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    Scott Brown’s Financial Regulation Failure

    Scott Brown’s Financial Regulation Failure

    Scott Brown didn’t see the forest for the trees in deciding to support Chris Dodd and Barney Frank’s financial reform legislation.

    Although Olympia Snowe and Susan Collins went along also, they did so only after Brown made his announcement. If Brown had come out strongly against the legislation, it could have been stopped.

    The fundamental problem with the legislation is that it doesn’t address — as Brown acknowledges — the underlying problems with the mortgage market. It was the mortgage bubble, instigated by liberal social justice demands placed on Fannie Mae and Freddie Mac, which caused the crisis, not a failure of securities rules and regulations.

    No mortgage market problems, no mortgage-backed securities problems; no mortgage-backed securities problems, no financial crisis.

    One of the greatest scams ever is the success of Democrats in distancing their mortgage policies from the financial crisis, and portraying the crisis as simply a matter of Wall Street greed and lack of regulation.

    When Brown announced that he would support the legislation, his press release stated in part as follows:

    While it isn’t perfect, I expect to support the bill when it comes up for a vote. It includes safeguards to help prevent another financial meltdown, ensures that consumers are protected, and it is paid for without new taxes. That doesn’t mean our work is done. Further reforms are still needed to address the government’s role in the financial crisis, including significant changes to the way Fannie Mae and Freddie Mac operate.”

    Reform of Fannie Mae and Freddie Mac never is going to happen unless Democrats have no other choice. Not at least as long as Barack Obama is President or Democrats control all or part of Congress. Fannie Mae and Freddie Mac are off limits for Democrats, just as they were when the the Bush administration warned of problems.

    By supporting legislation without including reforms of Fannie Mae and Freddie Mac, Brown lost leverage to address the root of the problem, and squandered his 41st vote.

    There also is much mischief in the bill. Here’s just one somewhat esoteric example in which the legislation damages investor protection. Sen. Tom Harkin of Iowa managed to add an amendment late in the process, with bipartisan support, removing Equity Indexed Annuities (EIAs) from the purview of the Securities and Exchange Commission.

    EIAs are complex products usually sold to smaller individual investors which promise both guaranteed returns and indirect participation in stock market gains. The products sound too good to be true and they are; investors almost certainly get paltry returns and are locked into the product typically for 10 years or more. Surrendering the product results in large penalties to help recoup the large commissions paid to the salesmen. The SEC has been trying to regulate the sale of EIAs for years because of sales practice abuses, and has issued regulations which are being challenged in court. But now the case will be over, because the legislation removes the ability of the SEC to regulate EIAs.

    Harvey Pitt, former Chairman of the SEC, has a good post in The Daily Beast arguing that the legislation actually will damage the SEC’s investor protection function:

    The bill sets the SEC up for failure. The SEC is given more rulemaking, more studies and more onerous responsibilities than any other financial regulatory body. Worse, the SEC must now regulate 10,000 hedge funds and several thousand private-equity firms, but was denied what many other financial regulators have—the ability to self-fund its operations. The SEC presumably was denied this authority because the members of its Appropriations Committees don’t want to jeopardize campaign contributions from those the SEC regulates.

    Pitt’s post raises another good point, what probably is the best point, which is that the legislation is so large (over 2500 pages) and dense that no one really knows what will be the consequences:

    Dodd-Frank is a ponderous beast. If Congress were paid by the word or the page, this verbiage might be understandable. But neither of those conditions exists, meaning all we can be certain of is that no one in Congress or the administration has actually read the entire bill.

    Who actually knows what’s in the bill? Passing legislation without understanding its contents is akin to allowing inmates to run the asylum. Only congressional staffers and paid lobbyists know what’s in the bill, and perhaps only specific provisions. In a bill this large, dealing with subjects this complex, all the rest of us know are the sound bites prepared by the shepherding committees.

    That is not to say that there is nothing good in the legislation. But rather than solving problems one at a time, we have fallen prey to the false narrative that only sweeping restructuring can solve any problem.

    But sweeping restructuring is what is freezing the economy. No one in business knows what is coming next. Thousands of pages of health care and financial and other legislation will be followed by tens of thousands of pages of regulations.

    It is no surprise that private industry is not hiring or expanding. No one knows what the rules will be six months from now, much less two years from now, as the regulations governing employees and investment and financing are promulgated.

    I’m not going to engage in the name calling some have directed at Brown. I believe Brown was sincere in his belief that the legislation does more good than bad. And I’m still glad that I supported his campaign, because Brown stood firm on health care and other negative Democratic initiatives.

    But Scott Brown failed to see the forest for the trees on financial reform.

    Whatever good the financial legislation accomplishes could have been accomplished without another impenetrable behemoth, sprinkled with lobbyist-induced goodies, which expands government for the sake of expanding government, and which constitutes a cure which is worse than the disease.

    Update: Also worth reading, Sen. Tom Coburn, Financial Reform’s Empty Promises, and Michelle Malkin, The Dodd-Frank monstrosity

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    Mr. Jacobson:

    Your understanding about Fixed Indexed Annuities is flawed and biased. Moreover, your viewpoint is the true "industry line," namely the securities industry.

    First, no one with a knowledge of these products have referred to them as "EIAs" for several years. Second, they are not investments- they are savings products. For those with the proper time horizon and savings goals, FIAs offer an alternative to other savings vehicles. Third, to cite improper sales practices as a reason for SEC oversight is absurd, given the SEC's recent track record; it has been their failure to regulate and understand their own house that has contributed to our economic malaise. Moreover, the SEC had a chance to prove widespread sales abuses to the DC Circuit Court of Appeals- and wasn't able to do so- leaving them to fall back on the argument that the FIA exposed their owners to the "risk" of not knowing how much they might gain. Really?

    The "study" you have cited is another biased piece by a securities industry-sponsored organization. Do you really believe that "The Securities Litigation and Consulting Group" is objective scholarship? I have seen this piece before- it is an attack piece clothed in the guise of academic study. Perhaps you should read the growing scholarship on these products from more credible sources, such as the Wharton School of Business study here:

    Finally, if you are "very familiar," as you say, let me ask you this: do you own an indexed annuity? If you did, you wouldn't have a lost a penny during the recent downturn. Does that sound "risky" to you? Did you realize there are contracts of 3, 5, and 7 year lengths? Did you know there are no management fees, as there are in Variable Annuities?

    What I'm citing are facts, not opinions. Please read the objective scholarship- and get your facts straight- before commenting on indexed annuities next time. The products are sound, and more consumers are buying them for that reason.

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