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August 18, 2010

Early (And Massive) Consequences of Financial Regulation

Our large and totally incompetent federal government is at it again with the consequences of financial regulatory reform.  Now, usually, we do not see the consequences of regulation for years after the laws are passed.  A good example of this is mark to market accounting, which was mandated by the Congress in Sarbanes-Oxley in 2002, but did not stick its ugly side out until 2008.

In regards to FinReg, Ford Motor Company has become its first victim.  Last month, Ford was forced to pull $1 billion in bond offerings because they could not get them rated by credit rating agencies.  Why?  Because if the credit ratings do not hold up, the rating agencies can be held liable under the new FinReg laws.  Ford was going to use the proceeds of the bond sale to finance its financing arm.  This means that because of FinReg, Ford buyers were going to have a tougher time getting financing.  So much for thawing the credit markets, right?  You can read the details of the bond failure here and here.

Not to worry, as the federal government stepped in again and provided $250 million in loan guarantees (mentioned in video 1 today) and they got a special visit from GM CEO Barack Hussein Obama (video 2).  So now our tax dollars are being used to back bond sales.  It seems to me as if the government is getting more and more involved in lending despite their so-called commitment to a free market.  The video gets even funnier when Obama states that his bailout of GM and Chrysler saved Ford.

Some key points to take away from Fin Reg:

1) What's going to happen when larger companies want to issue multi-billion dollar bonds?

2) Is the debt issuing system faster or slower as a result of FinReg?  Is it cheaper or more expensive?

3) Finally, if companies are in questionable industries or have low credit ratings, won't the result of this legislation either lead them into bankruptcy quicker (because they cannot get the financing) or cause the taxpayer to come in and back up the debt of poorly rated companies (as in the case of Ford).

Looks like the Congress really thought this one through.

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