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April 9, 2010


Recently, Senator Chris Dodd previewed what the Senate Finance Committee was thinking about financial regulatory reform.  I assumed that the bill would be bad, but Senator Dodd failed to meet even those expectations.  The core of Senator Dodd’s bill is to create a $50 billion slush fund to help avoid the “Too Big to Fail” problem.
That’s right, if you need to pause and read again, Senate Democrats want to create a $50 billion corporate welfare fund, that each of the big banks would pay into.
First, we should note that AIG alone is going to cost the federal government $185 billion.  If we throw in General Motors, Chrysler, Fannie Mae, Freddie Mac, and Citi, that cost goes to about $500 billion.  So, how would such a “slush fund” have solved this past crisis?  Furthermore, if the next systemic crisis only needs $50 billion to solve itself, would it really be a huge economic problem?
The solution to companies that pose systemic risk is simple, forced liquidation.  This is different from the “just let it fail” mentality.  Under the forced liquidation strategy, government would prop up the non-performing assets and pay-off the liabilities on an “as needed” basis.  Meanwhile, every asset in the entire firm is put up for sale.
Assets can sell for any maximum price, but cannot sell for less than 80% of their book value.  This is to cover the government’s perceived 80% ownership of the company and protect the taxpayer from losses.  The assets do not need to be sold immediately and can be held until the market conditions improve.  This strategy is built on the firm belief that no matter the market conditions, there is a given buyer at a given price.
This solution incorporates a certainty that market conditions will improve within a 12 to 24 month period.  Additionally, it provides an open-ended strategy that does more than throw money at problem and keeps the government from behaving fearfully as opposed to behaving rationally.  Once the company is back in solvent condition, the stock can be IPO’ed out by the government or the government could sell ownership to another company (IPO is preferred since the government selling directly to other businesses can cause problems).
The bill also includes a Consumer Protection Agency run by the federal government.  Are you kidding?  What happened to consumers protecting themselves?  Do we seriously believe that the government can properly consult and warn consumers about products and services?  What’s even funnier is that the Federal Reserve will be financing this agency and it will be located at the Fed, yet the Fed will have no authority.  As you can see from the Huffington Post:
Dodd sought to allay concerns about the consumer protection bureau being located at the Fed by emphasizing that it was a matter of "rented space in the Fed," adding that the Fed will have "not one iota of authority" (other than one vote on a nine-member council of systemic regulators with veto power over bureau rules).”
So does the Federal Reserve print money to pay for this agency or what?  Is this how we are going to pass (and finance) future legislation that we can’t pay for?
The consumer protection solution is simple.  Each consumer is responsible for his/her consumer rights.  As Rick Santelli recently said, “you can’t cheat an honest man.”  In every situation where I have been defrauded or wronged by an entity, I have demanded a full refund and a termination of services.  In every situation, my request was granted.  I could not imagine if I had to rely on the federal government or a government agency to protect me from such a thing.  I also know that this “consumer protection agency” could not do a better job protecting my consumer “rights” than I can.
My question to the readership, if the Dodd reform bill would have been in place in 2008, how would it have stopped the impending financial crisis?

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