Monday, 26 July 2010 13:56 | newjerseynewsroom.com
BY CHRISTOPHER W. YOUNG
COMMENTARY
One is not hard pressed to appreciate the energy and execution ability of President Obama.
Since he took office, he has passed the Healthcare Reform Bill, the Economic Stimulus
Package and the most recent Financial Reform Bill. Despite his ability to get this legislation
through the House and Senate and despite his appeared real conviction for these bills's value,
he has suffered dramatically in public opinion and support. In many ways I appreciate his
willingness to stand up and lead, even in spite of his most likely short lived presidency.
Regardless of his willingness to lead and take decisive action in hard times, it appears to me
and most of the United States' population that something is amiss with his policies. The most
likely candidate for his continuous decline in public support may have something to do with
uncertainty. It seems as though the Healthcare Reform Bill and even more the Financial
Reform Bill are fraught with ambiguity and lack of insight into the economic impact these bills
may have on the business and financial community.
To help explain this uncertainty, let's briefly analyze the Financial Reform Bill (FRB) that
was approved by the Senate last week. The bill touches all financial regulatory bodies and
creates new financial regulators and offices that add to the already complex nature of financial
regulation. According to SIFMA, the FRB contains 456 actions that need to be implemented.
These actions may include conducting studies to analyze systemic risk across the economy or
creating new reports to be shared across many of the financial regulatory agencies. The
takeaways from these actions are that they will be conducted over the next 3 years with many
studies and actions taking place over the next 12 months.
Inherent within this bill is the fact that uncertainty of the real economic impact to the financial
community will not be known in totality until 36 months from the time the bill is signed into law. Sure, there will be periodic updates and learning's that will help put some clarity around the
impact but the true costs will not be known for some time. Recently at the SIFMA Summit of
Regulatory Reform some of the financial forecasts put forward were that investment banks
would suffer a 4-8% decrease in return on equity, whereas some retail banks may do worse. In
addition, many were calling for smaller retail and commercial banks to begin a consolidation
cycle because the costs to maintain and report on the new reform may be burdensome. Others
were stating that the consumer will be hurt because the regulatory costs will be transferred to
them with the chances of eliminating ‘free-checking' accounts and potentially increasing ATM
fees and loan fees. Rather than provide increased competition in the financial community it
appears at the surface that this bill creates a barrier to entry for the larger financial institutions.
In addition to the 456 actions the bill requires the creation of new organizations, such as the
Financial Stability Oversight Council which is chartered with reporting on systemic risk,
derivatives and will have authority on liquidating failing financial institutions. Another noted
organization is the Office of Financial Research which will be part of the Treasury and will be
chartered with aggregating financial data across the economy. This office, although not
described well in the bill sounds a bit like the Office of the Director of National Intelligence in the
sense that they aggregate intelligence data and encourage collaboration across the intelligence
community.
The main speaker at the SIFMA conference was Deputy Secretary of the Treasury, Neil Wolin.
When prompted with questions on the ‘how', ‘when' and ‘costs' of the bill, Neil seemed to
politely dodge the question. The outcome of Neil's discussion was that we will need to wait and
see how the studies go and the recommendations that will be made by each of the regulatory
bodies before we know the ‘how', ‘when' and ‘costs'.
Unfortunately there are takeaways from the bill that need to be highlighted. First, the bill is
overly aggressive which will only increase the chances of poor implementation and lack of
intelligent policy. For a frame of reference, major corporations only take on about 6 or less
emphasized activities in a given year. Second, the bill leaves substantial ambiguity and lack of
a clear path that is needed to encourage banks to lend, businesses to borrow and hire and
financial markets to rally. Third, the bill aids the larger financial institutions, eliminating
competition and potentially creating the next ‘To Big To Fail" institution.
At the core of this bill I think is the unfortunate yet true spirit of a zealous administration
shrouded with populist intentions. In a time when we need clear regulatory guidance, a
welcomed business and financial climate and a sense of leadership that galvanizes the
American population, President Obama and his administration delivered a bill that is extremely vague creating an economy of uncertainty which will only continue to push out lending,
borrowing and hiring — once again creating the appeared division between Main Street and
Wall Street.
Christopher Young is a professor of economics at Seton Hall University and managing director
of M&A at Berkery Noyes in NYC.
Last Updated ( Monday, 26 July 2010 14:11 )
