I went along to a Six Telekurs event “Securities Valuations: Is the Price Right?” last week – good event with some interesting speakers, most notably Paul Atkins of Patomak Partners to talk about the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010. Paul is based out of Washington and was not very complimentary about what has been going on.
He started by saying that the Act was very large in size, with over 2319 pages (compared to SarbOx with only 60) and given this size he suggested that you could guess how many in Congress had actually read it. Background to the Act were:
- “Political Tailwinds” such as:
- New Democrat Government with tenuous majority
- Ambitious legislative plans
- Bleak economic back-drop
- An angry populace:
- TARP bailouts/Wall St bonuses
- Recession and high unemployment
- Perception that Govt. contributed to crisis
- Aggressive case for new regulation based on:
- Lack of confidence in current systems and regulation
- “Too big to fail” demonstrating that regulators lack the toolsets necessary to deal with such events
- High leverage across the financial system and the economy
- Poor risk management by existing participants
- Opaque shadow banking system and opaque derivatives markets
He summarised that Housing and the Credit Rating Agencies were the key fundamentals behind the financial crisis.
Paul said that with the new regulation had the following features:
- The Act is a sweeping revision of financial regulation in the US
- few dodged the regulatory changes (notably insurance managed to do this)
- The Federal Reserve has emerged pre-eminent amongst all regulatory bodies in the US.
- Significant discretion has been yielded to regulators to work out specifics
- Sheer size and ambiguous wording of the Act exacerbates the uncertainty in the market and economy and will require further fixes over coming years
- The Act does not reform Government Sponsored Enterprises (Fannie Mae, Freddie Mac)
- Far from reducing/simplifying the number of agencies involved in regulation the Act eliminated 1 agency and created 13 more
- Paul asked the question whether spreads and volatility will rise in the market due to new regulation (such as the Volcker rule) and whether ultimately this will trickle down to hinder or benefit SMEs.
- The Act will likely result in regulatory arbitrage opportunities and Paul said this was not a good thing for the United States
Paul said that in his view Congress learned the wrong lessons from the crisis:
- No reform of Fannie Mae and Freddie Mac
- Government Housing Policy left unaddressed
- Transparency still lacking despite efforts from FASB on fair value
- International Policy Co-ordination is still an open question as to its extent
- No reform of existing regulator structures
- The crisis has resulted in payoffs to favoured groups (Unions, Trial Lawyers etc)
Paul talked about how hedge funds and private equity funds were going to experienced increased regulation with them having to register if they have over $100M assets under management and future implications for systemic risk provisions. He mentioned that Venture Capital investments had escaped being required to register if the lock-up period was over 2 years.
He briefly discussed the coming changes in OTC derivatives on centralised clearing, post trade reporting and new liability provisions. Paul was also concerned about certain SEC related issues such as “Whistleblower” provisions which contain a bounty programme of about 10-30% of any fine subsequently awarded against a financial institution. He re-iterated that it was not yet clear what all of the bodies involved in regulation would be doing, and at the same time as this was the case the very same bodies were also being given very strong powers such as that of legal subpoena.
Paul was a very knowledgeable speaker and had some good points to make. Listening to him speak it would seem from my perspective that the Act is a prime example of “being seen to be doing something” to address the crisis rather than something better structured, with all of “law of unintended consequencies” risks that such an initiative entails.