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Our Most Overregulated Underregulated Industry

blog.chron.comApr 17, 2012

By Chris Ladd

The Securities Act of 1933 is one of the most elegant and successful pieces of complex legislation in history. In less than 60 pages it constructed a regulatory framework that would allow Wall Street to survive its self-immolation and re-emerge as the engine of Western capitalism.

Then you have Dodd-Frank, a lumbering, 2300 page behemoth of special interest carve-outs. Dodd-Frank replaces eighty years of careful emphasis on informed risk with a smothering muddle of pointless new agencies and arcane rules.

Finance is probably the most overregulated under-regulated sector of the economy. Washington’s obsession with control has saddled the industry with appalling compliance costs while leaving the public increasingly exposed to abuse. There is no better way to illustrate this problem and its solution than to compare Dodd-Frank with the 1933 Act.

Dodd-Frank adds to the current regulatory scheme three brand new regulatory bodies and will require thousands of additional pages of enabling regulation. Why all the new agencies? Because in spite of its spectacular length, Congress did not actually update our regulatory scheme, it merely delegated the hardest questions to the agencies.

It almost miraculously fails to halt risky practices by federally insured banks and regulated entities that gave rise to the 2008 collapse. The Act does, however, seek to regulate the trade in blood diamonds, report on mine safety, and monitor minority hiring.

Dodd-Frank doesn’t get federally insured banks out of the business of derivatives trading. It doesn’t impose margin rules and reserve requirements on banks or insurance companies trading CDO’s. The proprietary trading, mass securitization, collusion between investment banks and rating agencies – they are all untouched. 2300 pages later these matters are left to the regulators to sort out.

By contrast, why was the Securities Act of 1933 successful in building a reasonable regulatory foundation that successfully constrained fraud? Congress in 1933 resisted the urge to eliminate every market risk or anticipate every potential securities scenario.

Instead of trying to keep up with financial innovation, the Securities Act of 1933 created a regulated zone and required companies to abide certain rules if they wished to access that zone. It did not try to keep qualitatively bad investments from reaching the public markets. It tried to keep fraudulent investments from reaching the public markets. The rules emphasized disclosure and let investors judge quality on their own. Further, the Act preserved a range of innovation outside the regulated markets. There, investors could take greater risks, free from the burden of most regulation.

We’ve been slowing dismantling our regulatory structure since the Reagan years, but the effort has strangely increased the burden of financial regulation. To preserve federal protection over insurance and banking entities while allowing them to step outside this zone of protection, government has tried to keep pace with the accelerating rise in financial complexity. Government is inherently slow. It has not kept up.

We are left with a growing body of increasingly unstable banks, investment houses, and insurance companies. They find life under “deregulation” to be accompanied by an absurd burden of new and largely pointless documentation requirements as government struggles to keep pace with their innovations. Banks are doing more with your money than they were ever allowed to do before, and your government has little authentic grasp of their activities.

The philosophy behind the 1930’s Era financial regulations offers a template for a solution. Government should not try to protect what it can’t comprehend. Federally protected entities like FDIC insured banks should not engage in risky derivatives trading. Pension funds, 401k investors, most insurance companies, and other protected entities should not be allowed into commodities markets, derivatives, or other environments with a high-disaster quotient.

On the other hand, private equity groups and hedge funds should be free to be as risky as they want within the limits of fraud laws. If regulated exchanges, insured banks, insurance companies, and our quasi-government mortgage financiers were constrained from dealing in exotic instruments engineered to obscure risks we would never have been introduced to the phrase “too big to fail.” Federally guaranteed organizations simply cannot be on the bleeding edge of financial innovation without dragging the public into their disasters.

Ambitious regulatory schemes like Dodd-Frank exist to protect financial institutions, allowing them to benefit from public backing while in engaging in activities for which they are not suited. The same problem haunts regulatory efforts in other fields like oil exploration, food safety, or education.

Effective regulation recognizes that government cannot do everything. It creates protected zones emphasizing transparency, while carefully limiting its own reach. Regulations that respect the public interest over special interests consistently do less and accomplish more.


Back to April 2012 Archive

CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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