Texas Lawyer Ted Cruz made a splash among the political chattering class with a seemingly impressive fundraising haul in the first reporting period for his U.S. Senate campaign. 

 The Cruz campaign  was quick to boast about its success.  In reality, the numbers tell a different story.  According to the FEC, Cruz took in 61 donations over the federal contribution limit, including six donations over $9,000 and two $10,000 contributions received on the final day of the reporting period.  

Digging further, it becomes clear that Cruz’s financial report is not the strong showing among the “grassroots” or Tea Partiers his campaign claims. More than 70% of the reported contributions were $500 and up and more than 200 contributions came from lawyers, attorneys or others in the legal profession.  

In short, Cruz claimed to have raised $1 million.  He appears to have exaggerated that figure by close to $150,000.  Did he ask friends to give in excess of the federal contribution limits in the final hours to create a paper dragon?  Looks that way... 

Search for Rafael Edward Ted Cruz if you want to read the FEC report for yourself.

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While investigating the upcoming race to replace RINO Kay Bailey Hutchison in Texas, it has come to our attention that there is a young candidate claiming to be a movement conservative, but who probably actually fits more into the mold of the Federalist Society and other Ivy League lawyer elites.

Former Texas solicitor general, Ted Cruz, was quoted recently in the Washington Post saying that he sees the 2010 election "as incredible moment in time" and predicts a "real move in the coming year" toward calling a convention - referring to a Constitutional Convention.

Ted Cruz and the Texas Lt. Governor - David Dewhurst, a true establishment politician who is commonly referred to as "Dewcrist" because of the personal and political characteristics he shares with the former governor of Florida - have both staked out a Constitutional Convention as a plank in their platforms. 

Ted Cruz is currently running aggressively for the Senate seat and has started downplaying his support for his Ivy League ways in this pursuit.

He wants to convince Texas Republican primary voters - a group that is not usually taken with the Ivy League credentials Mr. Cruz so proudly wears while in D.C. - that he is part of the grassroots movement that is bringing real change to Washington.

The problem is that if Ted Cruz were to get elected somehow, how would anyone really know where he stands on the critical issue of protecting the U.S. Constitution?

Will he be with his Ivy League colleagues? Or would he stand with the Tea Party Patriots and Founding Fathers? 

Right now Washington D.C. is literally overrun with Ivy League elites - think Barack Hussein Obama - who think they're smarter than the Founding Fathers and who regard most Americans as sheep to be herded.

Let's hope Texas doesn't go from RINO to worse this election. Hutchison was not a true movement conservative, but at least she hailed from the heartland.

Incidentally, Ted Cruz is in company with Jesse Jackson Jr. on the matter of wanting to rewrite the U.S. Constitution.

We haven't heard much from him lately, but before he went into hiding, this speech on the floor of the U.S. House by then Congressman Jackson gave us an idea of the debates we could expect at Ted Cruz's Constitutional Convention.

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Perhaps a voter from Delaware said it best when he called the Kilroy provisions in Dodd-Frank act on behalf of the trial lawyers, "still another reason to keep the Democratic Party contribution spigot wide open." 

It's no wonder that Nancy Pelosi made sure that Congresswoman Kilroy was on the conference committee of the so called Wall Street Reform bill when it was being finalized. Neither of them wanted to risk having the trial lawyer giveaway provisions stripped out of the final version of the bill.

It was very encouraging to read U.S. Congressman Jeb Hensarling (R-TX) state that the Dodd-Frank Act that would only benefit "trial lawyers and government bureaucrats." Perhaps lobbyists should also be added to that illustrious group. 

So while it great that there was overwhelming opposition to the Dodd-Frank bill from conservatives in Congress, it is just a little worrisome that the Pledge to America didn't specifically address the trial lawyer giveaways in the Dodd-Frank Act or mention the damage the provisions have caused in the bond market or the pain in store for small businesses, local and state governments, and taxpayers everywhere.

It is very likely, however, that a victory for conservatives in November will signal a new ability and willingness to roll back the trial lawyer inspired language that is already causing problems in every aspect except, of course, for the ability of Democrats - like Pelosi, Kilroy, and Frank - to raise loads of cash from lawyers for the upcoming election.

On to November, on to Victory, and on to the Repeal of the Dodd-Frank liability provisions sponsored by Congresswoman Mary Jo Kilroy and Speaker Nancy Pelosi!

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This comment on a Redstate.com post back in July precisely identified the key problems with the Dodd-Frank act. As the voters in Delaware and New Hampshire make their voices heard in opposition to higher taxes, trial lawyers, and new government bureaucracies; our friends in Congress need to keep the pressure on to repeal the Dodd-Frank act and to get rid of the Kilroy-Pelosi amendment.

See Today's Wall Street Journal For An "Unintended" Consequence of The Dodd-Frank Disaster

Ausonius Thursday, July 22nd at 10:55AM EDT (link)

On page C1 and continued on C8 there is an article about Ford pulling out of plans to issue new bonds backed by packages of auto loans because the ratings firms in America have been almost terrorized by the Dodd-Frank Bill.

