One is not hard pressed to appreciate the energy and execution ability of President Obama. Since he took office, he has passed the Healthcare Reform Bill, the Economic Stimulus Package and the most recent Financial Reform Bill. Despite his ability to get this legislation through the House and Senate and despite his appeared real conviction for these bills's value, he has suffered dramatically in public opinion and support. In many ways I appreciate his willingness to stand up and lead, even in spite of his most likely short lived presidency.
Regardless of his willingness to lead and take decisive action in hard times, it appears to me and most of the United States' population that something is amiss with his policies. The most likely candidate for his continuous decline in public support may have something to do with uncertainty. It seems as though the Healthcare Reform Bill and even more the Financial Reform Bill are fraught with ambiguity and lack of insight into the economic impact these bills may have on the business and financial community.To help explain this uncertainty, let's briefly analyze the Financial Reform Bill (FRB) that was approved by the Senate last week. The bill touches all financial regulatory bodies and creates new financial regulators and offices that add to the already complex nature of financial regulation. According to SIFMA, the FRB contains 456 actions that need to be implemented. These actions may include conducting studies to analyze systemic risk across the economy or creating new reports to be shared across many of the financial regulatory agencies. The takeaways from these actions are that they will be conducted over the next 3 years with many studies and actions taking place over the next 12 months.
Inherent within this bill is the fact that uncertainty of the real economic impact to the financial community will not be known in totality until 36 months from the time the bill is signed into law. Sure, there will be periodic updates and learning's that will help put some clarity around the impact but the true costs will not be known for some time. Recently at the SIFMA Summit of Regulatory Reform some of the financial forecasts put forward were that investment banks would suffer a 4-8% decrease in return on equity, whereas some retail banks may do worse. In addition, many were calling for smaller retail and commercial banks to begin a consolidation cycle because the costs to maintain and report on the new reform may be burdensome. Others were stating that the consumer will be hurt because the regulatory costs will be transferred to them with the chances of eliminating ‘free-checking' accounts and potentially increasing ATM fees and loan fees. Rather than provide increased competition in the financial community it appears at the surface that this bill creates a barrier to entry for the larger financial institutions.
In addition to the 456 actions the bill requires the creation of new organizations, such as the Financial Stability Oversight Council which is chartered with reporting on systemic risk, derivatives and will have authority on liquidating failing financial institutions. Another noted organization is the Office of Financial Research which will be part of the Treasury and will be chartered with aggregating financial data across the economy. This office, although not described well in the bill sounds a bit like the Office of the Director of National Intelligence in the sense that they aggregate intelligence data and encourage collaboration across the intelligence community.
The main speaker at the SIFMA conference was Deputy Secretary of the Treasury, Neil Wolin. When prompted with questions on the ‘how', ‘when' and ‘costs' of the bill, Neil seemed to politely dodge the question. The outcome of Neil's discussion was that we will need to wait and see how the studies go and the recommendations that will be made by each of the regulatory bodies before we know the ‘how', ‘when' and ‘costs'.
Unfortunately there are takeaways from the bill that need to be highlighted. First, the bill is overly aggressive which will only increase the chances of poor implementation and lack of intelligent policy. For a frame of reference, major corporations only take on about 6 or less emphasized activities in a given year. Second, the bill leaves substantial ambiguity and lack of a clear path that is needed to encourage banks to lend, businesses to borrow and hire and financial markets to rally. Third, the bill aids the larger financial institutions, eliminating competition and potentially creating the next ‘To Big To Fail" institution.
At the core of this bill I think is the unfortunate yet true spirit of a zealous administration shrouded with populist intentions. In a time when we need clear regulatory guidance, a welcomed business and financial climate and a sense of leadership that galvanizes the American population, President Obama and his administration delivered a bill that is extremely vague creating an economy of uncertainty which will only continue to push out lending, borrowing and hiring — once again creating the appeared division between Main Street and Wall Street.
Christopher Young is a professor of economics at Seton Hall University and managing director of M&A at Berkery Noyes in NYC.