A Question of Transparency

Apr 19, 2011

Later this morning, Deputy Treasury Secretary Neal Wolin will present remarks before the Pew Charitable Trusts on the implementation of Dodd-Frank reforms. With the passing of the 9 month anniversary of Dodd-Frank becoming law, this is certainly an opportune time to check in on the status of its implementation.

One interesting impact of the bill has been the increased transparency that regulators are following in developing the rules needed for implementation. With the 259 mandatory and 188 discretionary rulemakings authorized under Dodd-Frank, this is no mean feat. I have met with the regulators in the morning, seen the agency post the agenda of the meeting shortly thereafter and gotten a call from a reporter later in the afternoon asking what the meeting was about. And if that isn’t enough to show that it is a new day, Federal Reserve Chairman Ben Bernanke is breaking with long-time precedent to hold regular news conferences to give a glimpse into the thinking of the Fed.

Certainly a new world, but not where it is needed most.

Transparency and process provide businesses and market participants with the certainty needed to engage in transactions and develop business models that are profitable, if other conditions are met, including supply and demand, etc.

However, when it comes to systemic risk, the Financial Stability Oversight Council (“FSOC”), of which Treasury holds more power than others, the lack of transparency is palpable. FSOC can determine which firms, financial or non-financial, are deemed to be systemically risky, leading to more regulation and the ability of the government to kill a firm in crisis. Yet its means of operations, development of regulations and lists of companies have not been transparent or orderly. Rules have been drafted to be purposely vague, even as entire industries that Dodd-Frank mandates to have a seat at the table are left out of the discussion.

The Office of Financial Research (“OFR”), a new agency devoted to information gathering and analysis, will play an important role in FSOC’s ability to manage systemic risk. Indeed the OFR will have broad subpoena power, yet much of the information that it will gather already goes to financial regulators.

At the end of the day, it would take a Kremlinologist to determine what firms are in or out, or how the rules are being written, enforced, or more importantly, how to follow them.

A question for Deputy Secretary Wolin-- why should FSOC act any differently than other regulators, and why is it even less transparent than the Federal Reserve?

Civil liberties in the United States are a direct outgrowth of the excesses of the English King. An economic Star Chamber could mean that we are forgetting the lessons our founding fathers have tried to teach us through the centuries. This is sad, if true, and more difficult to create the 20 million jobs that we need over the next 10 years.

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