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In this excellent blog post from RadioViceOnline, the author points out that the new legal liability provisions in the Dodd-Frank Act aimed at enriching the trial lawyers will actually make it more difficult to build new police and fire stations with municipal bonds.

Dodd/Frank financial reform…haste makes confusion

September 7, 2010 at 3:57 pm by SoundOffSister 

The recently enacted Financial Reform bill, brought to us chiefly through the efforts of Senator Dodd (D. Ct.) and Congressman Frank (D. Ma.), was, like much of the handiwork of this Congress, passed in haste. Remember, something had to be done immediately so that we never have another financial meltdown like we just had?  This bill, too, was ponderous, consuming 2300 plus pages, and, like Obamacare, probably wasn’t read by anyone who voted for it.  Well, as Speaker of the House Pelosi (D. Ca.) would have said, now that the bill has passed, we can see what is in it. 

Within days, what we saw was problematical, and, I’m guessing this is the tip of the iceberg.  Here are just two of the issues.

The first involved the $1.4 trillion asset-backed securities market.  This is the market where corporations and municipalities sell bonds to raise funds for certain specific projects.  As an example, your town might issue bonds to cover the cost of a new police and fire station. 

What happened here was that under SEC regulations, any bond issue sold must have a rating from a “credit rating” firm, such as Moody’s or Standard & Poor’s.  The Dodd/Frank bill, however increased the legal liability of these credit rating agencies (a lawyer’s relief act), so the companies refused to provide ratings in bond deals.  The bond market screeched to a halt.  After a few days, the SEC had to “suspend” its long standing regulation of requiring credit ratings, and allow the bond deals to proceed without a credit rating.

The second involves the process by which the FDIC gauges the soundness of banks.

Banking regulators were “weeks away” from finalizing a long-running effort to set risk-based capital standards for smaller, less-complex banks, say people familiar with the matter.

But now, thanks to the Dodd/Frank Bill, it is anyone’s guess when that will happen.  Bank regulators had planned to use credit ratings as part of that process, but the bill bans the use of credit ratings in setting those standards. 

As Comptroller of the Currency John Dugan, an FDIC board member said,

I do worry about there is a little bit of throwing out the baby with the bath water. It might be worth Congress taking a second look at.  [emphasis supplied]

Anyone think Senator Dodd and Congressman Frank will do so?

Please visit RadioViceOnline to leave a comment. 

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Republican victory in November will make it possible to repeal the trial lawyer loving, investor and taxpayer crushing, Kilroy-Pelosi provisions of the Dodd-Frank disaster of a financial regulation bill.

Republicans eye Frank’s chair

Tue, 2010-08-31 08:40 — Andrew T. Berman

Republicans are eyeing the powerful chairmanship of the House financial services committee held by Barney Frank, the Massachusetts Democrat, as one of the biggest spoils of victory in November’s midterm congressional elections.

Mr Frank, whose sharp tongue makes him one of the Democrats’ most formidable congressmen, pushed through Wall Street reform against Republican opposition and will have a key role in determining US housing policy should his party retain its majority in the House. Polls show control of the House of Representatives is too close to call while the Democrats are expected to retain control of the Senate, albeit with a reduced majority.

 

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"...the lawyers have still another reason to keep the Democratic Party contribution spigot wide open." Ron Wohlust, Dagsboro, Del.

 

The following letter to the editor appeared in the Wall Street Journal on August 23, 2010, in response to U.S. Rep. Mary Jo Kilroy's defense of her anti-taxpayer, anti-investor, pro-trial lawyer amendment to the Dodd-Frank Act.

 

Main Beneficiaries Aren't Investors

Rep. Mary Jo Kilroy's letter ("It's Right to Make Ratings Agencies Take Responsibility," Aug. 10) attempts to justify her famous amendment as protection for helpless investors. Not mentioned is that her provision provides a sop to favored Democratic Party financial supporters, namely the trial lawyers and the public employee unions.

The rating agencies become de facto guarantors of the issues they score. Whether or not they were negligent in their work, any default in a rated security will be followed by lawsuits brought by investors and especially by public employee pension fund administrators. The latter have become eager securities regulation plaintiffs as they seek to shore up unfunded deficits caused by unsustainable levels of promised benefits. Securities lawyers are happy to take these big-fee cases, most of which result in settlements coerced by the high cost of defense and willingness of juries to spend other peoples' money. The rating agencies, faced with a risk to their very existence, understandably responded by declining to issue ratings, and the provisions had to be suspended to avoid a shutdown of the bond markets.

With unlimited liability attaching to their every move, it's difficult to see how the raters can ever charge enough for their services to compensate for their risks. But the lawyers have still another reason to keep the Democratic Party contribution spigot wide open.

Ron Wohlust

 Dagsboro, Del.

 

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Buried in the Dodd-Frank Act are provisions that make it very difficult for local governments to issue new bonds to build roads and schools and to fund other essential services normally provided through state and local governments. 

These new liability provisions - which were included in order to gain political favor with the trial lawyers - will negatively impact the basic services for local taxpayers and will result in less available financing in the form of municipal bonds which are used to pay for local infrastructure and services.

