Too Big to Succeed: Dodd's Proposal Creates a Cumbersome Bureaucracy

05/17/2010 05:12 am ET | Updated May 25, 2011

When President Obama asked a group of senior executives for suggestions on streamlining government, it's unlikely that any of them suggested layers of new bureaucracy, vague marching orders, or management by committee. Yet Sen. Dodd's 'compromise' financial reform proposal does all these things.

The likely result? Banks and other financial institutions will still be tightly-run aggressive organizations that can develop and sell complicated and risky new products in a heartbeat. But the agencies tasked with their oversight will be complicated and slow, encumbered by hard-to-follow rules and divided lines of authority. Guess who comes out ahead in that scenario?

Banks shouldn't be too big to fail, and bureaucracies shouldn't be too big to succeed.

As the New York Times notes in its headline, the Dodd bill "adds layers of oversight" to the reform process. Here's an example: Once upon a time (it seems so long ago now), it seemed as if our leaders understood that "too big to fail" meant "too big to exist." But there's no more talk of breaking up the big banks or subjecting them to the supervision of a "super regulator." Instead, oversight for them is given to a "Financial Stability Oversight Council" with nine members.

That's right. Instead of dismantling these threats to the world financial system, they'll be watched ... by a committee.

Financial institutions of different sizes would be regulated by different agencies under the Dodd bill, which doesn't make any sense. While large banks pose the greatest risk, smaller ones can provide warning signs for the economy. And we run the risk of having different sets of rules for the same kind of corporations, even as they offer the same kinds of products to the same kinds of consumers.

And, speaking of consumers, the agency dedicated to their protection is now downgraded to a "bureau" and subordinated within the Federal Reserve. How much lower is this thing going to go before the talking's through? Will it become an "office," or a "department"? Maybe "a guy or gal with a laptop and a part-time assistant"? It's not a hopeful sign. The decisions of the newly-renamed "bureau" are subject to a veto by the Financial Stability Oversight Board. It will have very little real enforcement power over abusive corporations who know they can "work the refs" if there's a real problem.

And how effectively will these agencies coordinate with one another? The Dodd bill doesn't inspire confidence. Pages 51 and 52, for example, contain this language: "The Council shall resolve a dispute among 2 or more member agencies ... (if) the Council determines that the disputing agencies cannot, after a demonstrated good faith effort, resolve the dispute without the intervention of the Council; and any of the member agencies involved in the dispute-- provides all other disputants prior notice of the intent to request dispute resolution by the Council; and requests in writing, not earlier than 18 days after providing the notice described in subparagraph (A), that the Council resolve the dispute." Etc. etc.

That's not exactly the design for a lean-and-mean fighting machine.

The Federal Reserve, so notoriously asleep at the switch as the last crisis brewed, will now be the regulator of choice for Goldman Sachs and other large financial companies. It's unclear whether it'll be required by law to stop these institutions from risky gambling with their own accounts, either. Its empowered to study the so-called "Volcker rule," but there's some serious betting going on that says it'll never come to pass. With confidence-building statements like this one, that may be a safe bet:

Mark Warner, a Democratic senator from Virginia, yesterday told the Financial Times: "I don't necessarily think (the rule) needs to be a mandate."

To be fair, the Dodd bill's byzantine structure is a slight improvement from today. As Steven Pearlstein notes, it reduces the number of Federal oversight agencies from four down to three. But Pearlstein's been channeling his inner "Mitch McConnell," with all the chagrin that would bring a reasonable person, by thinking the Senate should "scrap this sucker and start over."

Remember, we have a situation where banks and insurance companies created a number of new products over a short period of time. The bankers may be -- you'll pardon the expression -- dicks, but they're entrepreneurial and energetic dicks. They're likely to run rings around this new bureaucracy, with its vague rules and its governance-by-committee.

Consider this instantly-infamous quote regarding Lehman's $50 billion debacle from one of its former executives: ""When I read this, I giggle a little bit. Because $50 billion is a shitload of money, but in the grand scheme of things, $50 billion is a drop in the ocean."

Like I was saying: dicks.

In situations like Lehman's, new tools like "Repo 105" were used to hide the real financial state of the company from investors, regulators, and the public. Loans were disguised as purchases of Lehman assets. "Repo 105" allowed the company to temporarily "sell" its assets to lenders "buyers," so that it looked both smaller and financially healthier than it really was. Is this bill's cumbersome management structure really the way to go after creative tricksters like Lehman and its co-conspirators "business partners"?

We need a new, leaner approach to financial reform - one that combines the clear authority of a banking "super regulator" with the protection an independent Consumer Financial Protection Agency can provide to American households. Instead, this bill provides an administrative structure so complicated that it's almost impossible to map it on paper. Who's going to draw the org chart for our new regulatory system: M. C. Escher?

Richard (RJ) Eskow, a consultant and writer, is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard blogs at: