Treating Wall Street Like the Mafia

Chris Dodd’s Agency for Financial Stability will give too much power to federal regulators

Perhaps Senate Banking Committee Chairman Chris Dodd (D-Conn.) thinks of himself as a modern day John Sherman. In 1890, Ohio Sen. Sherman set out on a mission to establish “just competition” laws and level the economic playing field. His quest culminated in the dismantling of monopolies—such as American Tobacco and Standard Oil—and the passage of new laws prohibiting malicious competitive practices. In a similar way, Dodd now seeks the power to tear apart any company he considers a risk to the national economy. But unlike Sherman, Dodd isn’t out to create the best possible conditions for competition to thrive. He’s out for blood.

Dodd’s plan for overhauling Wall Street regulations, released last week, includes a proposed new organization: the Agency for Financial Stability (AFS). This new regulator would be tasked with identifying and addressing “systemic risks posed by large, complex companies as well as products and activities that can spread risk across firms.” This represents one piece of the most extensive proposal to reform financial services regulation—topping even the ridiculousness of the Obama plan and Barney Frank plan. Which is saying a lot.

The financial crisis has made off with nearly $30 trillion in global wealth. Dodd believes Wall Street banks and other financial institutions are the chief culprits in this dubious economic caper. And to exact revenge, he will push for some of the toughest, most expansive regulatory powers to date.

To do this, Dodd plans to go Elliot Ness on Wall Street, using economists and accountants as if they were FBI agents. Only instead of targeting Al Capone and Big Angelo Lonardo, these number-crunchers would be given nearly limitless power to hunt down systemic risks inside America’s financial institutions.

Here’s one of the biggest problems with this (and with the Obama and Frank plans, too): the government offers only a dangerously vague definition of what constitutes a financial institution. So not only would Goldman Sachs and JP Morgan Chase qualify, but firms like Wal-Mart, Ford, and Texas Instruments—not exactly the companies you think of when discussing Wall Street regulation—might be subject to higher compliance standards as well. It all depends on the subjective whims of the Agency for Financial Stability.

As outlined in the Dodd plan, AFS would be an independent agency, one whose chairman was appointed by the president and confirmed by the Senate. It would also have a 9-member board comprised of federal financial regulators and an independent expert.

The structure is similar to President Obama’s proposed Financial Services Oversight Council. Both of these proposed overseers would monitor the market for systemic risks, and would possess the authority to collect information from financial institutions as needed. The major difference is that where the Obama council would only have the power to designate firms as “Tier 1” companies, a category that would require stricter regulation, Dodd’s agency would actually have the power to break-up those companies considered too big to fail.

In other words, an Agency for Financial Stability would enjoy unprecedented power over the private sector. Presently, if the government wants to take a large firm apart, it must first take its case to court, proving that the company is either a monopoly or that it is maliciously attacking its competitors.

Yet not only would Dodd’s AFS write rules for capital requirements, leverage limiting, and risk management compliance, it would also have the authority to treat Wells Fargo or UBS like the Bonanno crime family.

Which means that the risk of undue political influence is palpable. Let say’s enough people come to believe that Goldman Sachs is secretly controlling the Treasury Department, as Rolling Stone’s Matt Taibbi so viciously claimed. All those people need to do is pressure the government into taking the company apart on the grounds that it’s size has become too critical to the economic health of the nation. There are certainly enough anti-Goldman Sachs staffers on Capitol Hill to make that happen. And it doesn’t take a follower of Ayn Rand to imagine a scenario where flimsy justifications like “to expand competition” and “create a fair playing field” start rolling off the tongues of aggressive AFS agents.

Nor is the Agency for Financial Stability the only part of the Dodd plan worth worrying about. His regulatory overhaul proposal also includes a Consumer Financial Protection Agency, similar to the one currently being considered in the House. Even more aggressive than Rep. Frank’s version, this consumer agency would also ultimately protect the market to death.

The Wall Street Journal pointed out last week that the Dodd overhaul plan would open up anyone who associates with someone accused of fraud to civil suits, even if prosecutors have no proof or are just on a fishing expedition. The Dodd proposal also repeats the errors of the Obama plan on issues like derivative reform, hedge funds, and executive compensation.

There are a few good ideas in the proposal. Consolidating federal banking rules into a single regulator could do a lot to simplify and refocus banking rules. Though that reform shouldn’t be kept separate from consumer protection concerns, and it would be inappropriate for the regulator to force the various charters under its supervision into one-size-fits-all regulations.

The Dodd plan also requires large firms to provide “funeral plans” outlining how they could be quickly and effectively shutdown in the case of an emergency. In theory, this is just a part of responsible risk management. But the Dodd plan treads into dangerous waters by giving AFS the authority to approve or reject such plans.

In the end, the Dodd plan is on the highest order of hubris. Politicians in Washington honestly believe they can fix the economy and prevent future calamity. Sure, they weren’t quite right when they “fixed” the system after Enron, or when they “reformed” the rules under Clinton, or when they “fixed” everything after the Savings and Loan Crisis. But this time will be different! At least Elliot Ness knew enough to change tactics after several initial failures to capture Al Capone.

The current financial crisis was largely brought about by well-intentioned regulations that just got it wrong. We thought that 8 percent was enough capital for banks to hold onto in case they ran into trouble. We thought that subprime mortgage-backed securities were decreasing risk. We were wrong on both counts. We can’t anticipate every risk. Under the Dodd plan—like the Obama and Frank plans before it— we’ll be proven wrong once again.

