Vague law will hobble economy
BACK IN February, President Obama stopped by the US Chamber of Commerce to talk up the economy. He urged the assembled CEOs to “get off the sidelines and get in the game.” Their persistent complaint that uncertainty about new regulations discouraged investment and job creation was met with a presidential eye roll. In the White House view, the new health care overhaul and Dodd-Frank financial service regulation gave them all the certainty they needed.
If the economy is currently enjoying the benefits of certainty, we should all be worried, not just the CEOs. A closer look at derivatives regulation — just one piece of the Dodd-Frank financial bill — brings into focus the consequences of vague legislation written by politicians who don’t understand how the economy works.
Derivatives are a kind of financial instrument used in one form or another by nearly every major corporation. This is not just an issue for the J.P. Morgans of the world; Caterpillar, Ford,
Enter the Congress. Last year’s Dodd-Frank law contains over 100 different provisions dealing with derivatives and swaps. These changes involve things like securities registration, margin requirements, counter-party credit checks, and new compliance officers. Every firm in America — without exception — has been told that it must comply with the new laws beginning July 16. Oh, and by the way, the final rules haven’t been written yet.
It doesn’t take Warren Buffett to realize that when companies don’t know what new rules will look like, it affects their ability to commit capital and create new jobs. When I was the operations director for a small electronics firm in Manchester, N.H., I could feel how an uncertain business environment made us less willing to spend money. Businesses delay plant expansions, hold off on equipment purchases, or hire more cautiously throughout the year.
The Commodity Futures Trading Commission and the Securities and Exchange Commission are spearheading the rule-writing effort. Displaying a lack of both calendars and business sense, they’ve assured the markets that “guidance” will be posted on their website — “soon.” Allowing just five weeks to finalize and implement dozens of new rules is the height of arrogance and poor planning. It leaves the distinct impression that no one within 500 yards of the White House has ever held a job in the private sector.
Without clear rules, market participants can’t answer the most basic questions: Can non-financial firms such as farms or manufacturers purchase over-the-counter derivatives? Who is a legal swap dealer? Is my company in compliance with the new law? Poorly written rules will also introduce higher costs for hedging risk, complying with regulations, and defending against swarms of trial lawyers descending on any company that appears vulnerable to claims of “non-compliance.” Sensible rules shouldn’t be this difficult to finalize. If the legislation is calling for unworkable standards, the regulators should admit it.
In addition to the offer of website “guidance,” just last week Treasury Secretary Tim Geithner called for new global derivatives standards. Seriously? We can’t even get our own house in order. Perhaps Geithner recognizes the damage that badly designed regulations will do to our financial markets and hopes that global system will impose costs on everyone, thus protecting us from the excesses of Dodd-Frank.
The irony here is that Geithner’s pronouncement only adds to the uncertainty that’s hobbling the economy. Investors and business leaders will wait and watch as he travels to Europe to raise the issue with his foreign counterparts. They’ll discuss various scenarios for global derivatives rules and regulators. Nothing will actually happen.
So here we are with just four weeks to finalize over 100 provisions from the most sweeping financial regulations bill in a generation. The Commodity Futures Trading Commission is preparing to delay the implementation of some — but not all — of the rules for some unspecified amount of time. Trial lawyers are waiting to take advantage of the confusion, but Commissioner Scott O’Malia has reassured everyone that “all of this will hopefully be clear in a week or two.” Hopefully?
Just remember: Obama wants you to “get in the game.” But please don’t mention regulatory uncertainty. He doesn’t want to hear it.
John E. Sununu, a regular Globe contributor, is a former US senator from New Hampshire.