Surprise of the Day: Treasury Approves of Financial Reform Bill

"Beer: the cause of and solution to all life's problems."

Homer J. Simpson

Deputy Treasury Secretary Neal Wolin preached to the regulatory captured choir today as he remarked in front of the FINRA annual conference about the new financial reform bill--yes, the very same one that will:

empower it to "gather information and activities of persons operating in consumer financial markets," including the names and addresses of account holders, ATM and other transaction records, and the amount of money kept in each customer’s account.

The new bureaucracy is then allowed to “use the data on branches and [individual and personal] deposit accounts … for any purpose” and may keep all records on file for at least three years and these can be made publicly available upon request.

While Wolin did not comment on this particular intended consequence of the bill, he did highlight a few other notable features:

By bringing the derivatives markets out of the shadows, reform will benefit those businesses that use derivatives to manage their real risks. That's good for every farmer and every manufacturer that uses derivatives the way they were meant to be used. And it's good for all of us who have a stake in the basic stability of the financial system.

Aside from the romantic and naive implication that elevates bona fide hedgers above all other market participants, the stability of the financial system is better preserved by non-exponential growth in money supply. When your buddies at 33 Liberty keep interest rates artificially low for extended periods of time, you can regulate until the farmer's cows come home and the money will still find its way somewhere. It also helps if your central bank doesn't intentionally inflate bubbles then lie about it.

When the President signs financial reform, those firms that pose the most risk will be subject to tighter, tougher regulation – regardless of their corporate form;

Looks bad for David Rubenstein, but I'm sure he'll find a way out. And, as has been discussed at EPJ before, when the government is able to define what constitutes risk and impose it on investment firms, it has pen stroke authority to make or break entire industries. If you believe the government is a good assayer of risk and productivity, then this is the law for you.

advisers to hedge funds will have to register with the SEC for the first time, bringing transparency and oversight to these unregulated financial firms;

As I recall, the hedge funds were a blip on the radar during the carnage of 2008, and all the serious problems were vested in the already highly regulated Frankenstein financial institutions.

securitizers of mortgage- or other asset-backed securities will be required to have skin in the game and to disclose the loans that make up those securities;

In unhampered free markets, skin in the game is actually a normal outcome. It's only when you introduce unlimited low cost loans and government guarantees that moral hazard emerges and creates bizarre concepts, such as too big to fail. Much like the old joke about paying for your meal beforehand in Argentina, artificially increasing the velocity of money through printing is what encourages due diligence myopia and hot-potato securitization.

shareholders will have a say in the compensation of senior executives at the companies they own;

Shareholders already have this voice--they can vote their shares or sell them. Excessive compensation is only an issue in government-coddled industries, where shareholders know Uncle Sam will save their company regardless of the poor decisions or compensation structure.

the SEC will have the explicit authority to prohibit or limit the use of mandatory binding arbitration agreements.

Currently, arbitration, such as through the American Arbitration Association, is the last vestige of a free market answer to dispute resolution. It is low cost, generally fair, and efficient, which is why it must be stopped at all costs. Never mind that it was the ability to select competent, efficient and fair judges that led to the creation of common law in the first place. In its place will be the bloated court system, or arbitration performed by the regulatory agencies, which themselves are stacked with industry insiders. As to mandatory, a customer has the right to contract with a competing firm should he not like the terms of contract--that is unless a government sponsored monopoly prevents such competition.

These reforms are long overdue. These reforms are important. And looking at the House and the Senate bills today, I think we can say with confidence that these reforms – along with many others – are moving swiftly towards enactment. When the President signs financial reform, he will sign a bill that is comprehensive, far-reaching, and that addresses the core causes of the financial crisis.

True to form, the Ministry of Truth has proclaimed from the hills it has weighed the evidence on the blind scales of justice and found both the root cause of and solution to our problems--done with as much obliviousness to irony as Homer Simpson himself.