With the loss of these funds, the overall municipal budgets across the country will necessarily be negatively impacted, putting also at risk the salaries used to pay for teachers, fire fighters, police, EMS, and other essential personnel.

The law firm of Skadden Arps has written an excellent analysis of the Dodd-Frank Act. In it they point out that delays in bringing new securities to market, along with increased administrative, compliance and operating costs and increased exposure to third-party claims, will negatively affect the municipal bond market.

Local taxpayers will have to make up for lost revenue from municipal bonds used to provide for these essential services and infrastructure needs through higher taxes; all so that the trial lawyers can have yet another source of income.

This is not reform. This is a payoff to a powerful special interest group at the expense of taxpayers at the local level.

If you are concerned about these developments, we encourage you to contact your elected local and state elected officials. Also contact the Members of Congress and the U.S. Senate who represent you. Follow us on Twitter to show your support for our efforts to educate the public.

Please write your Congressman and U.S. Senators to express your opposition to these provisions. Please follow us on Twitter and Facebook to stay informed on this issue. Together we can make sure this relatively unknown provision is removed. 

Please click here for the full report; or, here for the section regarding the new liability provisions. 

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Friday, July 23, 2010

 Kilroy Keelhauls Economy with Sweetheart Deal

As Congresswoman Mary Jo Kilroy updates her resume for her post-November job hunt she can add a new achievement: causing economic chaos by bringing a $1.4 trillion market to a grinding, painful halt. As the result of a Kilroy-authored provision of the Dodd-Frank financial overhaul law, the world's three largest bond rating agencies said their credit ratings could no longer be used in documentation for new bond sales. Because many types of bonds are required by law to include credit ratings in their official documentation, the bond market was completely shut down with no asset-backed bonds put on sale this week. 

 I'm not sure how many jobs the collapse of a $1.4 trillion market destroys or fails to save, but I'm sure it's a lot. And beyond the killed jobs, the ramifications for consumer credit will be devastating: Ford Motor Co. has already been forced to scuttle a debt deal to finance auto loans.

 [For a good discussion of Kilroy's blunder, watch the video here with Ford Motor Company CEO Alan Mulally. It gets relevant around 4:21.]

 Think about it: Nobody can get a loan to buy a car because Congresswoman Kilroy just killed the bond market. If nobody can get financing then there aren't going to be many cars rolling off the lot. If nobody is buying cars, there's no need to make cars (or car parts). If there's no need to make cars or car parts, there's no need for workers to be employed at Honda Marysville (Congratulations to them on cranking out their 10 millionth vehicle earlier this week!).Worthington Industries would likely have to make cutbacks too as the demand for automobile steel tanks. So where does that leave us? Car dealers, car manufacturers, steel workers, the drivers who deliver the cars, the workers who make the car parts, and all the support personnel at all the previously mentioned entities left without work. Of course, you can't turn on the TV without seeing a commercial for a car dealership so there are going to be some cutbacks at the TV stations too from the loss of advertising revenues... but I'm sure, by now, you see the pattern: it's all connected. It's not so much a financial overhaul as an economic keelhaul. No bond sales = no consumer financing = no consumption = no jobs.

And why'd Kilroy do it? To make the financial system more accountable? To right horrific wrongs?

Nope. She did it to excite the erogenous zones of one of her key constituencies: the trial lawyers! This is an election year, and she needs cash.

The Kilroy provision (or Kiljobs provision, if you prefer) renders ratings agencies "expert", and thus, exposes them to a new liability similar to that held by auditors. A major difference, of course, is that auditors are liable for their examination of what is and bond raters are now liable for predictions of what may be. In effect, bond raters now face a level of liability greater than anyone else in all of business: in order to avoid being sued into oblivion bond raters must predict the future accurately every time at bat.

Congresswoman Kilroy knows full well that no one bats a thousand. Just look at her own political party and the "Summer of Recovery".

The impossibility of bond raters getting it right 100% of the time is exactly why Kilroy authored the provision making them legally liable for not having the foresight of Nostradamus: it's food on the table and Benzes in the driveway for her trial lawyer donors.

When they thrive, she thrives.

But we don't:

According to the Wall Street Journal, the Kilroy provision "has done the exact opposite of the bill’s intended efforts at creating more transparency and openness. It is forcing more deals underground, where there will be less access to capital and less opportunity for public scrutiny." Where only people who have the cash and theconnections can have access and reap the benefits.

Congresswoman Kilroy has sold us up the river again, pretending to pass Wall Street reform legislation while rewarding her donor base. Let's hold her liable in November.

Posted by MainStreetOhio15th at 10:48 AM  

Labels: 2010 Election, Barney Frank, Chris Dodd, Dodd-Frank, Honda Marysville,Mary Jo Kilroy, OH-15, Ohio's 15 Congressional District, Worthington Industries

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Breaking Dishes in the Credit Market

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As professor Mason predicted, state and local governments, small businesses and tech startups, services at the local level, and job creation will all be disrupted as a result of the Dodd-Frank bill trial lawyer provisions.

