Posts Tagged ‘Financial Regulation’

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.


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.