Loopholes in Dodd’s Legislation
Lobbyists on K Street have been going through Senate Banking Committee Chairman Chris Dodd’s nearly 1,400 page Wall Street reform bill with a fine tooth comb looking for loopholes. Not exactly light reading, but a necessary task for people whose very livelihoods (well, extra zeros on their pay checks) depend upon finding ways around the new legislation.
And, by all accounts, there are plenty of loopholes.
Some jaded Republicans are claiming that the bill’s imperfect form is due to the fact that Senators Dodd and Schumer are accepting cash from lobbyists in exchange for going soft on specific parties. I don’t know that I necessarily believe that– but I don’t know that I necessarily don’t either. The legislative process is ridiculously complicated and I can’t even begin to comprehend all of the compromises that must be made in order to get a bill through committees, much less to pass in the House and Senate. So I’m certain that the more offensive, less palatable, stricter terms of the bill may have been taken out at some point for any of a variety of reasons.
But I digress.
The Huffington Post reports that on MSNBC on Tuesday morning, Sen. Bob Corker (R-TN), a Banking Committee member who worked closely with Dodd, said there was “no question” that Dodd’s draft contained loopholes. Among those “carve-outs” Corker mentioned: “Private equity firms are left out,” he said. “Hedge funds are left out.”
Good news for us, I guess. Maybe. I mean, a little oversight and greater transparency wouldn’t have necessarily hurt the industry, especially since most investors want that anyway.
According to the Huffington Post,
The list shows that private equity funds and hedge funds join community banks in being exempt from a number of requirements, such as having to create a “risk committee,” or having to pay into the $50 billion fund for liquidating systemically risky institutions that pose a “grave threat” to the system. Venture capital and private equity advisers are exempt from the section of the bill that requires hedge fund advisers managing more than $100 million in assets to register with the Securities and Exchange Commission.
Labor groups are concerned about the private equity exemption. Banking Committee member Sen. Jack Reed (D-RI) told the people at Huffington Post he planned to introduce an amendment to remove the private equity exemption.
Besides all of this, people are taking issue with the fact that Dodd’s bill (well, Obama’s reform plan) doesn’t do what they keep promising. All of the talk about fixing Wall Street and “Never again will taxpayers be on the hook because a company is ‘too big to fail.’ “– well, it doesn’t add up. In fact, the specific language, cited in the New York Post, says that failed financial firms must repay taxpayer money “unless the United States agrees or consents otherwise.” It also says that Washington can bail out bondholders to financial firms as long as it “determines that such payments or credits are necessary or appropriate to minimize losses.” So we could find ourselves bailing out firms indefinitely, whenever “necessary and appropriate,” which will, invariably be whenever the next financial crisis hits. And it will hit.
In order to be effective, the Post article suggests the bill really needs two things : 1) the ability to force unregulated derivatives (like those CDOs behind the Goldman fraud scandal) through central clearinghouses to increase transparency so that regulators have information about the volume of and prices of the derivatives being traded; and 2) to be able to limit the amount of leverage a firm can take on, regardless of how “safe” a firm appears. LTCM was one extreme example of this back in 1998, but even the kind of shit that was going on in 2008 was pretty ridiculous– and when one firm takes on an excessive amount of risk by borrowing beyond its means, one failure can cause chaos for the entire economy.
The bill is definitely not everything Obama is making it out to be. It is not, in its current form, going to prevent future failures on Wall Street or even keep us from bailing those failures out. Still, it will be better than nothing.
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