Like reversing the epigram in T.S. Eliot’s “Murder in the Cathedral,” Congress’s last temptation in financial reform is to “do the wrong deed for the right reason.” The credit rating agency liability concepts in both the House and Senate financial reform bills are “wrong deeds” in this sense.

A number of academics, industry bodies, regulatory agencies and Congress have been working on ideas to strengthen the securitization process. As we know only too well, rating agencies downgraded thousands of Triple-A residential mortgage-backed securities (RMBS), which, because of interconnected investor rating requirements, had a devastating impact on the financial system.

It is reasonable to assume that some types of conflicts of interest may have incentivized rating agencies to provide inflated ratings. Leaving aside whether a conflicted issuer (who wants to sell more AAA bonds) or a conflicted institutional investor (who wants high-yielding AAA bonds because he doesn’t bear any responsibility for loss) may have a worse incentive to demand inflated ratings, many hold rating agency exemption from liability for the quality their ratings to blame.

But most who advocate rating agency liability have imagined liability on par with that elsewhere in the financial system. Not, apparently, those in Congress. Hence, Congress is entertaining a strange provision to set a lower pleading standard for rating agency liability, making it easier to sue rating agencies than other financial market participants.

The liability standard for rating agencies established by the House bill hinges on “gross negligence as the requisite state of mind,” while the Senate bill would make it sufficient to show that the credit rating agency “failed to conduct a reasonable investigation” or to “obtain reasonable verification” of factual elements used in the rating process.

Both of those standards are lower than liability imposed on private securities lawsuits under the Private Securities Litigation Reform Act (PSLRA), making the agencies the lightning rod for securities lawsuits. That doesn’t make sense unless you want to reduce incentives to rate small businesses, municipalities and emerging technologies, increase their cost of capital, and weaken our already anemic economic recovery.

This form of discriminatory liability is bad law. As Warren Buffett testified before the Financial Crisis Inquiry Commission, rating agencies “made a mistake that virtually everybody in the country” — including bank regulators with true inside information — made. We didn’t know what we didn’t know. Hence, it is easy — even if specious — to argue after the fact that one should have done something different to avoid a loss without reference to materiality or ex ante information.

The real question for regulatory reform, then, is how can we know more so that rating agencies and others can make better decisions for which they can reasonably be held liable? The key — discussed early in rating agency hearings and the press but lost in the political shuffle of reform — is the due diligence function. Due diligence, it seems, has been confused with rating agency analytics and has therefore not gotten the attention it should receive

Third-party due-diligence firms, like Clayton Holdings in Connecticut and the Bohan Group in San Francisco, are hired by investment banks to re-underwrite a sample of mortgage or other loans in the pool to be securitized as a check on how well the pool matches the seller’s stated underwriting standards. A sample of sufficient size should yield a reasonable representation of the quality of loans in the pool.

But as mortgage lending boomed, many due-diligence firms scaled back their statistical sampling at Wall Street’s behest. “By 2005, the firms were evaluating as few as 5 percent of loans in mortgage pools they were buying, down from as much as 30 percent at the start of the decade," according to Kathleen Tillwitz, a senior vice president at DBRS, a credit-rating firm.

Subprime mortgage security prospectuses do not enumerate the methods or findings of due-diligence reports, and the firms are not authorized to release the detail of the reports, even to the rating agencies, without written permission from the underwriter or trustee. While trustees used to allow junior investors to hire due-diligence firms to perform follow-on analyses, trustees have rebuffed such investor requests since early 2008. As a result, the market continues to impose a “lemons discount” on mortgages, and both the primary and secondary securitization sectors remain suppressed.

It seems, therefore, that the first step to securitization rating problems would be to require minimum levels and reporting requirements for due diligence.

Moreover, the due-diligence problem and the causes of the financial crisis are largely confined to structured finance. The unduly harsh liability concepts, however, penalize issuance in all sectors, even those where rating agencies provide valuable and high-quality information. Sectors like municipal bonds — which will be crucial to smoothing the local effects of the crisis in the face of declining property tax revenues — will be needlessly affected by the proposed legislation.

U.S. capital markets are one of America’s greatest contributions to the world, enabling the creation of roads, schools, small businesses and new technology in scores of countries and towns around the globe. At a time of great economic volatility and sluggish job growth, Congress and the president should not jeopardize capital markets by unnecessary and punitive proposals.

Let’s craft reform that relates to the specific causes of the crisis — even including removing ratings mandates for investors — but let’s keep the focus on helping the industry move forward without creating needless impediments to growth.

Joseph R. Mason is the Hermann Moyse Jr./Louisiana Bankers Association Professor of Banking, Louisiana State University, and senior fellow at the Wharton School.

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Now that the Senate has passed the massive 2,300-page Dodd-Frank bill, paving the way for the President to sign this unprecedented bill into law, it is useful to look at what the bill does and does not do.  Proponents have long claimed that this measure is vital to reining in Wall Street excesses, to ending the ‘too big to fail’ political falsehood that led to numerous and costly taxpayer bailouts of failed private companies, and to achieving financial stability by eliminating any chance of risk in our economy, ensuring that always elusive goal of liberals:  a risk-free society.

