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Thursday, July 15, 2010

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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  1. I'm glad you are finally posting about Scott Brown. I felt your silence spoke volumes.

    I am dissappointed. Maybe more dissappointed because I voted for him. I would like to see a stronger GOP candidate run against him in 2012. It could happen. My state has a habit of letting anybody from anywhere, just drop in and call our Statehouse home. Why not the Senate seat too.

    When Barney, Chris, John, Jesse and Harry speak so lovingly about him, Scott Brown isn't doing the job we sent him to Washington to do.

  2. I am disappointed in Scott Brown. However, since I don't live in MA, I didn't vote for him, and can't do much more than post and email to encourage him to vote in a conservative way.

    However, it would be beneficial to compare his campaign rhetoric to his voting record to-date. His chant of "41st vote" ... he has not stopped much, if anything, that I've seen. He seems to be caving to the liberals when the DC liberal pressure is on - when it counts for the country the most.

    I'm glad that Theresa is seeing what I've noticed: "...Scott Brown isn't doing the job we sent him to Washington to do."

  3. Brown served his purpose. As soon as AZ voters deny McCain renomination on August 24 (please AZ!!!), Brown will start his plans to switch parties. He is, after all, a Democrat by principle.

    One of the things about this banking meltdown that has been lost is that Wall Street id what they do best: innovation. Presented with an impossible political mandate that would normally required the bankers to assume all of the risk for little or no return, they created profitable pass-through vehicles where everyone in the channel made money except the suckers at the end of the line who assumed all of the risk while fulfilling the "ownership society" political mandate.

    Congress intentionally corrupted the efficient checks and balances that tempered the productive forces of fear and greed and the bankers successfully navigated around the political shoals. What were they supposed to do? Commit suicide?

  4. I am very disappointed, because the last thing this country needs right now is comprehensive government - anything. To vote yea on a bill that is 2500 pages without having months to absolutely know what this bill does is assured damage for this country. There MUST be a limit to the amount of content a bill has when being passed. We all know it has perks and juicy tidbits "bundled" (I hate that word bundled) inside, because this content would never pass if it was voted based on it's own merits. They are just another vehicle to change this country - one huge bundle of paper at a time. If there is to be any real change in this country, then we must stop the way laws are being passed in this manner.
    To see Scott Brown support this is just another example that the cancer is not to be cured by electing "Rs". In fact, it hurts so much more when you see what they do and support after you elect them, doesn't it? I despise most Republicans more than I hate Democrats.
    How many here internally recoil to read that? Both parties are corrupt and will remain so until every countryman and woman starts electing officials BASED ON CONSERVATIVE PRINCIPALS in their hometown. I'm not sure that will ever happen. There is no way you can get term limits legislation, read-a-bill-before-you-pass-it legislation, repeal laws not in step with the Constitution legislation, or anything else meaningful passed with the current body of "representatives". Enjoy what freedom you have left while you can while you can still realize you have some of it left.
    My one comfort - the space age. Once the moon or Mars is colonized full-time, then there will be another fledgling America. A chance to start over. This world is too tightly packed with people to expect anything more than a steady erosion of individual rights with every new person born. To know that our descendants will one day inherit the limitless potential of unlimited space and the mysteries within has become the only thing that keeps my fist still while witnessing the greatest human government in the history of the world give in to base theft and corruption.
    So, remember - your children will be FREE out there somewhere, someday. There is too much mineral wealth up there for corporations to ignore. As a believer in the free market and the greed of human nature, people will be sent there to mine it. This will fund the venture. Can you imagine how much an asteroid 1 mile across with a 75% nickel content is worth? Trillions. How about the same example with gold or plutonium? Support NASA and space colonization in this country or ANY country while you can. Research it, and find comfort that when established, it will serve as a pressure release valve for those who value freedom above everything else, even if they don't realize it. Those who believe will leave this planet, taking great risk to themselves like the colonists crossing the uncharted Atlantic. When there is 238,700 miles between yourself, and your oppressors, then one may become a bit emboldened. Think about it, and have hope.
    In closing, if you don't live in Massachusetts, forget about Scott Brown. He knows what he is. Those who are elsewhere need to elect a representative they can trust by researching issues, and prior votes, otherwise, they will have a BIG GOVERNMENT POLITICS REPUBLICAN also.

