• O’Reilly Tonight: Financial “Reform”

      On The Factor tonight, Bill wants to discuss the pending financial “reform” bill. I put “reform” in quotes, because the 1,336 page bill is likely to do little more than create a new maze of unproductive regulation. Here are five new agencies the bill would create:

      — Financial Stability Oversight Council
      — Office of Finance Research
      — Office of National Insurance
      — Office of Credit Rating Agencies
      — Bureau of Consumer Financial Protection

        A “Bureau of Consumer Financial Protection” sounds nice. But the more (and the more loudly) government devotes efforts to protecting ordinary investors from Wall Street, the less incentive ordinary investors have to protect themselves.  Pretend to remove the risk (or severely dilute the risk) of personally suffering financial losses, and ordinary, non-professional investors lose their incentives to personally exercise prudence, caution, and good judgment.

        Bob Litan, writing for the Huffington Post, also points out that the bill restricts funding for start-ups:

        Under existing law, startup companies can raise money easily and quickly from “accredited investors” — individuals with substantial wealth or income. There is no need for the companies or the investors to gain approval from any state or regulatory official.

        All of this would change if Section 926 of the Dodd bill is included in any final reform legislation. That section would require, for the first time, companies seeking angel investment to make a filing with the Securities and Exchange Commission, which would have 120 days to review it. This would both raise the cost of seeking angels and delay the ability of companies to benefit from their funding.

        The negative impact of the SEC filing requirement would be aggravated by the proposed doubling of the net worth or income thresholds required for investors to be “accredited.”

        The bill has also been widely criticized by Republicans for having a $50 billion “bailout fund.” But that’s misleading– the “bailout fund” is funded entirely by a tax on banks, and is supposed to be used to pay for the bankruptcy process of failing banks -- not to keep them in business.

        The real solution is to forbid any bailouts in the future, and stop propping up failure. Then financial markets will treat risk appropriately.

        Instead, the bill is filled with onerous requirements and new regulatory authority for bureaucrats:

        — If the FSOC recommends, a financial company could not acquire or merge with another company if total consolidated liabilities exceed 10% of aggregate liabilities of all financial companies. (p. 490)

        — “The Board of Governors may, by regulation or order, establish prudential standards for non-bank financial companies supervised by the Board of Governors and bank holding companies… that may include a contingent capital requirement; enhanced public disclosures; and overall risk management requirements.” (p.88)

        — “The Board of Governors shall issue regulations requiring each bank holding company that is a publicly traded company and that has total consolidated assets of not less than $10,000,000,000 to establish a risk committee.” (p.99)

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