Of course, none of those claims is correct.  Instead of addressing the obvious flaws that led to the very real financial crisis that began in 2008, the Dodd-Frank bill’s labyrinth of regulatory overreach and ill-conceived changes is certain to injure our economy for years if not decades to come.

The fundamental principle of any reform has to be getting the right diagnosis, because without that you cannot possibly hope to find the right cure.  The Dodd-Frank bill fails that crucial test in several ways.  

Killing Job Creation 

First, and most importantly in this period of high unemployment, there is nothing in this bill that will help create jobs and much that will impede us in that goal.  Through its numerous provisions that ban and ration credit products, make credit more costly and less available, and reduce consumer choices, the Dodd-Frank bill will be a private-sector job killer at a time when government policy ought to create an environment where private lenders lend responsibly to creditworthy consumers and small businesses.  In fact, the only professions that may benefit from this bill are trial lawyers and government bureaucrats.

That sad fact gives way to yet another critical flaw in the Dodd-Frank bill:  Massively expanding the size of government’s regulatory bureaucracy with new layers, agencies, and required rulemakings does not mean that oversight will get any better.  In all likelihood, consumers will be worse off as the new alphabet soup of merged and restructured agencies struggle to organize, hire staff, stake out their jurisdictions and write an estimated minimum of 12 new government reports, 44 studies, and 243 new rulemakings required under the bill.  All the while, banks and investors will sit cautiously on the sidelines waiting out the regulatory uncertainty of Dodd-Frank before they resume lending, Thus hampering our prospects for economic growth.

Despite Democrats claims that this bill will end taxpayer-funded bailouts, the bill creates a permanent TARP-like government bailout mechanism that is specifically designed to bypass the time-tested bankruptcy process for failed non-bank financial firms.  Repeating the mistakes of TARP and making them permanent only institutionalizes the inherent unfairness of the government’s picking winners and losers.  By bureaucratic fiat, the government can now take over a failed or failing company and borrow from the Treasury to pay off politically favored creditors.

The crony capitalism approach of rewarding politically favored allies over other similarly situated parties allowed the Obama Administration to favor the UAW over secured creditors in the bailout of GM, and foreign bank counterparties to be paid 100 cents on the dollar in the bailout of AIG while others with less political clout got a haircut. 

No Fannie or Freddie Reform 

Finally, the Dodd-Frank bill is singularly noteworthy for what it does not do:  It does not require any reform whatsoever of Fannie Mae and Freddie Mac, the two government-sponsored mortgage giants whose failures have already cost taxpayers $147 billion and counting.  

Democratic Strong-Arming 

Repeatedly, other conservatives and I offered taxpayer-protection amendments to end the bailouts of Fannie and Freddie, recoup lost taxpayer money and end the hybrid public-private status of these two financial Frankensteins.  At first our efforts were simply voted down by the Democratic majority.  Later, when the omission of Fannie and Freddie from the bill became indefensible, our amendments were declared non-germane to the bill’s subject matter, which covers every aspect of economic activity from prepaid gift cards to a bank teller’s Christmas bonus. 

Some may say the Dodd-Frank Wall Street bailout bill is as much a product of a flawed process as it is of the government-knows-all philosophy of its authors.  I disagree.  As usual the Democrats failed to grasp what the American people intrinsically know to be true:  You cannot outlaw risk and you cannot achieve a stable economy by sacrificing prosperity.  Unfortunately, I fear those truths will be reinforced with a vengeance once the Dodd-Frank bill is signed and the Obama Administration begins its implementation.

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By Sydney M. Williams, from Thought of the Day

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Recently, the U.S. Chamber Institute For Legal Reform wrote to the Chairman and Ranking Member of the U.S. Senate Banking Committee warning them about the new liability provisions for ratings agencies contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

They warned that the Dodd-Frank bill would create major funding consequences for state and local governments, consumers and taxpayers, as well as for businesses. In effect, state and local taxes will increase, consumers will get hit with higher costs, and the costs of capitalizing a business will increase as a result of the law and its impact on credit rating agencies. 

So despite being urged by the U.S. Chamber Institute For Legal Reform to seek alternative measures to achieve greater accountability over the credit rating industry and avoiding adverse consequences on the broader capital markets, Congress instead did what the lawyers asked for at the expense of taxpayers and businesses. 

Supporting the Institute For Legal Reform's argument is a well researched scholarly paper written by Dr. Anjan Thakor of the John M. Olin School of Business at the Washington University in St. Louis, Missouri. Dr. Thakor is considered an expert in the finance sector and has been a key witness in a number of federal cases involving banking litigation.

In his paper, entitled "Economic Consequences of Proposed Changes in NRSRO Regulation," Dr. Thakor concludes that the proposals to change the legal liability standard for NRSRO/rating agencies will likely result in credit ratings becoming less informative about the fault risks, less responsive to new information, and may contribute to ratings becoming downward-biased. Thakor further asserts that this will likely lead to a higher cost of capitol for states, municipalities, and corporations and less aggregate corporate investment.

