Dodd-Frank as well as Stigler's Ghost

The New York Times finally published  Gretchen Morgenson's article , pointing out that Dodd-Frank enshrines rather than eliminates "too large to neglect ," though systemic "designation" of "financial utilities" such equally the exchanges has been underway since the bill's beginning. Needless to say , this has been my see all along.

Today let's motility on. I'll label the bigger work , "too large to neglect way equally good large to compete." TBTF=TBTC. There , nosotros tin set that on bumper stickers.

As the Ms. Morgenson figured out , the Chicago Mercantile Exchange is directly equally good large to neglect , in addition to volition live able to borrow from the Fed in addition to larn a bailout. But that's non the large issue. The CME is directly equally good large to compete. Who tin directly start a novel telephone substitution , maybe offering to a greater extent than protection against high frequency traders or other conveniences to customers , in addition to threatening the CME's client base? Not against a protected "financial utility."

George Stigler taught us that regulators are prone to "capture." Over the years , regulators start to sympathise alongside the manufacture they're regulating. Next matter you lot know , the regulations goal upwardly existence used to protect the manufacture from competition. Luigi Zingales' great novel book calls it "crony capitalism ," emphasizing that it , non equally good much benevolent authorities or equally good much ufettered marketplace seat contest , is the primary feature of our society.

This is non an aspersion on the morals of the people involved , who are unremarkably really good meaning. But if you lot pass most of  your days talking to manufacture people , non consumers , for your entire career , it's pretty natural to shortly larn the see that your chore is to assistance industry. And all the "jobs" it provides. You larn the idea. If you're living on a authorities salary , in addition to ties to the regulator volition live worth huge amounts inwards manufacture when you lot quit , it's fifty-fifty to a greater extent than natural.

Stigler would enjoin us that uncomplicated , clear regulations , in addition to situations where the regulator doesn't reckon the same people over in addition to over i time to a greater extent than , are less amenable to capture. Huge , complex regulations , whose wording gives regulators cracking discretion , in addition to regulators who reckon the same people i time to a greater extent than in addition to i time to a greater extent than , pose the most danger for capture.  Inviting regulators to pass thousands of hours sitting downwardly alongside the regulated firms to write detailed complex rules , which deeply comport upon what those firms in addition to their competitors tin produce is asking for problem on a cosmic scale. I don't get got to enjoin you lot where Dodd-Frank lies on this spectrum.

Worst of all , the primary point of Dodd-Frank "regulation" is to brand certainly that regulated fiscal companies don't lose money. If the regulators are imposing large costs on the banks in addition to other institutions , but are charged alongside making certainly they don't lose coin , how volition they perhaps avoid structuring regulations to assistance subsidize the manufacture in addition to avoid "wasteful" contest , or upstart competitors siphoning away profitable lines of business? TBTF=TBTC.

The "stress tests" are a skilful example. Will the Fed issue rules for the stress tests , thus that banks tin know what's coming? No. The Fed staffers know that if they write rules , thus the banks volition game approximately them in addition to the tests volition ever pass.  So , the Fed comes upwardly alongside something novel in addition to interesting for each stress test. The  fact that fiscal institutions volition game their way approximately rules is what leads to the huge regulatory discretion nether Dodd-Frank.

This would live fine..except that billions of dollars are hanging on the outcome. Like whether B of H5N1 gets to pay dividends. Really , how long tin a minor grouping of Fed staffers remain uncaptured playing a game similar that? A regulator alongside cracking discretion is the easiest to curvature to industry's wishes.

Capture does non withdraw house correct away. Zealous immature regulators wade inwards to write rules in addition to cook the world. Capture happens over years of haggling , people moving inwards in addition to out of manufacture in addition to regulatory trunk , networks of friendships in addition to personal relationships springing up. That hasn't happened yet. But if the scheme is ripe for capture , it would live amazing if this i fourth dimension inwards all of history the capture did non result.

I lately toured the Fed's website on fiscal reform. The Fed is remarkably transparent close all the things it's doing to "implement" Dodd Frank. (Is this a plea , "this is non our thought , don't brand us produce all this crazy stuff?")  2/3 of the Dodd-Frank regulations have withal to live written.  So catch Stigler's ghost , in addition to let's  read what the Fed is upwardly to.  As you lot read , cry back , "How much coin is at stake inwards this rule-making?" in addition to  "could this procedure perhaps larn captured?" Also enquire , "Just how much of this is absolutely necessary to halt some other fiscal crisis?"

 The Board .. is working on a lastly dominion that….

..defines when a nonbank fellowship is "predominantly engaged" inwards fiscal activities; in addition to the damage "significant nonbank fiscal company" in addition to "significant banking company asset company."

..would implement the enhanced prudential standards..

..implementing Volcker Rule requirements that bound the mightiness of banking entities to engage inwards proprietary trading in addition to to invest inwards or sponsor individual equity funds in addition to hedge funds.

...establish margin requirements for swap dealers ,… major swap participants ,.. …permitting entities supervised past times the Federal Reserve to engage inwards retail unusual telephone substitution futures in addition to options.

…establishes risk-management standards for designated FMUs supervised past times the Federal Reserve

…implement the credit adventure memory requirements applicable inwards connectedness alongside the issuance of asset-backed securities.

…prescribe regulations or guidelines that prohibit incentive-based compensation arrangements..

I wonder what the CEOs cry back of that one.

The Board expects to asking comment on a proposed rule….

…to apply the Depository Institution Management Interlocks Act to a nonbank fiscal fellowship designated for consolidated supervision past times the Federal Reserve.

…to impose fees on banking company asset companies… that are sufficient to encompass the toll of supervising in addition to regulating these organizations.

(Stop in addition to read that jaw-dropper again.)

… prohibits a fiscal fellowship from making an acquisition if the liabilities of the combined fellowship would transcend 10 per centum of the liabilities of all fiscal companies.
… found minimum requirements for registration in addition to reporting of appraisal management companies.

…implement character controls for existent estate appraisal automated valuation models. 

(Wait. to halt some other fiscal crisis nosotros demand to regulate "appraisal management companies?" "Minimum requirements" is clear Stigler-speak for "keep out competitors)

The Board issued rules 

... on stress testing requirements for certainly banking company asset companies…

…[that] establishes risk-management standards for designated FMUs supervised past times the Federal Reserve

…that permit a debit carte du jour issuer dependent plain to the interchange fee standards to have a fraud-prevention adjustment.

,… to implement changes to the marketplace seat adventure working capital alphabetic character dominion , which requires banking organizations alongside important trading activities to adjust their working capital alphabetic character requirements … The lastly dominion includes alternative standards of creditworthiness for determining specific adventure working capital alphabetic character requirements for certainly debt in addition to securitization positions ,

(There's a whopper of negotiating who gets to brand how much money)

..issued reports to Congress on their implementation of OMWI [Office of Minority in addition to Women Inclusion]offices.

If this rule-making is all starchy for you lot , cheers to the Fed's fantabulous transparency , nosotros tin reckon what Fed staff genuinely produce all twenty-four hr menstruum in addition to who they verbalize to. These are the firstly 2 I picked off the website , honest , no cherry picking:

H5N1 Random Sample of a Fed Staffer’s day:

Meeting Between Federal Reserve Bank of New York (FRBNY) Staff in addition to Representatives from Tullett Prebon July 23 , 2012

Participants: (deleted)  

Summary: Tullett Prebon in addition to FRBNY staff held a telephone telephone to verbalize over volume adventure mitigation services inwards the involvement charge per unit of measurement derivative market. Tullett Prebon staff discussed the purpose such services play inwards the marketplace seat in addition to the potential impact of CFTC in addition to SEC proposed rules for trading in addition to reporting OTC derivatives on Tullett’s tpMatch service.

Well , I'm glad the Fed is listening closely to how its rules comport upon the profitability of specific companies.

Meeting betwixt Federal Reserve Board Staff in addition to Representatives of Citigroup Inc. June eleven , 2012

Participants: (deleted)

Summary: Staff of the Federal Reserve Board met alongside representatives of Citigroup , Inc. (“Citigroup”) to verbalize over issues related to the proposed dominion of the Board in addition to other prudential regulators on margin in addition to working capital alphabetic character requirements for covered swap entities in addition to to verbalize over issues related to implementation of other requirements nether Title VII of the Dodd-Frank Act.

The Citigroup representatives discussed their views in addition to concerns regarding the mode inwards which the requirements nether Title VII would apply to overseas branches of United States of America of America banks , including non- United States of America of America clients of such branches , equally good equally related issues regarding implementation , timing in addition to harmonization of global rules. H5N1 re-create of the coming together agenda provided past times Citigroup is attached below.

Again , the indicate hither is non to accuse the Fed in addition to its staffers of malfeasance. All of this rule-writing is required past times the Dodd-Frank deed , in addition to the Fed website almost apologetically shows the department of Dodd-Frank requiring every measure. All the Fed staff I know are dedicated well-meaning people. Stuck inwards an impossible system.