this recent poll done by pen sean and burr land. robert green joining us to talk about it. mr. green, thanks for your time. >> thank you, sir. >> up next on c-span3, a look at the dodd/frank financial regulations five years after they were signed into law. we'll hear from house financial services chair jeb henserling on the law. and thomas perez talks about regulating retirement financial advisers. later, a discussion on islamic extremism. >> when congress is in session, c-span3 brings you more of the best access to congress with live coverage of hearings, news conferences, and key public

affairs events. and every weekend it's american history tv traveling to historic sites, discussions with authors and historians, and eyewitness accounts of events that define the nation. c-span3, coverage of congress, and the american history tv. >> president obama signed the dodd financial regulation into law five years ago. up next, a panel talks about the different provisions of the law including the creation of the consumer financial protection board, and the financial stability oversight council. the american enterprise institute hosted this event. >> good afternoon ladies and gentlemen. i'm alex pollack. it's my pleasure to welcome you here on july 21st the unhappy fifth birthday of the dodd/frank act to our conference on what should be done to reform it.

100% predictable feature and financial cycles is after a crisis there's political and regulatory overreaction. always. so with the dodd/frank act which, as you know a truly remarkable 6th flores sense of regulatory bureaucracy and deadweight costs. unchecked and unbalanced authority to bureaucrats. all the while utterly failing to address the blunders which were so important. are we stuck in the bureaucratic

mire and can we fix it? if so, how in particular? you're about to hear how from our expert panel. let me introduce them in the order they will speak. as we proceed through the panel, we will be working our way through the various titles of dodd/frank. first will be my colleague, peter wallison, who is arthur f. barnes chaired fellow at aei. peter co-directs a program on financial studies and pew financial reform task force and served on the inquiry commission where he wrote a very enlightening and highly controversial descent. he was white house council to president reagan, general counsel of the treasury department and practiced

corporate law. financial crisis was spawned by the financial -- the financial crisis spawned dodd/frank. but do you understand what spawned the financial crisis? buy peter's book hidden in plain sight in case you haven't yet. >> our second speaker, senior director of global affairs strategy and public policy at bloom berg, where he covers policy issues in europe, asia, and the u.s. equity fixed income and derivatives markets and the impact of capital or the lack thereof, i assume. on market structure. chris is special counsel and policy adviser of the commodity futures trading commission, including the time of the implementation of title vii of

dodd/frank and worked for the house committee. next will be j.w.whitt at george mason university. senior scholar on federal markets. previously j.w. was on the staff of the financial services committee in washington, d.c. he has written extensively on corporate law with his academic work appearing in the journal on regulation, journal of corporate law, and university of pennsylvania journal of business law and other journals. our concluding panelist will be mark calabria director of financial regulation studies at the kato institute. previously mark spent seven years on the staff of the senate banking committee where he drafted significant portions of the housing and economic

recovery act of 2008. that's the act that established a new regulatory regime for fannie mae and freddie mac, just in time to put them into conservatorship. mark also worked at the department of housing harvard's joint center for housing studies, the national association of home builders and the national association of realtors, as well as the census bureau. as you can see he is very experienced in the government housing complex. and therefore well prepared to reform it. each panelist will speak for 12 to 15 minutes, after which we will give them a chance to react to each other's comments or clarify points. after that we'll open the floor to your questions until about 2:30. at that point, peter wallison will address our key note speaker of the house financial services committee. so on to our panel. and, peter, you have the floor. >> thank you very much, alex.

i'm going to start with just a little bit of background on the act and then cover titles one and two all in 12 to 15 minutes. reforming the dodd/frank act will be difficult because most of the public has never heard of it and continues to believe that the financial crisis was caused by in sufficient regulation of wall street. in reality, the financial crisis was caused by the government's own housing policies, which forced a major reduction in mortgage underwriting standards. by 2008 more than half of all mortgages in the united states, that was 31 million loans, were either subprime or otherwise riski. and of those 76% were on the books of government agencies, primarily fannie mae and freddie mac, the two government sponsored enterprises that dominated the mortgage market. that chart, which some of you

were close enough can actually see, gives you a visual representation of what it looked like. everything on the left, blue, is fannie and freddie. above that is fha federal housing administration. above that other agencies also doing the same thing, v.a., and some of the agriculture credit agencies also make loans. on the right the black, is the private sector's contribution, which is about 24%. and we'll get to that in a minute. the remaining 24%, and that's the black on the right of these mortgages were on the books of the private sector. and when all of these mortgages began to default that is the ones fannie and freddie made or bought and the ones that the private sector bought when all of them began to default in unprecedented numbers fannie

