Audits Create More Efficient Regulation
There is a constant conversation on Wall Street about how government should best regulate the markets. After the 2008 financial crisis and the Bernie Madoff scandal, the federal government enacted one of the most sweeping legislations ever brought to the financial markets. The Dodd-Frank bill was enacted and members of Congress congratulated themselves for having put forth legislation to make Wall Street a safer environment for John Q Public and the US markets. Who best knew how to police Wall Street, but elected politicians with zero expertise in the financial markets?
If the US were to kill Dodd-Frank and use that annual cost on a special task force that would make government audits more common, I believe corruption and fraud would be targeted more efficiently while saving Wall Street and the American taxpayer billions. Dodd-Frank is a terrible albatross around the neck of the US banking sector and slows down our economy. It doesn't police Wall Street, it hampers it.
In July of 2016, the American Action Forum published a study https://www.atr.org/six-years-later-dodd-frank-has-cost-almost-40-billion that found the cost of Dodd-Frank had reached 36 billion on Wall street and 70 million man hours of paperwork.The American Action Forum found the Dodd-Frank had hurt borrowing by the US Consumer. In fact lending was down 14.5% due to the enacted legislation
The Dodd-Frank Bill and Washington DC-enacted legislation in general are antiquated relative to today's fast moving financial sector. Why should all financial firms be hampered by this legislation? Should all financial firms take the blame for the heinous action of the Bernie Madoffs, Angelo Mozilo's and Allen Stanfords of the world?
Regulation typically is enacted to make the markets function more smoothly, more fairly and more honestly for all parties. However, what caused the 2008 financial crisis was regulation itself! The Federal Government guaranteed mortgages and then went a step further to try to make house ownership affordable to all. Fannie Mae and Freddie Mac were created to prop up the housing market. These entities almost blindly bought baskets of mortgages, creating an artificial market. Then as mortgage standards were continually loosened, scores of borrowers who couldn't afford houses got loans and those loans were sold by the originators and then re-sold repeatedly until they eventually wound up in Fannie Mae and Freddie Mac portfolios. However, as these borrowers started not to pay back their loans, defaults soared. Making matters worse, Wall Street had leveraged up all of these loans and created many financial products that all were feeling the spread of the lack of repayment. This is what caused the 2008 financial crisis.
Regulation for the sake of regulation is typically a poor choice. The regulation is enacted by those who don't understand the markets and are generally lobbied by those financial firms affected to allow loopholes in the legislation.
Maybe a new federal agency should examine all annual audits of every financial company whether a bank, investment company, fund or brokerage house. Just as the IRS does tax return audits both randomly and if a filing looks suspect in any way, the new agency would be empowered to perform its own audits of financial companies both randomly and if it has suspicions about the audit that the financial company filed.
The budget will be a fraction of the Dodd-Frank cost and a multiple of its efficiency.
Written & Edited by Alexander Fleiss
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