Archive for the ‘Regulation’ Category

CFO Magazine Update on Delayed Dodd-Frank Implementation

In Obama Administration, Regulation on August 16, 2012 at 1:03 am

Most don’t read CFO magazine, except perhaps when suffering insomnia.  Suspecting you missed it, I linked a piece on Dodd-Frank implementation below [1] (free, no paywall).  Randy Myers’ article is called Unfinished Business.  While the Obama Administration takes credit for the bill, it is not yet implemented because regulators are far behind schedule writing the rules.  No one knows exactly what the end result will be.

Some highlights are repeated below.

Yet because the legislation was drafted so hurriedly, and because the matters it tackles are so complex, Congress left much of the heavy lifting to regulators, saddling them with nearly 400 rulemaking requirements and calling upon them to complete dozens of studies.

It didn’t happen. By June 1 of this year, understaffed and overwhelmed regulators — at the Securities and Exchange Commission, the Federal Reserve, the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency, and elsewhere — had finalized only 110 of the 398 regulations they were tasked with crafting, according to law firm Davis Polk & Wardwell. They had missed 148 deadlines, including 21 for which they had not even issued any proposed rules.

They faced another 140 future rulemaking deadlines, including 123 where they had no proposed rules on the table, and a clutch of additional rulemaking requirements for which they had been given no deadline. Former SEC commissioner Annette Nazareth, now an attorney with Davis Polk, says it will probably be “at least well into 2013” before rulemaking is completed. In some cases, implementation could stretch beyond that.

With so much rulemaking yet to be done, it is probably unfair to ask if Dodd-Frank has succeeded so far in creating a stronger and more secure financial system in the United States. “I think we’ve got a long way to go before we can judge Dodd-Frank,” says Carol Beaumier, an executive vice president with Protiviti, a consulting and internal audit firm.

 National Bank Oamaru.jpg

Still, skeptics, and outright critics, are abundant…. “I think it [Dodd-Frank] has done little to solve our problems,” says Kevin Williams, CFO of Jack Henry & Associates, a $967 million provider of information-processing solutions to community banks. In the two years since the law’s passage, Williams notes, the nation’s biggest banks have gotten bigger, not smaller, with the six largest holding assets equal to 63% of the country’s gross domestic product. That makes their potential failure an even bigger concern than it would have been in the past, he contends.

An excellent point is made below; regulation is looked at as preventing financial mistakes but that is neither realistic ex ante nor is there a track record of regulation preventing financial blow-ups.  The 2008 American financial crisis started in the heavily regulated mortgage business.

“No law can prevent incompetent management or fraudulent management,” warns Jeffrey Burchill, CFO of insurance company FM Global. “You can penalize people for gross error or gross misconduct, but it’s very difficult to prevent that conduct.”
All laws, especially sweeping, complex ones, have unintended side effects and one quite plausibly is increase the compliance costs of smaller banks, leaving fewer large banks.  Large banks, of course, create systematic risks when they fail that smaller community banks cannot.  Smaller, local banks tend to be more responsive to local business lending needs, too.

Meanwhile, small community banks are being hurt by the cost of complying with a law written in response to problems created by large banks, says Williams. That charge has been echoed by former FDIC chairman Bill Isaac, now chairman of Fifth Third Bancorp., who has said he wouldn’t be surprised if half of the nation’s community banks go out of business if they don’t get some relief from Dodd-Frank.

“I think Dodd-Frank was a political response to an economic problem, and history tells us that is not always the best solution,” says Isaac.

If Williams proves prescient, Dodd-Frank will have been a large, costly, and ultimately misguided effort to strengthen the financial markets. Yet in light of the ongoing devastation wrought by the 2008 credit crisis — to the financial and housing markets and economies around the world — it is probably unrealistic to expect that policymakers would not have tried.


Pictures from Wikipedia Commons.

Supreme Court Knocks Down Curious Obama Labor Dept. Overtime Idea

In Obama Administration, Regulation on June 19, 2012 at 8:05 pm

Why is President Obama seen as so anti-business by many in commerce?  Behind the scenes, myriad government agencies fight against American enterprise everyday, often for the flimsiest of reasons.

One example of Obama Administration overreach was rejected by the US Supreme Court on Monday June 18, 2012. [1]

It is long-standing law that traveling salespeople are not covered by overtime rules.  Paying every hour a salesperson is on the road would be very expensive.  It is alrady factored into the job, which pays well. 