  5. Scott Brown's election has proven two things: one, it was meaningless in that we're getting the same results if Martha Coakley had won; and two, people will vote for RINOs and then continue to bitch about them. Scott Brown isn't the problem, it's the idiots who vote for RINOs and cross their fingers who are the problem. Quit being loyal to a freaking political party whose only interest is winning or maintaining power for their own existence. Start supporting libertarians if you want real conservatives and principled legislators.

  6. it is disappointing, but i mean he is a republican who won in massachusetts. you can only expect him to be so conservative, you know?

    let's hope that the weasel language allowing him to back out becomes his talisman later. As in "i expected to be able to vote for it, but in the final version i can't." indeed, if republicans succeed in amending it with poison pills, that might be possible.

  7. and my hopes were dashed. sigh.

  8. Mr Jacobson, you really have no idea what you are talking about concerning annuities. Annuities were never under the purview of the SEC. After the tech stock meltdown of 2000-2001, annuities really took off because investors correctly perceived that they would never have their principle and gains exposed to market risk again. FINRA (formerly the NASD)saw many, many billions of dollars leaving brokerage accounts and fleeing to safety in annuities, never to return. So FINRA, in their incestuous relationship with the SEC, pushed 151A to have annuities classified as securities. One small problem, though...they are NOT securities. Furthermore, annuities are already heavily regulated by NAIC and by insurance commissioners of every state in the union.

    In the most recent meltdown of 2007-2008, the typical mutual fund account lost 30-40% of its value. Even with the rebound that took place in the latter half of 2009, most people have still not recovered all their losses. For many millions of Americans approaching retirement or already into retirement, this means that their retirement will be delayed by years, or they will not be able to have the standard of living in retirement they planned on.

    But account holders who had their retirement funds in annuities did not lose a dime in the meltdown. And in the subsequent rebound, many annuity owners saw gains posted to their accounts of 20-50%, while those in mutual funds have still not gotten back to even. In April of 2009, after the market meltdown had run its course, John Ameriks, the head of Vanguard funds told a group of retirement financial planners in New York City that "people need to buy annuities. It is the only hope left for them".

    The reason annuities have surrender charges is NOT to recoup the commission paid to the advisor. When someone purchases an annuity, the insurance company uses the money to purchase a long-term treasury bond to guarantee the owner's principal, as well as a bond call option to guarantee the annuity purchaser's upside gain if the market goes up. If the annuity owner bails early, the insurance company has to sell that treasury bond at a discount, or loss, and they also have to recoup their outlay on the bond call option that is now worthless to them.

    Unlike securities, the safety of principal in an annuity is contractually guaranteed. Also, if the market (S&P, Dow, etc)that the annuity is indexed to goes up, that gain is also contractually guaranteed and locked in, that is, the gain can never be lost in subsequent years. I find it most interesting that annuities are considered by some to be unsuitable for those saving for retirement, but those same annuity-bashers apparently have no concern about workers and retirees being sold very risky securities and mutual funds where we have seen twice over the last ten years people losing 30-50% of their retirement nest egg.

  9. @georgetrue - sorry friend, but you are just pitching the industry line.

    I am very, very familiar with EIAs, the sleezy sales practices, the enormous commissions, and the surrender schedules which are used to recoup those commissions. The SEC stepped into the situation because insurance companies started pushing these products as quasi-equity investments when the stock market was hot, using misleading sales presentation which led people to believe they were getting stock market participation when in fact, they were not. People who tried to get out of these products did suffer significant losses, and others would have been better off in a CD or Treasury security, instead of these bells and whistles products.

    For readers who want to understand these products,

    check out this detailed analysis, http://slcg.com/pdf/workingpapers/EIA%20Working%20Paper.pdf,

    or the letter I submitted to the SEC on its proposed regulations, http://www.lawschool.cornell.edu/spotlight.cfm?pageid=152381

  10. @georgetown - how exactly does one "never have principal and gains exposed to market risk again?" Do the annuity companies put their client's money in a giant mattress?

  11. ...And right on cue, the Kabuki act comes to a close, as the former Obama-punching bag Goldman Sachs announces its settlement with the SEC on the same afternoon that the bill is passed.