Anthony Randazzo is a policy analyst for Reason Foundation.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • The Libertarian Guy||

    Fuck Chris Dodd.

  • ||

    Well, yeah, Libertarian Guy.

    Since we seem to have a choice between

    (a) funding TBTF organizations ad infinitum with our tax dollars, either as part of a government takeover or just to transfer money from the relatively poor to the fabulously wealthy and

    (b) giving a new agency the power to break them up.

    I guess I'd take (b). Too bad (c) isn't on the table. (c) being leave them alone until they fail, during failure, and thereafter.

  • ||

    The problem of course is that if you think lobbying and rent seeking are bad now, wait until Dodd gets a hold of that kind of power.

    "Step right up! Get your competitors buried while protecting your own company. Can I get a starting bid of ten million dollars?"

  • The Libertarian Guy||

    RC, that's like choosing between the pot of boiling water, and the pot of boiling oil.

    BTW, "giving a new agency" power is bad because a) it creates a new agency and b) it gives away yet more power. We've got more than enough of that shit already.

  • ||

    Caption Contest!

    "See, each of my balls are this size. That's all you need to know."

  • Slut Bunwalla||

    "It's not enough to just grab a guy's balls. You gotta pull! Really put some effort into it. I wanna see veins bulging!"

  • ||

    ""Agency for Financial Stability""

    Wasn't that the reason for the Federal Reserve?

  • Barney Frank||

    We have to blame thomebody.

  • Art-P.O.G.||

    Good observation, Vic.

  • PR||

    Citi, Chase, Bank of America, & Wells will all welcome this opportunity to regulate their competitors out of business

  • andy||

    why would we ever think to treat wall st. firms like the mafia? it's not like they're criminally funneling/extorting money from honest citizens and they certainly aren't "organized" or connected to people in high places to organize and legitimize such extortion:

    http://www.deepcapture.com/wp-.....ll-web.png

    honestly, if you ask me, we need more elliot ness and less chris dodd on this issue.

  • andy||

    oops... you didn't ask me... i retract the "if you ask me" condition.

  • ||

    "'Monkey Steals a Peach!' Were all you jokers asleep in ninja school?"

  • prolefeed||

    Among its components is a proposed new organization, the Agency for Financial Stability, which would have the power to break-up those companies considered too big to fail.

    So the plan is to break them up into pieces big enough to fail?

    Ummm, how about just letting huge companies being run into the ground to go ahead and fail, and lose their business to more competent competitors?

  • prolefeed||

    should read:

    "... pieces small enough to fail?"

  • mr simple||

    Because they've regulated those competitors out of business. If we didn't have the burdensome regulation, written by big businesses to cut off competition, we would have the good medium size companies that could step in and take over. But I agree; let them fail anyway.

  • ||

    "Agency for Financial Stability" sounds just like some sort of agency Ayn Rand would have put in Atlas Shrugged. This is additional proof that the Dems are using Rand's book as a script, a place to get new ideas.

  • Kroneborge||

    umm, are you crazy. BofA, Citi, Fannie, and Freddie etc should all be broken up.

    If a company is to big to fail, IE it's failure would wreck the country/world's economy then it should be broken up.

    Otherwise you WILL have the tax payers funding the bailout. And we all know that no matter how much people cry about letting companies pay for their mistakes.

    Let's think about this for a bit, what if say BofA etc was split up like we did with AT&T, what would be the results.

    Would people not be able to get mortgages, or credit cards? Do we really need a trillion dollar moster to issue mortgages?

    what about companies, could they still not issue bonds to raise debt?

    Anthony, I know your heart is in the right place, but you need to get your head back in reality. Allowing these too big to fail banks to fail will NEVER happen. Thus they must be split up.

  • ||

    While that sounds good in theory, how do you think this will actually work in practice? Remember, there were quite a few requests that the Treasury make clear that Fannie and Freddie did not have government guarantees. Those requests were ignored. As a practical matter, such a policy would put the entire financial market at the discretion of the state. We would see the Fannie-ization of the U.S. financial markets.

  • Kroneborge||

    I think splitting up the companies would work great in practice. Look at the costs of a phone call since they split up AT&T.

  • ||

    Crucial difference between the break up of ATT and these banking break ups you are proposing is this: ATT was broken up as a result of DE-regulation. The government removed regulation protecting the company. In what you are describing, correct me if I am wrong, you want to break these organizations up by means of regulation.

  • Lignin on the Street||

    Consolidating federal banking rules into a single regulator could do a lot to simplify and refocus banking rules.

    And would in turn lead to new types of organizations that don't precisely fall into the 'banking' category.

    Will we never learn? And by 'we' I mean 'me'.

  • Chrispy||

    I know it's not the main point, but the article gets the case against Standard Oil completely wrong: http://mises.org/story/2317

  • ||

    That was a tremendous excerpt, I am going to go get a copy of that. Sounds like something Dodd, Frank, and the like should read. Although they would probably dismiss it as "Hateful Right-Wing Propaganda," which is code for, "Facts that are inconveniently contrary to my political ends."

    Wait, never mind, they don't even read the legislation that they vote on, recreational reading is probably out of the question.

  • ||

    Where's Chad BTW? I would have expected to here the trumpet of government interventionism to be heard by now.

  • ||

    *hear rather... stupid fat fingers.

  • ||

    Okay dammit, I that post makes no freakin sense at all. Guess that is what I get for trying to be pithy. I redact it and post the following:

    Where's Chad BTW? I would have expected to have heard the trumpet of government interventionism by now.

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