One unintended consequence of the Dodd-Frank law: A new FDIC team of bankruptcy specialists spends its days sitting in the office playing card games while waiting for a giant financial company to collapse.
That potential scenario comes from Martin Baily, a supporter of the overall financial reform law and a former economics adviser to President Bill Clinton.
“You’re going to have staff there playing hearts all day and waiting for the next big crisis,” Baily said at a panel discussion about the Dodd-Frank law sponsored by the American Enterprise Institute, a conservative thinktank. He was referring to the law’s mandate for the Federal Deposit Insurance Corp. to have “resolution authority,” the power to step in and liquidate big banks, brokerage firms, insurance companies or other companies considered systemically important to the overall U.S. financial system.
The new resolution authority means the FDIC will have to hire top talent able to liquidate a large and complex company, pay off its debts, and run a “bridge” company to preserve as much value as possible during the wind down, said Baily, now with the liberal-leaning Brookings Institution.
Steve Bartlett, head of the Financial Services Roundtable, an influential banking group, said the Dodd-Frank law is unlikely to be repealed even if Republicans take back control of Congress in next month’s election. However, some parts of it are likely to be fine-tuned in the coming year, such as the Fed’s new power to set a ceiling on the interchange rate for debit cards, he said.
The scores of rulemakings and studies mandated by Dodd-Frank mean federal banking and financial regulators have to move quickly to meet the 6-, 12-, and 18-month deadlines set by the law. “And that’s going to include a lot of mistakes,” Bartlett said, referring to the rapid pace agencies must take with proposed regulations, public comment periods, and final versions of regulations.
The reform law requires 315 rulemakings – 140 of them related to derivatives regulation – and 145 studies, according to K&L Gates law firm.
Proposed rules that are now out for public comment include the Financial Stability Oversight Council’s criteria to designate systemically important non-bank financial companies and how to limit banks’ risky trading for their own accounts; the Securities and Exchange Commission’s plan to give investors more information about the underlying assets in asset-backed securities; the Fed’s examination of alternatives to credit ratings in capital rules for banks; and the Commodity Futures Trading Commission’s look at the regulation of agricultural derivatives.
“Like it or not, this law is now reality,” added Bartlett, a former House lawmaker. “We have to deal with it.”
UPDATE - Oct. 15, 2010
The FDIC dismissed the notion that the agency’s new team assigned to handle the liquidation of a major financial company will have little to do until one collapses.
“It’s not just winding down financial institutions, it will also be monitoring … companies worth more than $100 million and those designated as systemically important,” said Greg Hernandez, an FDIC spokesman. How the agency’s new office will oversee such companies is part of the regulation the FDIC proposed earlier this week, he said.
Hernandez said the new unit, the Office of Complex Financial Institutions, is beginning to take shape, but declined to say how many employees have been hired or assigned to it so far.
More generally, the FDIC has already been on a hiring spree. It was authorized to hire up to 9,029 employees for fiscal 2010, which ended on Sept. 30, and had 8,084 new hires in place as of Sept. 27, Hernandez said. The jump in manpower was to help handle the continuing rise in U.S. bank failures, which stands at 129 so far this year, as well as other regulatory changes. The FDIC board will decide in December at its budget meeting how many more staffers might be needed to handle Dodd-Frank along with continued bank closings.