Buried Treasure

Chris Dodd unveiled an 1100 page bank reform bill. Are there any nuggets in there?

The Connecticut Senator is infamous for receiving sweetheart loans from Fannie Mae while overseeing the mortgage giant. But there are some sensible proposals in his bill.

First, it would limit the Fed’s power to overseeing monetary policy. In an era of mission creep and personality cults, limiting any institution’s power is a good thing. Most financial derivatives would be centrally cleared, avoiding a big element of systemic risk. And Municipal bond advisers would need to register with the government, removing a big source of pay-to-play conflict.

But it’s not all high-minded ideals, either. Dodd’s bill would require big banks to issue “reverse convertible” bonds that would turn into equity if their businesses went south. Nice for the insurance companies in Hartford who aren’t banks.

Significantly, Dodd’s bill would politicize the banking industry and establish an alphabet soup of agencies to oversee consumer lending, commodities trading, and hedge funds. It even establishes an educational arm to administer pork, er, federal grants to States for “financial literacy projects.” Wonder who’s gonna get that money?

The Senator from the Nutmeg State did indeed bury some treasure in this bill. But by making banking even more political, it seems to me that it’s leading in the wrong direction.

Douglas R. Tengdin, CFA
Chief Investment Officer
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