Despite being urged by the U.S. Chamber Institute for Legal Reform to seek alternatives measures to achieve greater accountability over the credit rating industry, and avoiding adverse consequences on the broader capital markets, Congress instead passed the negligence liability standard on credit rating agencies.

For a download of Dr. Thakor's paper, please click the link below and search Dr. Thakor.

"Economic Consequences of Proposed Changes in NRSRO Regulation"

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"Potential competitors either will be deterred by all of the new regulatory requirements or be destroyed by the liability provisions set up in the bill. The lack of competition led to poor quality ratings in the runup to the crisis. This bill perpetuates and, in fact, worsens that problem."

Statement of U.S. Senator Richard Shelby

Ranking Republican Member of the Senate Banking Committee

Congressional Record, July 15, 2010 pp. S5875 - S5877

Mr. SHELBY. Madam President, I rise today to offer some remarks on the Dodd-Frank regulation conference report, which is now before the Senate.

Nearly 2 years ago, the financial crisis exposed massive deficiencies in the structure and culture of our financial regulatory system. Years of technological advances, product development, and the advent of global capital markets rendered the system ill-suited to achieve its mission in the modern economy. Decades of insulation from accountability distracted regulators from focusing on that mission. Instead of acting to preserve safe and sound markets, the regulators primarily became focused on expanding the scope of their bureaucratic reach.

After the crisis, which cost trillions of dollars and millions of jobs, it was clear that significant reform was necessary. Despite broad agreement on the need for reform, the majority decided it would rather move forward with a partisan bill. The result is the 2,300-page legislative monster before us that expands the scope and the power of ineffective bureaucracies. It creates vast new bureaucracies with little accountability and seriously undermines the competitiveness of the American economy.

Unfortunately, the bill does very little to make our financial system safer. Therefore, I will oppose the Dodd-Frank bill and urge my colleagues to do the same.

This was not a preordained outcome; it is the direct result of decisions made by the Obama administration. Had they sincerely wanted to produce a bipartisan bill, I have no doubt we could have crafted a strong bill that would garner 80 or more votes in the Senate. If the American people haven't noticed by now, that is not how things work under the Democratic rule.

Unfortunately, the partisan manner in which this bill was constructed is not its greatest shortcoming. One would have assumed that the scope of the crisis--trillions of dollars lost and millions of jobs eliminated--would have compelled the Banking Committee to spend the time necessary to thoroughly examine the crisis and develop the best possible legislation in response. Unfortunately, such an assumption would be entirely unfounded. The Banking Committee never produced a single report on or conducted an investigation into any aspect of the financial crisis.

In contrast, during the Great Depression, the Banking Committee set up an entire subcommittee to examine what regulatory reforms were needed. The Pecora Commission, as it came to be known, interviewed, under oath, the big actors on Wall Street and produced a multivolume report.

Unfortunately, this time around, the Democratic-run committee gave Wall Street executives a pass, I believe. There were no investigations, no depositions, and no subpoenas. In fact, Chairman Dodd, my friend and colleague, never called on the likes of Robert Rubin and Lloyd Blankfein to testify before the Banking Committee. Not a single individual from AIG's financial products division was questioned by the committee or its staff. Although Congress did establish the Financial Crisis Inquiry Commission to do the work that the majority party, I believe, refused to do, the Commission's work will not be completed until the end of this year.

Most amazingly, the Banking Committee didn't even hold a single hearing on the final bill before its markup. The committee never took the time to receive public testimony or survey experts about the likely outcomes the legislation would produce. We know the majority heard from Wall Street lobbyists, government regulators, and liberal activists, but they clearly decided they did not want the American people to have a chance to understand and comment on the bill before us today before it was enacted. The question is, Why? The majority knows that this bill is a job killer and will saddle Americans with billions of dollars in hidden taxes and fees. Allowing the public to weigh in on this bill would have spelled the end of the Democratic version of reform. I believe we owed more to those who lost their jobs, their homes, and their life savings. I believe this truly was a missed opportunity.

The difference between what we needed to do, what we could have done, and what the majority has chosen to do is considerable. I will speak on this.

Congress could have focused this legislation on financial stability. It could have utilized the findings of the Financial Crisis Inquiry Commission. Instead, the Democratic majority chose to adopt legislative language penned by Federal regulators in search of expanded turf. They chose to legislate for the political favor of community organizing groups and liberal activists seeking expansive new bureaucracies that they could leverage for their own political advantage. The result is an activist bill that has little to do with the recent or any crisis and a lot to do with expanding the government to satisfy special interests. Congress could have written a bill to address the problem of too big to fail once and for all. In fact, the Shelby-Dodd amendment began to address this problem right here on the floor. Unfortunately, the Democrats once again overreached at the eleventh hour and undermined the seriousness of our effort by emphasizing social activism over financial stability. Democrats insisted that the overall financial stability mission of the Financial Stability Oversight Council was less important than the political needs of certain preferred constituencies. This dangerous mixing of social activism and financial stability follows the exact same model that led us to the crisis in the first place; that is, private enterprise co-opted through political mandates to achieve social goals. Fannie and Freddie proved this combination can be highly destructive.