The Obama Administration’s Labor Department took the unique viewpoint that pharmaceutical representatives must be covered by overtime rules because they aren’t really salespeople.  Technically, government regulations already hold drug reps aren’t to “sell” to doctors but rather promote medications to doctors. [2]  That line of reasoning made me smile.  Speak of splitting hairs!

In reality, drug reps are not working differently than other traveling salespeople.  Thus, the Supreme Court upheld drug reps are not covered by federal overtime rules. 

Justice Alito said the Labor Department’s position was “quite unpersuasive.” [1]

Why would the Obama Administration invest time and expense to obtain OT for drug reps?  Sometimes we hear the Administration is concerned about medical costs yet Administration actions like this would increase costs for pharma and other medical companies.  Wouldn’t some of these higher OT costs be passed along to consumers (and the government itself as payer of Medicare and Medicaid)?

Doesn’t the Administration claim to be out for the little guy?  Drug reps earn a median, not average, pay in excess of $90,000 a year.  [2]  I’ve known a few drug reps over the years and they also receive use of a company car in order to call on doctors.

This Administration attempt was fortunately put down by the SOTUS, but is yet another example of why American business trembles about our government.



 Pictures from Wikipedia Commons.

Statistics Show 2009-12 The Weakest Economic Recovery Ever

In Economy, Obama Administration, Regulation, Unemployment on April 11, 2012 at 1:16 am

The worst economic recovery ever? 

Yes, this ‘recovery’ is worse than those following the Great Depression and the near depression of the 1980, 1981-2 double dip recessions.  Deep recessions are usually followed by broad-based booms.  Consumers and corporations have delayed needs that are typically fulfilled through accelerated purchases.  Twenty Twelve does not have a feel even remotely like robust 1984.  Few would refer to today as “Morning in America.” 

An excellent free piece (not behind the paywall) at the Wall Street Journal comes from Edward P. Lazear. [1]  Highlights follow:

The Great Depression started with major economic contractions in 1930, ’31, ’32 and ’33. In the three following years, the economy rebounded strongly with growth rates of 11%, 9% and 13%, respectively.

The current recovery began in the second half of 2009, but economic growth has been weak. Growth in 2010 was 3% and in 2011 it was 1.7%. Who knows what 2012 will bring, but the current growth rate looks to be about 2%, according to the consensus of economists recently polled by Blue Chip Economic Indicators. Sadly, we have never really recovered from the recession. The economy has not even returned to its long-term growth rate and is certainly not making up for lost ground.

Contrast this weak growth with the recovery that followed the other large recession of recent decades. In the early 1980s, the economy experienced a double-dip recession, with contractions in both 1980 and ’82. But growth rates in the subsequent two years averaged almost 6%. The high growth that persisted throughout the 1980s brought the economy quickly back to the trend line. Unlike the current period, from 1983 on, the economy was in rapid catch-up mode and eventually regained all that had been lost during the early ’80s.

It would be difficult to argue that government polices over the past three years have enhanced confidence in the U.S. business environment. Threats of higher taxes, the constantly increasing regulatory burden, the failure to pursue an aggressive trade policy that will open markets to U.S. exports, and the enormous increase in government spending all are growth impediments. Policies have focused on short-run changes and gimmicks—recall cash for clunkers and first-time home buyer credits—rather than on creating conditions that are favorable to investment that raise productivity and wages.


Pictures from Wikipedia Commons.

Warren Buffett’s Firm Regularly Requests SEC Disclosure Exemptions

In Political Rhetoric, Regulation, Warren Buffett on January 31, 2012 at 9:23 pm


Back on December 8, 2011, the Wall Street Journal disclosed something interesting in light of recent political news, namely, billionaire investor Warren Buffett’s Berkshire Hathaway conglomerate recently obtained an exception from a SEC disclosure rule.  It turns out Buffett has sought SEC confidentiality exemptions in no less than 10 of the past 20 quarters, according to the WSJ article below.

Given Mr. Buffett’s recent political activism, it is interesting he has opted to keep Berkshire investments in the dark.  It is also interesting because of Mr. Buffett’s advocacy of higher tax rates, though he personally carefully structures his own income to minimize his own taxes.  Perfectly legal, but an example of “do as I say, not as I do”.