    Yeah, Scott Brown was a real disappointment here, but it also seemed like the GOP leadership was asleep at the wheel (yet again). Worst case scenarios concerning Fannie loans now estimate that taxpayers could be on the hook for another trillion dollars, which could very well happen since the housing market seems to suggest very little chance for a substantial turnaround anytime soon. And yet, the leadership never made an issue of this- had they done so, Brown would have had adequate cover. They could have also pounded the table about the fact that two of the men who shared a big role in bringing about the crash- Dodd and Frank, are the ones with their names on the bill.

    And of course, nothing in the bill will likely prevent the next crash (or even the next "flash crash").

  12. As a Brown volunteer and voter, I too am disappointed in this vote. I think Scott has made a difference so far, tho there's certainly room for improvement. I am 50 years old and for 47 of those years, Ted was my senator. Scott is still far, far better than Ted. This was a big miss, but for now, I'm holding my fire. But, another of this magnitude will see me seeking someone else next time around.

  13. Unlike a number of conservatives, I was never a fan of Centerfold Boy. His voting record before becoming Senator made it pretty obvious he is an Arlen Specter wannabe.

    Scott Brown lied. And he will go on lying until voters are finally fed up enough to dump him. Which probably will be in 2012 - the days when a hard-core leftist posing as a "moderate" Republican for election after election are drawing to a close.

  14. I supported and worked for Scott Brown. I am disappointed, angry and feel used. Fool me once. shame on me (I trusted a RINO) fool me twice..NEVER again. There is not one whit of difference between Scott's reasons for voting yes and the Dems'. There is so much at play here to question his abilities to govern. His recognition of the IMPORTANCE of dealing with Fannie and Freddie FIRST! Then his inability to understand the Progressives' agenda and their m.o. If he did, he may have recognized how vital this bill is to their goal. Many of us agree that Scott is probably a good guy, is trying his best to do what he believes is right, and wants to get along with the big guys. What we believe is that he is out of his element and is just not smart enough to do the job during these terrible times where there is no room for mistakes. He has made a grave error with this vote, one that will have profound effects on us, our children and grandchilden, on our capitalistic way of life. Businesses will be destroyed or never begun. Bailouts will continue and our taxes will continue to increase to pay for this monstrosity and the healthcare one, as well. Because he cannot see this is why he should not be re-elected.

  15. Mr. Jacobson,

    I am an independent market research analyst who specializes exclusively in the indexed annuity and indexed life markets. I have tracked the companies, products, marketing, and sales of these products for over a decade. I used to provide similar services for fixed and variable products, but I believe so strongly in the value proposition of indexed products that I started my own company focusing on IAs exclusively. I do not endorse any company or financial product, and millions look to us for accurate, unbiased information on the insurance market. In fact, we are the firm that regulators look to, and work with, when needing assistance with these products.

    I am contacting you, as the author of a blog that was published at http://legalinsurrection.blogspot.com/2010/07/scott-browns-financial-regulation.html, “Scott Brown's Financial Regulation Failure.” This article had numerous inaccurate and misleading statements about indexed annuities in it. I am contacting you in response to these inaccuracies, to ensure that you and your readers have accurate, unbiased information on these products in the future.

    First and foremost, indexed annuities have not been referred to as “equity indexed annuities” or “EIAs” since the late 1990’s. The insurance industry has been careful to enforce a standard of referring to the products as merely “indexed annuities” or “fixed indexed annuities,” so as not to confuse consumers. This industry wants to make a clear distinction between these fixed insurance products and equity investments. It is the safety and guarantees of these products which appeal to consumers, particularly during times of market downturns and volatility. Your help in avoiding any such confusion is so greatly appreciated.

    Second, indexed annuities are not “complex products,” they are merely fixed annuities with a different way of crediting interest. If you can understand that you have the ability to deposit your money with an insurance company, defer taxes on the monies until you begin taking income, receive 10% withdrawals of the account value annually without being subject to penalties, and have the ability to pass on the full account value to your beneficiaries upon death- then you can understand nearly every indexed annuity sold today.

    Indexed annuities do not “sound too good to be true.” They are an ideal product for risk-averse savers who are looking for the minimum guarantees associated with fixed annuities, but greater upside interest potential.

  16. 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: http://www.annuitydefinition.com/files/unprotected/RealWorldReturns.pdf.

    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.