PHOENIX—The Dodd-Frank bill deserves an F for failing to provide the necessary information on capital markets to the government and , instead, creating more bureaucratic financial regulatory oversight, said former Securities and Exchange Commission Chairman Harvey Pitt Monday. Pitt, currently chief executive officer of Kalomara Partners, LLC, was addressing Investment Management Network’s “Super Bowl of Indexing” conference here.
This continued lack of foresight will have an inevitable impact on our economy since “we haven’t seen the worst of the financial crisis we have been enduring for the past three years,” Pitt said.
“In the wake of the financial crisis, President Obama signed the Dodd-Frank bill in July amid the proclamation it would ‘cure’ the financial crisis,” Pitt said. Besides its heavy-handed approach, the bill puts the is cart before the horse, he said, since the “report on the causes of the crisis won’t be issued until the end of this month. To understand a crisis, it is imperative to first understand the causes. The solutions are now etched in stone before we can even understand what caused the crisis. The 2,300-page behemoth is dripping with unintended consequences.”
Pitt’s biggest concern with the bill is the creation of a systemic rick council, the Financial Stability Regulatory Council, that can trump other regulators, “threatening their authority” without providing transparency.
Instead, Pitt believes the government should have created a clear delineation of authority to oversee the capital markets and the ability to foresee problems. It should have created a way to feed critical data from capital markets to the SEC, the Federal Reserve and other regulators and a systematic way for these regulators to analyze that data. Thirdly, Dodd-Frank bill should have created “trip wires” for such danger areas as over extension of credit.
“Without these three things, the government won’t be able to avoid the next crisis,” Pitt said.
Besides these omissions, Dodd-Frank gives the government too much oversight of companies and overburdens the SEC, Pitt continued. “The FSRC can impose risk-based capital and liquidity requirements on companies, can force them to divest holdings and limits mergers and acquisitions,” he said. “Pension funds can be subject to these regulations.”
Further, “Dodd-Frank will regulate any entity that performs vital services to or is a significant user of these markets. That includes institutional investors—mutual funds and hedge funds. It also regulates OTC derivatives and any company that engages in swaps transactions,” Pitt said. Beginning Sept. 15, 2011, the SEC and the CFTC will have to oversee OT C derivatives, “a market so complicated and so large it is hard to comprehend. The OTC derivatives market is larger than any other.”
But creating the hundreds of regulations needed is dwarfed by their implementation and enforcement, which will strain the SEC at a time when the President has imposed a federal salary freeze, with further cutbacks not far behind, Pitt said.
The Dodd-Frank bill now requires the SEC to oversee 10,000 hedge funds, 6,000 broker-dealers, 11,000 investment advisors, thousands of derivatives, thousands of issuers of equities and credit rating firms—which will overwhelm the agency, he said.