If we're serious about job creation, it's time to stop beating up the financial sector.
Just when congressional leaders and the Obama administration thought they had things wrapped up on an ineffectual financial reform bill, things went awry. Sen. Russell Feingold, D-Wis., announced he would vote against the measure because he has correctly determined it is very weak and will not prevent another banking crisis. Sen. Scott Brown, R-Mass., one of a few Republicans prepared to vote for the bill, announced he can no longer support it because a $20 billion tax against large banks was added in the final days of negotiation. Sen. Robert Byrd's, D-W.Va., death further complicates the vote count in the Senate. Now the promoters of the bill are scrambling to re-assemble the votes needed in the Senate. They propose to scrap the $20 billion tax to appease Sen. Brown.
But they are determined to find a way to make up the $20 billion tax increase. One idea is to end the Troubled Asset Relief Program (TARP) early. Apart from possible government accounting trickery, it is not clear how that would save any money, as the TARP program is profitable if one ignores the massive losses being incurred, the auto companies and their finance arms, and Fannie and Freddie, with the jury still out on AIG. Those losses are baked in the cake and terminating the program will not erase them.
Terminating the TARP program immediately is a terrific idea that I support, but not one that will save money. In fact, it will likely cost money as the profits being made on the TARP program at the banks are helping to offset the enormous losses on the non-banks.
The other proposal is to hike the deposit insurance assessments that banks larger than $10 billion pay to the Federal Deposit Insurance Corporation (FDIC). This is a very bad idea on at least two counts, beyond the administrative nightmare of maintaining separate deposit insurance funds for banks over and under $10 billion.
First, it would politicize the deposit insurance system, which for 80 years has been a pay-as-you-go plan funded by the banking industry for the sole purpose of protecting depositors and maintaining stability in the banking system. It would be a serious mistake to allow the politicians to increase FDIC insurance premiums simply because they want to increase taxes without calling them tax increases. What is next: demanding that the FDIC use its surplus funds to pay for new vocational schools or some other pet project? Why not raid Social Security while we are at it?
Mr. Isaac, chairman of the Federal Deposit Insurance Corporation (FDIC) during the banking crisis of the 1980s, is chairman of LECG ( XPRT - news - people ) Global Financial Services, and is author of Senseless Panic: How Washington Failed America.
SEVEN WAYS FINANCIAL REFORM WILL HAUNT SMALL BIZ
July 5, 2010 - Christopher Steiner - Forbes
The pending historic financial reform bill was supposed to rein in the excesses that brought on the Great Recession and put taxpayers on the hook for, well, a lot.
It will likely be years before we know if regulators made good on their mission to stabilize the banking industry and protect consumers. Will there be unintended consequences? There always are (see "The Eight Worst Financial Laws Of All Time") and especially for small businesses.
Strident critics argue that more government control inevitably hurts smaller players more than big ones who generally have better access to capital and more cushion in their operations. Others think the bill is bad for all businesses, no matter how large.
Words Of Warning: Seven Ways Financial Reform Will Haunt Small Businesses
"This is the biggest piece of anti-business legislation--financial, industrial, large, small, partnerships, mom-and-pop--in history," says John A. James, a professor at Pace University's Lubin School of business in New York. "Piece by piece, title by title, this 2,000-page monster places paramount importance on increased government control, not regulation."
We plucked some of the most worrisome aspects of the proposed reform bill (for a full list, see our slideshow). Don't say we didn't warn you.
If the long-term capital-gains tax rate jumps from 15%, investors may well avoid taking equity stakes in new small businesses, says John A. James, a professor at Pace University's Lubin School of business in New York. The measure might also put a stake in the heart of many small firms waiting on another injection of capital.
Durbin's Debt Card Debacle
Sen. Dick Durbin's amendment, SA3989, seeks to allow the Fed to determine if debit processing fees are reasonable. But small businesses may never see their fees reduced, says Robert Livingstone, president of Ideal Cost, a West Palm Beach, Fla., consulting firm that helps businesses manage merchant expenses. His reasoning: Visa and MasterCard sell their acceptance capabilities directly to businesses. Their services are brokered by processors and Independent Sales Organizations, which would likely keep reselling the services at the old rate and pocket the savings themselves.
Dried Pools of Private Equity
To reduce overall risk in the system, big banks may not be able to invest in hedge funds and private equity firms to the degree they once did. Proposed rules limit their bets to no more than 3%of a fund's capital, points out Miranda Tan, chief executive of MyPRGenie, a newswire focused on small business. That means less funding to spread around--and more small business owners who will go wanting.
More Consumer Protection--Less Funding For Small Biz
Every haircut a bank takes in the name of consumer protection means less money available to small business owners, says Scott Shane, a professor in entrepreneurial studies at Case Western Reserve in Cleveland. One proposal bans borrowers from having to fork over pre-payment penalties on their mortgages. The end effect, on average, says Shane: "Small business owners will have less access to personal borrowing for their businesses."
Quashed Community-Bank Comeback
In 1999 the Graham-Leach-Blierly Act allowed mega-banks to further combine their commercial-banking arms. Hundreds of smaller banks--better equipped and more willing on their own to cater to the needs of small business owners--got sucked into larger organizations, some of those now deemed "too big to fail." The proposed new regs don't have much to say on this matter.
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