Financial Reform Bill: Cui Bono

Some time ago, I renamed the organization formerly known as the US Congress, and began referring to it as the Central Committee, in  honor the old Soviet ruling body, the political governing body the US Congress most closely resembles. Apparently in an effort to show support for their new moniker, the Central Committee and Barak Obama have passed  a 2,300 page financial reform bill. Despite the media spin, which has been tirelessly extolling the virtues of this legislation, the financial reform bill is bad news for the American public and bad news for America. Interestingly, a very small percentage of the bill actually has anything to do with the stated goals of the legislation; financial reform.

Cui bono? A Latin adage which means as a benefit to whom? As I and the phrase both suggest, there is a hidden motive behind this legislation. In this case, it indicates that the party responsible for something may not be who it appears at first to be.

The real benefactors of this reform legislation are not the American people, nor is it America’s economy. The Latin phrase commonly means that those who will benefit are found among those who have something to gain, and the stated enemy, in this case Wall Street, is a scapegoat. So, cui bono: who benefits?

The victors of this legislation, as with all legislation advanced by Obama, are special-interest groups. In this case, in particular, plaintiffs’ lawyers benefit. That’s just what America needs, more laws that benefit trial lawyers.

This poorly drafted hodgepodge–most provisions have nothing to do with the true causes of the financial crisis–will drastically expand the power of the federal government, create new bureaucracies staffed with thousands, and do little to help the struggling American citizen. Ambiguous language will result in frivolous and unnecessary litigation, further stifling economic growth. The additional costs will weigh on consumers, raise barriers to entry for entrepreneurs and destroy jobs. What a great way to get an economy up and running.

The bill has not been fully debated in Congressional hearings. Instead, it is the product of a series of marathon, late-night, closed-door negotiations. Senator Chris Dodd, Democrat from Connecticut, remarked at the end of an all-night session leading to the final draft, “No one will know until this is actually in place how it works.”

The drafters of the bill clearly are aiming to encourage whistle-blowers and ease their fears of retaliation, ostracism and reputational damage for future employment–all authentic concerns for legitimate protesters. But the unintended consequences of unfounded charges from employees with ulterior motives will be devastating for shareholders.

Already, a company must hire attorneys and accountants to investigate almost any purported complaint, with strict policies and procedures to ensure due process. The injection of plaintiffs’ attorneys into the mix increases the potential for specious claims to get traction and win a settlement, especially if the complainant is anonymous. Congress has skewed the delicate balance between good policy and over-indulgence of accusations.

In another example, the bill imports class-action lawyers’ favorite tool, section 10(b) of the Securities Exchange Act, explicitly into the law governing securities-related derivatives and swaps. Section 10(b) is the hunting license for trial lawyers to bring class-action lawsuits for sometimes frivolous reasons. While itself not necessarily earth-shaking considering the current state of the law, the change’s real-world effect could be troubling when combined with the bill’s new regime regarding transparency and clearing of derivatives, which will make pricing information public for the first time. Because private plaintiffs must show causation under section 10(b), plaintiffs’ lawyers simply point to drops in stocks as evidence of causation.

With stocks, frivolous lawsuits may be dismissed on causation grounds by the judge. However, derivatives often fluctuate for a variety of complicated reasons, so judges simply may avoid the difficult decision of dismissing a frivolous complaint on the merits and leave matters to a jury to sort out. Since the bill’s exceptions from liability are very narrow, plaintiffs’ lawyers will find the $1.5 trillion over-the-counter US securities derivatives market a tantalizing prospect for lawsuits.

These securities-related derivatives are important tools in basic corporate finance, mergers and acquisitions, and hedging transactions. By upping the ante on liability and leaving unresolved bureaucratic turf issues between regulatory agencies, the bill guarantees that these instruments will become more expensive and hedging risk will become less certain. It does not take a financial genius to predict that the writing and trading of these instruments will migrate to London, Singapore and perhaps Toronto.

Other special-interest groups are celebrating. The bill gives the newly politicized SEC authority to let certain large shareholders, acting in coordination in a non-transparent manner, nominate directors directly–mainly unions, state pension funds and activist shareholders pushing special agendas. The interests of these groups often differ from the interests of individual shareholders. By tipping the scale further in the favor of them, the net effect will be to politicize the proxy process, overrule well-established state law, undermine company management and confer on opaque proxy advisory firms, “activist shareholders,” unions and other often-allied interest groups additional back-room clout to influence corporate affairs for their own benefit. Who loses? The average shareholder.

What started as a bill to get Wall Street, has become a bill that sticks it to everyone, Wall Street, Main Street, consumers, entrepreneurs, shareholders and taxpayers. The financial markets are critically important to America. They raise capital for businesses producing goods and services. They create jobs, fund ideas and increase wealth for all Americans. When Americans save and invest, they are putting their capital to work, building their nest egg and that of others too. We need a more thoughtful, balanced plan to make sure that that nest egg is as safe as it can be, but also to ensure that we are not killing the proverbial, golden egg-laying goose.

The US Senate, which still needs an renaming as well, to honor their strongly socialist behavior, approved the bill as well. But that was no real great surprise, because most Senators no longer have the best interest of America at heart. Instead of protecting the United States, it has been in lockstep with the Central Committee and Comrade Obama for the last two years in their effort to create a Culture of Entitlement. And they’re getting closer every day.

From the article: Trickle-Down Retribution by Paul Atkins.

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