Congress could have written legislation to address key issues known to have played a key role in the recent crisis. On the government-sponsored enterprises, Fannie and Freddie, the bill is silent, aside from a mere study. On the triparty repo market, the bill is silent. On runs in money markets, the bill is silent. On the reliance of market participants on short-term commercial paper funding, the bill is silent. On maturity transformations that allowed the shadow banking system to effectively create money out of AAA-rated securities, thereby making the system much more vulnerable, the bill is silent. On the financial system's overall vulnerability to liquidity crises, the bill again is silent. We know with certainty that all of these factors--none of which is addressed in the bill--were integral to the recent financial crisis. While we don't want to write legislation that only deals with the last crisis, we do want to enact a law that addresses what we know were systemic problems. This bill fails to do so. Congress could have written a bill to streamline regulation and eliminate the gaps that firms exploit in a race to the regulatory bottom. This bill does the opposite by making our financial regulatory system even more complex. We will still have the Fed, FDIC, SEC, CFTC, OCC, and the remainder of the regulatory alphabet soup. In fact, most of the existing regulators that so recently failed us have been given expanded power and scope. This bill will also add new letters to the already-confused soup, such as the CFPB and the OFR. In addition to increased regulatory complexity, there will be new special activist offices within each regulator for almost every imaginable special interest.

Congress could have set up reasonable new research capabilities in its new Stability Oversight Council to complement financial research performed by the Federal Reserve and others. Instead, the Democrats decided to establish the Office of Financial Research with an unconstrained director and a focus on broad information collecting and processing.

I believe this office will not only fail to detect systemic threats in the asset price bubbles in the future, it will threaten civil liberties and the privacy of Americans, waste billions of dollars of taxpayer resources, and lull markets into the false belief that this new government power will protect the financial system from risky trades. Congress could have been transparent in identifying the bill's fiscal effects and costs. Instead, the majority wrote a bill that hijacks taxpayer resources but hides that fact from public view. Just as the administration refuses to acknowledge trillions of dollars of contingent taxpayer liabilities residing with Fannie and Freddie, this bill refuses to provide Americans with a transparent view of the costs of the new multibillion-dollar consumer protection bureaucracy. According to the report on the bill offered by the majority, the consumer bureaucracy's budget is ``paid for by the Federal Reserve System.'' Make no mistake, ``paid for by the Fed'' means paid for ultimately by the taxpayers.

Taxpayers will be on the hook for billions of dollars of unchecked, unencumbered, and unappropriated spending financed by the inflationary money printing authority of the Federal Reserve which will be hidden from the American people in the arcane Federal budget. Congress could have also used this legislative opportunity to begin the process of reforming the failed mortgage giants Fannie and Freddie, whose ever growing bailouts have no upper limit. When it became clear that this was not the intention of the Democrats, Republicans sought to address the current and worsening conditions of the GSEs.

We suggested establishing taxpayer protections, such as portfolio caps, on the mortgage giants. We recommended making the cost of Freddie and Fannie bailouts transparent to the public; that is, to the taxpayer. We offered initial steps toward the inevitable unwinding of these failed institutions. Yet at every turn, the Democratic majority blocked Republican efforts to establish at least a foundation for reform. The Democratic-preferred approach in this bill to reforming the mortgage giants is a study. Let me repeat that notion. In order to address a bailout that has already cost American taxpayers roughly $150 billion to date, with unlimited future taxpayer exposure, the Democrats propose a study. It does not take a study to determine that $150 billion in unlimited loss exposure needs to be addressed immediately--now.

Congress could have focused on securities market practices that were known to have contributed to systemic risks in our financial system. Instead, Democrats overreached once again.

For example, the bill gives the Securities and Exchange Commission, which has failed to carry out its existing mandates, a new systemic risk mandate to oversee advisers to hedge funds and private equity funds. Yet no one contends private funds were a cause of the recent crisis or that the demise of any private fund during the crisis resulted in a systemwide shock.

Congress could have acted to curtail Wall Street's speculative excesses and enhance Main Street's access to credit. But instead, in this bill large financial firms on Wall Street seem to have benefited, judging by the behavior of the stock prices, while the legislation almost surely will increase uncertainties and costs for Main Street and America's job creators.

The actual provisions in the bill will benefit big Wall Street institutions because they substantially increase the amount and cost of financial regulation. Only large financial institutions will have the resources to navigate all of the new laws and regulations that this legislation will generate. As a result, this bill, disproportionately will hurt small and medium-sized banks which had nothing to do with the crisis.

While the largest financial institutions will get special regulation under this bill, the unintended result will be lower funding costs for these firms. That will benefit the big banks and hurt the small banks. Therefore, this bill will result in higher fees, less choice, and fewer opportunities to responsibly obtain credit for blameless consumers. Moreover, this bill raises taxes which, as we all know, are ultimately borne by consumers. Make no mistake, when Wall Street writes a check to pay its higher taxes, the ones who end up paying those taxes are American consumers and workers.

Congress could have written legislation for consumer protection that respects both American consumers and the need for safety and soundness in our financial system.

Instead, the Dodd-Frank bill was basically constructed by architects in the Treasury Department who have a certain condescension for American consumers and their choices.

