Dodd-Frank Part II: Managing Systemic Risk

Yesterday the US Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, following the House of Representatives doing the same late last month. Last thing to do: Mr. Obama has to sign it. He will. When? Soon. On the news this morning he seemed very concerned about his daughter starting camp. But yes he will sign it and he considers it another landmark legislation he has championed to protect the little guy. We’ll see if the voters agree in November during the mid-term elections for Congress. So in this second installment, a few words about “systemic risk” addressed in the bill.

Probably the central part of Dodd-Frank (already quicker to say than Sarbanes-Oxley, not sure how we shorten it like some did with SOX or Sarbox – how about “Dank”?) is its establishment of a new regulatory regime for  companies whose failure could create a “systemic risk” for our economy and financial system. Shockingly, a new federal agency has been created – the Financial Stability Oversity Council (“FSOC”?). The members of the council, to be led by the US Treasury Secretary, include the heads of major agencies such as the SEC, the Fed and the FDIC. The council’s job is to decide which big companies are “systemically important.” Once they decide that, they get to regulate them. They can require them to get rid of assets to avoid a “grave threat” to our financial stability, can require whatever reserves they think make sense, more public disclosures and the like. The Fed will also oversee and regulate the systemically important companies if they do not already. Dank (trying it out not sure how it sounds) also targets “large interconnected” bank holding companies with at least $50 billion in assets. They will also be subject to more regulation.

The big question will be: which company is systemically important? Suddenly our biggest financial institutions will be trying to claim they are not so big and important after all, even though they spend the rest of the year playing the “who’s bigger” game. And will this cause our biggest companies to scale back their growth plans? Is that a good thing? Answer for yourself, I am not sure.

Do we care in small and microcap land about this part of Dank? Not much. To the extent the super-banks and insurance companies deal with smaller companies, very little likely will change. Will it help avert another near financial meltdown like the fall of 2008? It will probably help. Are they trying to kill a really large mouse with a nuke? Maybe, a little. But nothing new under the sun there. More to come.

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