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The American Voice Institute of Public Policy Blogs the Issues!

Monday, May 24, 2010

Senate's Folly of Financial Reform

By Joel P. Rutkowski, Ph.D., President

On Thursday, May 20, 2010, the Senate passed the Wall Street Reform and Consumer Protection Act of 2009 (H.R.4173-As amended by the Senate) by a 59-39 vote.  

Legislation is More Big Government and Taxes

Once again the Democrats led by President Barack Obama have taken this nation in the wrong direction with this legislation that increases taxes on a variety of American businesses and mandates massive regulation.   For example, to track virtually every financial transaction and to share this information with other agencies such as the Internal Revenue Service (IRS) a massive new consumer agency has been created.  Funding of promising startup firms will be greatly delayed by onerous new restrictions on angel investors. Furthermore, state incorporation laws would be federalized by proxy access provisions and at the company and shareholders' expense unions and progressive shareholders would be empowered to wage director campaigns.  In the long- term these actions will be detrimental to the economic growth of America as this nation's businesses and financial system will be at a competitive disadvantage globally, forcing capital to relocate from America to other desirable markets.  

Does not hold Big Government Bureaucracies  Accountable

The savings-and loan crisis of the late 1980s was another Washington-sparked economic meltdown that resulted in the creation of the Office of Thrift Supervision which was to prevent another such  banking financial crisis from  occurring — which it did not.  Now the Senate bill eliminates the Office of Thrift Supervision to create a new bank regulator that will be staffed with all of the Office of Thrift Supervision employees that failed to avert the financial crisis that occurred two years ago.

The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac were important contributors to the subprime mortgage crisis and posed a systemic risk to the financial system.  For example, Fannie Mae all throughout  the last decade bought many of the now bankrupt subprime mortgage originator New Century Financial Corporation mortgages.  In fact, until Fannie Mae  reclassified in September 2009, a large part of its prime mortgage portfolio as subprime the actual enormity holdings of subprime mortgages by GSEs during this time was unknown.  As early as 1993, millions of mortgages to borrowers with credit scores of less than 660 considered to be the dividing line for subprime loans by prominent researchers had been classified by Fannie Mae and Freddie Mac as prime. One would be foolish not to believe that a major factor in inflating the housing bubble was the misrepresentation of government-sponsored enterprises Fannie Mae and Freddie Mac. For example, in late 2006 and early 2007, market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system.  As a result, because of the ineptness of the Democrat-controlled Congress, the cost to the American taxpayer to bailout these government-sponsored enterprises has been $400 billion.  However, the taxpayer is further exposed to unlimited liability for the entities and their potential new missteps because of President Obama's "Christmas bailout" of the GSE's—the December 24, 2009, order removing the caps of $400 billion that the Treasury was authorized to spend on Fannie Mae and Freddie Mac. Yet with all this known about these the two mortgage underwriters the Senate bill does nothing to reform these GSE's. Also, other contributors to this crisis such as any of the irresponsible lending products or the zero-down mortgages are not eliminated by the measure. 

Final thoughts  

Whatever hope there was of bringing market discipline to the nation's largest financial institutions is eliminated by the legislation. And instead it gives them the special privileged status of “too big to fail” which will guarantee an ever-increasing concentration of the nation's financial markets.   By giving more power to the government to intervene in a discretionary manner will not prevent future bailouts.  By requiring adequate capital based on simple, enforceable rules will prevent them. And to not cause disruption to the financial system and the economy making it possible for failing firms to go through bankruptcy.  One would be foolhardy and ridiculous to believe proponents of this bill as well as President Barack Obama  that if this measure was law the financial crisis that brought the economy to the brink of collapse two years ago and cost millions of Americans their jobs and savings would not have occurred. In fact, the next financial crisis will put the last one to shame as a result of this “reform.” The legislation fails to even address the blatant problems and without accountability gives bureaucrats more power and discretion.   


1.           Mark A. Calabria, “Dodd's do-nothing financial 'reform,' ” New York Post, May 20, 2010.

2.           Brady Dennis, “Senate passes financial regulation bill,” The Washington Post, May 21, 2010

3.           John Berlau, “Dodd Bill Gives a Pass to Fannie and Freddie,” Human Events, May 20, 2010.

4.           John B. Taylor, “How to Avoid a 'Bailout Bill,' ” The Wall Street Journal, May 3, 2010.


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