The ultimate goal is to substitute the judgment of a benevolent bureaucrat for that of the American consumer, thereby controlling consumer behavior without regard for the safety and soundness of our banking system.

The American people are being told not to worry, however, because it is all being done for their own good. While a consumer protection agency might sound like a good idea, the way it is constructed in this bill will slow economic growth and kill jobs by imposing massive new regulatory burdens on businesses, large and small. It will stifle innovation in consumer financial products, and it will reduce small business activity. It will lead to reduced consumer credit and higher costs for available credit.

Less credit at higher price will dampen the very small business engines of job creation that our economy desperately needs right now. That is a price I am not willing to pay.

Congress could have implemented reforms to improve derivatives market activities. Instead, the bill's derivatives title seems to be inspired by a desire to be punitive or to provide short-term political support during an election, or both. Instead of imposing a rational and effective regulatory framework on the OTC derivatives market, the bill runs roughshod over the Main Street businesses that use derivatives to protect themselves every day.

The Dodd-Frank bill will increase companies' costs and limit their access to risk-mitigating derivatives without making our financial system safer in the process. As a result, there will be fewer opportunities for businesses to grow, fewer jobs for the unemployed, and higher prices for consumers.

Congress could have written a bill to put an end to overreliance on credit agencies and underreliance on their own due diligence. Instead, the Dodd-Frank bill sets up new regulations and liability provisions to give the impression that ratings are accurate. It then takes a contradictory direction and instructs regulators to replace references to ratings with other standards of creditworthiness. To make matters even more confusing, the bill also provides for the establishment of a government-sponsored body that will select a credit rating agency to perform an initial rating of a security issue. I anticipate the net effect of these conflicting provisions will be a reduction of competition among credit rating agencies. Potential competitors either will be deterred by all of the new regulatory requirements or be destroyed by the liability provisions set up in the bill. The lack of competition led to poor quality ratings in the runup to the crisis. This bill perpetuates and, in fact, worsens that problem.

Congress could have eased regulatory burdens on small and medium-sized businesses not integral to the recent crisis or any crisis. Instead, Main Street corporations will be subject to a panoply of new corporate governance and executive compensation requirements.

These new requirements will be costly and potentially harmful to shareholders because they empower special interests and encourage short-term thinking by managers. These features were included solely for the purpose of appeasing unions and other special interest lobbyists, and there is no demonstrated link between these changes and the enhanced stability of our financial system or improved investor protection.

We are getting toward the end. Congress could have held hearings or analyzed a number of changes this bill makes to the securities laws. Instead, dramatic changes in those laws were written with little discussion and no analysis.

Throughout this process, there has been a lot of talk about the influence of Wall Street over this bill. To be sure, in the early stages of the negotiations, Wall Street and the big banks were very engaged.

I think the American people know, however, that in the end, the real influence peddlers on this bill were not Wall Street lobbyists but rather liberal activists and Washington bureaucrats. Wall Street and the big banks just happen to be the incidental beneficiaries of their success.

When Chairman Dodd and I began this process, we agreed that the bureaucratic status quo was unacceptable and that radical change was necessary. With that in mind, we agreed to consolidate all the financial regulators and constrain the Fed to its monetary policy role.This was not a result the big banks wanted. The last thing a large regulated financial institution wants is a new regulator. After all, they spent years and millions of dollars developing a relationship with our current regulators.

A major regulatory reorganization would seriously upset the status quo and cost them a great deal of money. Neither Chairman Dodd nor I were persuaded, however. Change was necessary and change was going to come.Unfortunately, that vision of reform began to die as the bureaucrats and the liberal left began to exercise their influence over the bill. When it became apparent that I was not willing to embrace the left's expansive consumer bureaucracy, it also became apparent that actual regulatory reform was not what the majority was seeking.

All other serious reform was scuttled by the Democrats in defense of the new consumer bureaucracy. That was the point at which Chairman Dodd and I began to seek a new negotiating partner, ultimately to no avail.As the Fed and the other regulators began to regain their foothold with the Democrats and the administration and the activist left consolidated its support around an expansive new bureaucracy, all the Democrats will succeed in doing, with the help of a few Republicans, is give the failed bureaucracies more power, more money, and a pat on the back with the hope they will do a better job next time.

That is not real reform. That is just more of the same.We had an opportunity to lead the world by creating a modern, efficient, and competitive regulatory structure that will serve our economy for years to come. Instead, I believe we squandered that opportunity by barely expanding our obsolete, inefficient, and uncompetitive system. To make it even worse, they have added to the bureaucratic morass several more unrestrained and unaccountable agencies.

It became apparent early on to me that the administration and the Democratic majority were not interested in regulatory reform. All they were trying to do is exploit the crisis in order to expand government further and reward special interests.The Dodd-Frank bill will not enhance systemic stability. It will not prevent future bailouts of politically favored institutions and groups by the government.

The bill serves only to expand the Federal bureaucracy and the government control of the private sector. It will impose large costs on the taxpayers and businesses.

For these reasons, I urge my colleagues to reject this bill.

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