The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism, Part 2
The Financial Stability Oversight Council has the power to do almost anything and there's very limited judicial review of their decisions.
Editor's Note: This is Part 2 of a multi-part series. Read Part 1 here, Part 3 here, and Part 4 here.
Assumptions Guiding the Act
The Consumer Protection Act is guided by several broad concepts:
1. Wall Street must be strictly regulated to prevent systemic risk and to promote financial stability.
2. Large interconnected international financial companies, like Goldman (GS) and JP Morgan (JPM), are inherently risky.
3. Excessive leverage leads to systemic risk.
4. A lack of transactional transparency impeded necessary regulatory control.
5. Investors lacked information to properly understand the nature of complex risky securities.
6. Regulators are capable of carrying out the intent of the Act.
Specific blame for the financial collapse is assigned as follows:
Lenders, investment bankers, credit-rating firms, mortgage brokers and others had ample incentive to take risks, often with other people's money. That led to a bubble in credit: too much borrowing.
The explosion of trading in the shadowy worlds of derivatives and hedge funds hid risks, and perhaps even created new ones, without the transparency essential to well-functioning markets.
Big financial firms lacked sufficient capital cushions to withstand a shock, and assets they could sell quickly to raise needed cash. …
For the inevitable day when another big financial firm gets into trouble, the bill attempts to impose order and punishment -- but gives authorities the power to use taxpayer money if they deem it necessary. ...
Description of the Act
What is obvious from a review of the Act is that the powers granted are very broad, almost unlimited, ill-defined, and yet to be written. The following descriptions of the Act are intended to give you an idea as to the vast scope of the Act and the powers granted. I have picked out some of the more important powers, but the Act is much more invasive and controlling than what I am describing here. I have gone into some detail because I believe that most people don't understand how pervasive the Act is. Please bear with me here; it will be eye-opening.
Here is a major law firm's (Gibson Dunn) overview of the Act:
[The Act] … seeks to increase financial marketplace transparency and stability by establishing a Financial Stability Oversight Council (the "Council") focused on identifying and monitoring systemic risks posed by financial firms and by financial activities and practices. It establishes a new regulatory and supervisory framework for "large, interconnected" banking organizations and certain nonbank financial companies. By a two-thirds vote, the Council can determine which US and foreign nonbank financial companies that are predominantly engaged in financial activities (together "NBFCs") are to be subject to enhanced supervision ("Supervised NBFCs") by the [Fed], based on the perceived risk a company poses to financial stability in the United States. Empowering the Fed to implement this regime substantially enhances its powers and responsibilities.
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