and freddie became solvent, as we know. and many of the financial firms that bought these mortgages also got into trouble. and some failed. now, instead of reforming the government's housing policies, which would have seemed to have been the right way to proceed here, the obama administration sought to punish the private financial sector with the dodd/frank act, which was one of the most restrictive regulatory laws since the new deal. in effect the congress and administration were attack the symptoms rather than the disease. i don't have time to discuss all the details. but if you have interest in really understanding why we had a financial crisis as alex suggested, it is in my book, called hidden in plain sight, published in january. this is an historically slow recovery from the recession that followed the financial crisis. and we can see the slow recovery

here. again, if you can see it from where you're sitting. you can see that the red line which is the recovery from the 2009 recession that followed the financial crisis, is a real outlier in terms of all the other recoveries from financial crises we have had before. now, why would this be? supporters of the administration's policy argue that slow rovers generally follow a financial crises. but recent academic work has disproved this. two respected academics looked at all 27 recessions. the u.s. encountered since the 1800s and found that those that followed financial crises actually recovered faster than those that were originated for other causes. there were three exceptions to this rule. the great depression, the period from 1989 to 1991 when the s&l

industry collapsed and the most recent period which of course followed the great financial crisis. these three periods had much in common. and we studied them carefully. there were all periods when the government adopted new regulations and controls over the economy, those in the new deal are of course legendary as is the endless depression they produced. those in 1989 to 1991 included two regulatory laws. reform, recovery and enforcement act known as firea and the fdic known as fidicia. now we have the granddaddy of them all dodd/frank act. this strongly suggests that the dodd/frank act is responsible for the slow recovery from the 2009 recession.

just like its predecessors. moreover, because of the huge costs that it has imposed on the financial system, it is likely the dodd/frank act wet blanket will stifle economic growth in this country for many years to come. unfortunately, dodd/frank seems to have become something of an icon for progressives led by elizabeth warren. they will not agree to any changes, even small ones. now, most lawmakers have heard enough from their constituents to know that the act has been destructive and impeded economic growth. but democrats are very reluctant to support any changes for fear of rousing the progressive base. in today's conference, my colleagues and i here on the platform will discuss some of the most problematic provisions of the dodd/frank all. not all but the most problematic ones.

the title one authority from the financial stability oversight council, which i will call fsoc. that designate systemically important financial institutions which most of you, if you follow this, know as i sifiss. the liquidation authority in title two, the volcker rule in title six, derivatives in title 7, utilities in title 8, enforcement powers for sec in title 9. and the qualified residential mortgage rating agencies and the consumer financial protection bureau in titles 9 and 10. but i will start with titles 1 and 2. title 1 gives the fsoc authority to designate certain large nonbank firms as sifis. the sifi idea is based on the notion that all large financial firms were are interconnected. you'll hear this all the time. you'll read it in the papers.

they're all inter connected. and if one fails, this is the theory, it will drag down others. that's why sifis have to be specially regulated by the fed under dodd/frank to reduce their risk of failing. however, we can see from looking at what happened after lehman brothers, and this may seem counter intuitive, after lehman brothers failed, that this idea is wrong. no other large financial institution failed as a result of on lehman's failure. and this is true even though lehman was one of the largest nonbank financial firms and a major player in the credit default swap mark. and also its bankruptcy occurred at a time when market participants were very worried about market in stability. this shows that large nonbank financial firms are not dangerously interconnected.

and if one of them were to fail it would not drag down others. so there's no need to designate nonbank firms as sifis and no need to save them when they fail. since designating firms of sifis is unnecessary and extends the too big to fail to other areas beyond banking fsoc designation authority should be repealed. title 2 of the act is called the orderly liquidation authority and provides extraordinary power for the fdic to resolve large failing financial firms, including banks and nonbanks. from what i said earlier about lehman, it should be clear there is no need for a special system for resolving or rescuing nonbanks. they can fail and be resolved in bankruptcy without harm to the

rest of the economy. lehman's bankruptcy caused chaos to be sure. but that was because it represented the government's complete reversal of a policy of rescuing large firms that market participants thought the government had established with the rescue of bear stearns about six months earlier. until the sunday before lehman filed for bankruptcy, the treasury and the fed thought they had a buyer for the firm. when that fell through, the government had no plan b. it refused to put up the necessary funds so lehman's bankruptcy became inevitable. although lehman's bankrupt lawyer was contacted earlier in the preceding week he was not authorized to draw any papers until late on sunday before the filing on monday morning.