The rationale for the SEC exemption is certain high-profile investors, like Mr. Buffett’s firm, could be harmed if people know about their investing activities.   Presumably, though, any firm is at a competitive disadvantage to have to disclose their holdings to their competitors.  The WSJ reports:

“Fifty money managers have used Securities and Exchange Commission rules to keep confidential their stakes in certain companies so far this year, an analysis of securities filings shows.  The longstanding practice got a new burst of attention last month when billionaire Warren Buffett’s Berkshire Hathaway Inc. disclosed a $10.7 billion bet on International Business Machines Corp.  The Omaha, Neb., conglomerate had been secretly accumulating the shares since March, twice receiving an exemption from the SEC on a 36-year-old law that requires investment firms owning more than $100 million in publicly traded stocks to disclose their holdings quarterly.”

Full article at:

Disclosure: at the time of this writing, the author was a long-term owner of Berkshire Hathaway stock.  SEC building picture from Wikipedia Commons.

Obama Administration Cannot Perform Simple Math

In Obama Administration, Racism, Regulation on January 12, 2012 at 1:16 am


We often hear how smart President Obama supposedly is.  If so, he really should teach elementary math to his own Department of Justice.

Holman Jenkins of The Wall Street Journal reports the Administration has sued a mortgage lender for discrimination on account of 210,000 minority borrowers paying above average higher fees or rates amongst a population of 525,000 minority borrowers. [1] 

The math is 210,000/525,000 = 40%.  That is less than half of the borrowers being given supposedly below average terms!

Lest we think that is just a one-off mistake, the same article points out the Justice Department also filed claims against two Los Angeles car dealers, saying 600 of 1,300 non-Asian buyers were charged more than the average Asian buyer.  Yes, they were accusing the car dealers of discriminating in favor of a minority group (Asians) though the math means only 46% of non-Asian car buyers were given the supposedly worse terms.

Anyone with exposure to elementary statistics knows results fall on what is called a “probability distribution”.  You will never take a sample of 4.4 million mortgage customers and get an exactly equal distribution of loan terms amongst all applicants.  You will never have the exact same distribution of credit scores amongst all applicants of different races.  This is incredibly obvious, at least to me.

While this sounds like silliness, we need to keep in mind every frivolous government lawsuit costs money, time  and aggravation for the companies that were sued.  It must be an ideological hatred of business that drives the Administration to attack businesses like it does.  Or, perhaps, they flunked math.



Bush Did Not “Deregulate”

In Obama Administration, President Obama, Regulation on December 21, 2011 at 12:56 am

I have heard many times “Bush deregulation” caused this or that.  It seems clear a part of the Obama reelection strategy will be to say that voting him from office means every rule will be ripped from the law books and your neighborhood restaurant will be serving bottles of arsenic in place of clean water, just like the supposed halcyon days of laissez-faire, the so-called “Bush years”.  Like many untruths, the “Bush deregulation” is repeated such it appears many accept it as true.

What “Deregulation”? 

If only it were so!

The facts speak for themselves.  The Bush Administration signed into law a very sweeping financial regulatory law, Sarbanes-Oxley.  Did it work?  You be the judge.

A recent Wall Street Journal editorial [1] points to the evidence about the Obama Administration’s rules that impose more than $100 million annual costs each, which shows the Administration is regulating more than prior Administrations.   No surprise there.

The interesting thing about the Journal’s piece is the accompanying graph which shows how the Bush Administration regulated more than Clinton.  The average $100 million+ rule count was 62 under Bush, 56 under Clinton and 84 so far under Obama. 

More evidence comes from this Heritage Foundation report (emphasis added):  

“The Code of Federal Regulations (CFR) is the regulatory equiv­alent of a statute book that includes only the text of existing regulations. In number of pages, the CFR makes the Federal Register look Lilliputian, with the 2007 edition totaling 145,816 pages, more than 4,500 pages longer than in 2001, when Bush took office, and almost 8,000 pages longer than in 2000.” [2]

What were the big regulations that were removed by the Bush Administration?  I am all ears. 

Why the regulatory explosion of recent years matters, from the Journal:

The evidence is overwhelming that the Obama regulatory surge is one reason the current economic recovery has been so lackluster by historical standards. Rather than nurture an economy trying to rebuild confidence after a financial heart attack, the Administration pushed through its now-famous blitz of liberal policies on health care, financial services, energy, housing, education and student loans, telecom, labor relations, transportation and probably some other industries we’ve forgotten. Anyone who thinks this has only minimal impact on business has never been in business.

