Dodd-Frank Still Being Ironed Out

Today we point you to this article in MarketWatch: “One Year On: Most Dodd-Frank changes still to come,” MarketWatch, July 21, 2011. (Click link to download PDF.)

The 3 Wise Men disagree with this piece on two main points:

1. Regarding community and regional banks: Mr. Chris Cole’s comments generally make sense with the exception of the enormous regulatory requirements being imposed on the banking industry.

The leaders of community banks with whom we have personally spoken are concerned their resources are inadequate to effectively function under the anticipated massive overkill of regulations coming out of Dodd-Frank, some of which have already been promulgated. It is our understanding those community and regional banks with assets less than $1 billion will be looking for partners with whom to merge.
2. Constant reference to — and the regulations intended to allegedly correct or control — the “too big to fail” issue.

In our opinion, this Administration and the Congress are misguided. They seem to be pursuing the agenda of controlling the financial services industry at all levels, even if it means the substantial impairment of capitalism (perhaps this is the real agenda).
It is not “too big to fail;” rather, it is “too integrated to fail.”
The key issue was the repeal of the Glass-Steagall Act supported by the Democrats and the Republicans and signed by then-President Bill Clinton. The integration of capital among the commercial banks, the investment banks, the broker-dealers, and the insurance industry is what created the crisis of 2007-2008 and which resulted in the demand for a taxpayer bailout.
Had the Glass-Steagall Act not been repealed in 1999, the capital of the FDIC insured commercial banks would not have been invested in or integrated with the high-risk activities of the investment banks, the broker-dealers, and the insurance industry, e.g., AIG. The failure of the latter would not have affected the financial solvency of the former.
The whole point of the Glass-Steagall Act was to provide the commercial banking industry with FDIC insurance in exchange for the separation of these banks from the high-risk activities of Wall Street and the insurance industry. The appropriate correction is to reverse the inappropriate decision of the political class in 1999 and to stop the effort to undermine reasonably regulated or otherwise described liberal capitalism.

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