Economics, Free Enterprise

Dodd-Frank is the midwife of crony capitalism

A bronze sculpture of the New York Stock Exchange Bull is seen at the Museum of American Finance in New York October 2, 2008. REUTERS/Shannon Stapleton

A bronze sculpture of the New York Stock Exchange Bull is seen at the Museum of American Finance in New York October 2, 2008. REUTERS/Shannon Stapleton

The Reuters headline yesterday said it all: “Wall Street left to rebuild Obama ties after backing Romney.” And so it begins. The government has become so powerful in the financial services field that private sector firms now have to “rebuild ties” after an election to avoid adverse rulings from their regulators.

If you are worried about crony capitalism, this is where it starts. Because of Dodd-Frank, Wall Street and the financial services industry generally will now be firmly in the control of the government. In the future, as long as the act remains in force, we can expect that Wall Street firms will be solid supporters of the administration in power. No CEO will risk the possibility that opposing administration policy will bring an adverse regulatory finding or an enforcement action.

However, that isn’t all. Under Dodd-Frank, if the secretary of the treasury believes that a financial firm in danger of failing could cause instability in the US financial system, he is has the power to seize the firm and turn it over to the FDIC for liquidation. If the company objects, the secretary can invoke the power of a court, but the court has only one day to decide whether the secretary’s act was reasonable. If the court does not act in that one day, the firm is turned over to the FDIC “by operation of law.” It does not take much political savvy for financial firms to realize that opposing the secretary of the treasury could be dangerous to their continued existence. All that has to happen is a rumor that the treasury is considering the possibility of a seizure and the firm is toast.

In addition, the Financial Stability Oversight Council, a new agency created by Dodd-Frank and headed by the secretary of the Treasury, is authorized to designate any financial firm as systemically important if the firm’s failure could cause instability in the US financial system. The designation means that the firm is turned over for “stringent “ regulation by the Federal Reserve, which has the power to control its capital, leverage, liquidity, and activities. Again, the mere suggestion that the FSOC is considering such a move will drive down a company’s stock price. Witness the sharp fall in bank stocks yesterday, when the election returns showed that President Obama would remain in office for another four years.

It isn’t only big firms that are in jeopardy. Small financial firms are menaced by the power of the Consumer Financial Protection Bureau, which can regulate how any financial or nonfinancial firm deals with its financial customers, from the biggest Wall Street bank to the smallest check-cashing firm. All will be subject to regulations coming out of Washington, or to enforcement actions for activities that are deemed to be “abusive”—a term not defined in Dodd-Frank.

What all this means is that in the future very few financial firms will be plaintiffs in actions against what they believe are illegitimate government regulations, and when a regulator or, worse, the secretary of the treasury, calls to ask for support of an administration initiative he or she can be sure of a smart salute and a full-throated “aye-aye, sir.” Not only will that cooperation forestall an adverse regulatory action, but it will probably mean some administrative “flexibility” when the firm wants to make a controversial acquisition. And that, ladies and gentlemen, is crony capitalism to its core.

8 thoughts on “Dodd-Frank is the midwife of crony capitalism

  1. Technically no; national socialism is, by definition, government ownership of the means of production. But for all intents and purposes? Hitler’s Germany was not national socialism for that reason, but it might as well have been.

  2. That should be “crony socialism”, commissar.

    National socialism is, by definition, national government control of the means of production and other property, or, in most cases, control by a powerful extremist cabal within the government. International socialism is when property is controlled by a super-national group of thugs.

    Hitler’s Germany was national socialism. Stalin’s Soviet Empire was national socialism that engaged in efforts to achieve international socialist domination through bribery, espionage, assassinations, and fifth-column operations — notably within media.

  3. Clearly this author hasn’t read about Korea’s economic history–if he had, he would realize that until regulations were put into place, crony capitalism was the norm because the financial firms were allowed to run themselves and dictate what the rules of the game were. Nor has he read up much about American history, either. Ever since Reagan deregulated, capital and savings banks invested in junk bonds because they had all the freedom they wanted. How did the US respond? MORE deregulation that came in waves, the pinnacle of which were done during Bush Jr.’s time in office.

    Regulation = crony capitalism? You’ve got to be joking. It depends on what KIND of regulation and to WHAT EXTENT.

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