Comments welcome below.




 Picture from Wikipedia Commons.

Mike Mayo’s Solutions For Wall Street Analyst Over-Optimism

In Analyst Ratings, Banking Bailouts, Finance, Mike Mayo, Regulation, Stock Analysts, Wall Street on November 7, 2011 at 1:57 am

Maverick banking securities analyst Mike Mayo has a timely new book out called “Exile on Wall Street: One Analyst’s Fight to Save the Big Banks From Themselves” (Wiley, 2011).  He relays his depressing stories about life as a banking industry bear amongst the Wall Street bulls.  The gist of his experiences is financial firms are in the business of selling stocks, creating a hugely strong incentive for stock analysts to be overly optimistic.   “Sell” truly is a bad word -which got Mr. Mayo in trouble at several points in his career- and he points to data showing 45% of analyst calls were “Buy” and just 3% “Sell”.  He also has some interesting ideas on a fix. Excerpt found at

The excerpt does not mention something I understand to be the case: because “Sell” is a bad word, “Hold” is tantamount to sell.  Forty-two percent of calls were “Hold”, which when added to the “3%” rated as “sell”, gets close to the 50% Mr. Mayo points out would be a random proportion. I think it is solid advice for investors to be cognizant of the Wall Street bias to encourage people buy stocks.  After all, that is the business they are in. When you see something other than “Buy”, be it “Sell” or “Hold”, you may take it as meaning the analyst does not think you should be an owner of that stock. 

I also think people should really think twice about just making decisions about owning a stock based on an analyst’s “buy” or “sell” rating, anyway.  I prefer to look at actual financial statements and analyse them.  Analyst reports make for interesting reading above and beyond the “Buy”, “Sell” or “Hold” headline.  If you do not feel comfortable understanding a financial statement on your own, there is an argument you may be better off delegating stock-picking to investing experts, which can be accomplished at a low-cost through mutual funds.

I call out Mr. Mayo’s proposed solutions.  I especially agree with his points about regulation being backward-looking and stifling innovation as well as his point that failed financial firms must be allowed to go bankrupt.  Quoting [emphasis added]:

“To fix the banking sector, should we rely more on government regulation and oversight or let the market figure it out? Tougher rules or more capitalism? Right now, we have the worst of both worlds. We have a purportedly capitalistic system with a lot of rules that are not strictly enforced, and when things go wrong, the government steps in to protect banks from the market consequences of their own worst decisions. To me, that’s not capitalism.”

“It’s easy to understand the appeal of certain regulation. If we’d had the right oversight in place, we would have limited the degree of the financial crisis, which included bailouts measured in hundreds of billions of dollars and millions of people losing their homes due to foreclosures. But we also would have sacrificed innovations in credit and a vibrant financial sector.”

“Moreover, the real problem with regulation is that it often doesn’t work very well, in part because it’s always considering problems in the rearview mirror. The financial system today is almost dizzyingly complex and moving at light speed, and new rules tend to address fairly precise things, like banning specific types of securities or deals.”

“The more effective solution would come from letting market forces work. That doesn’t mean no rules at all—a banking system like the Wild West, with blood on the floor and consumers being routinely swindled. We need a cultural, perhaps generational, change that compels companies to better apply accounting rules based on economic substance versus surface presentation.”

Mr. Mayo, managing director at Credit Agricole Securities, continues:

What we need is a better version of capitalism. That version starts with accounting: Let banks operate with a lot of latitude, but make sure outsiders can see the numbers (the real numbers). It also includes bankruptcy: Let those who stand to gain from the risks they take—lenders, borrowers and bank executives—also remain accountable for mistakes. As for regulation, the U.S. may want to look to London for ideas. In the last decade, the U.K. equivalent of the Securities Exchange Commission (called the Financial Services Authority) fired much of its staff and hired back higher-caliber talent, at higher salaries. This reduced the motivation for regulators to jump to more lucrative private sector jobs and improved the understanding between banks and regulators.”

A better version of capitalism also means a reduction in the clout of big banks. All of the third-party entities that oversee them need sufficient latitude to serve as a true check and balance. My peer group, the army of 5,000 sell-side Wall Street analysts, can help lead the way to provide scrutiny over the markets. Doing this involves a culture change to ensure that analysts can act with sufficient intellectual curiosity and independence to critically analyze public companies that control so much of our economy.”


Charging bull picture from Wikipedia Commons.