trades go through a clearinghouse and most trades conducted on an exchange. His bill also requires traders to post margins for un-cleared trades and swap dealers and major swap participants will be subject to capital requirements. However, his proposal is similar to the House's, which allows for exemptions for certain special interest groups such as commercial end-users. Too bad.
I agree with CFTC chairman Gary Gensler, who is pushing hard for all trades to be brought to a public exchange or platform.
I also like the proposal calling for an Office of Credit Ratings and allow individuals to sue credit rating agencies that do a lousy job. I would go a step further and make it illegal for a company to pay a credit rating agency to rate their bonds. Of course this is a lucrative business. But it also creates the kind of conflicts that arise during every market bubble. Sadly, I doubt this cycle will change much.
In the corporate governance area, I am glad to see Dodd, as did the House, recommend proxy access, which would allow certain shareholders to nominate their own directors under certain conditions. This is a big deal. It is potentially much more significant than Say on Pay, which Dodd also proposes, but which I think is overrated. He also has a provision for clawbacks, which will require executives to return compensation received based on performance that subsequently proved to be false.
And I also applaud one provision of the House bill that is missing from the Dodd proposal. He did not exempt the smallest companies from complying with the internal controls feature of Sarbanes-Oxley. I am applauding loudly, if you can't hear me.
So, all in all Dodd did a good job.
But, sadly, I am sure we will have another huge meltdown sometime in the future, since he did not require a different ilk of person from working on Wall Street.