because of this government bumbling, any opportunity to keep lehman operating under section -- chapter 11 of the bankruptcy laws, was lost. still, while chaos resulted from lehman's bankruptcy, i want to repeat no other large financial institution failed. now, there is one group however, whose failure could cause a systemic event. these are the very largest banks. say those in the trillion dollar category. because of their role in the payroll system, and they perform other services in the financial area, it could be important to keep the largest banks from failing. the fdic suggested that it would do this through a process it calls single point of entry. spoe. and which i will pronounce as spoe. under spoe strategy the fdic said it would use dodd/frank powers to take over the holding

company of an operating bank and use the resources of the holding company to recapitalize the bank. thus the bank would keep operating and would no longer be a danger of creating some sort of systemic default. the idea has attracted a lot of favorable attention. but there's one big problem. as pool kubiak, my aei colleague and i showed in a recent paper it doesn't work for the largest 12 banks. the very were ones that might actually be too big to fail. the fdic may have assumed if a major bank fails the holding company would also become insolvent so the fdic could take it over under dodd/frank. unfortunately, none of the holding companies of the largest banks becomes insolvent if its subsidiary bank is wiped out completely. if its investment in the capital of a subsidiary bank is

completely wiped out, all of them have other subsidiaries and other activities that keep them solvent. if they're not insolvent, title 2 of dodd/frank does not authorize the fdic to take them over. so the fdic's spoe strategy will not work. now, this is important because the fdic will then have to take over a failing bank in the old-fashioned way and resolve it in the only way the agency apparently knows how. and that is by selling it to a healthy bank. the trouble with that is that in an era when people are concerned about too big to fail, that won't work either. it will just make the buyer bank that much bigger. thus dodd/frank does not do the one thing that proponents claim it would certainly do and that is eliminate too big to fail for the very largest banks.

there is a way to solve this problem. the largeest banks can be made virtually fail safe by loading contributions of equity capital to their holding company. that's the best solution to the tbtf problem too big to fail problem. but to put it into effect, title 2 would have to be essentially replaced. even elizabeth warren and president obama will have to recognize that dodd/frank must be amended in this way if it is to accomplish its most important purpose. thanks very much. >> thanks, peter. chris. >> thank you, alex and peter very much for inviting me here today. it's a pleasure and honor to be here. so i'm going to briefly discuss the volcker rule and the new derivatives rules.

and i want everybody to have a political context. because both were highly a little bit sized. getting through congress and once they were put into implementation in the agency process. dodd/frank directed regularities to make substantial changes to the structure of the capital markets without understanding the consequences of those actions. some consequences have been good and some consequences have been bad. some of the good is that you have risk management procedures that have totally changed the industry and the way it operates, which i'll go into later. the bad was that dodd/frank is row managing trading behavior and that is impacting liquidity. as a result we no longer have freely functioning capital markets, but what we do have is a capital market that has been centrally planned by washington regulators who are terrified of risk. the volcker rule was put into place by a third agree

amendment. there was no hearing to discuss what this would do to our capital markets. the policy, although it might be designed to achieve good is to prevent banks from using deposits backed by the fdic and cheap credit from the fed to finance speculative risk taking. when you hear casino bam gambling by the president or washington leaders this is what they're talking about. after 950 pages of rule make we have corporate bonds, asset backed securities and investments in certain funds. it permits markets by customer accounts through a myriad of rules. we have to ask if the policy was designed to stop trading, why are banks still doing it? the volcker rule allows prop trading in muni debt and u.s. agencies. you have to step back and say is that good for the system? if the idea was to stop people from using tax payer funds to

trade, why is it you can invest in a detroit municipal bond and not ibm corporate bond. we should think about that. it's a good question. but the practical impact of the rule goes to the heart of what market making is. when washington chooses to micromanage decisions it makes compliance very, very difficult. there's no reliable way to distinguish customer acts and a bank's own account. because of this any rule that limits prop trading must inevitably limit marketing and customer liquidity. the ambiguity is forcing people to err on the side of caution and pull back. this led to corporate bond inventory. so much so blackrock said the corporate bond market is broken. it decreased 77% since 2007. that's been aided by the volcker rule and other rules put in place by dodd/frank. title 7 was a derivatives rule.

this, again was highly a little bit sized in congress and then when the implementation period occurred. it requires reporting of derivative transactions, clear them at clearing houses, entirely new registered entity, and margin on unclear trades. these rules were rushed, put through and forced down everybody's throat at five rules a week just because the only way that you can implement ideology is through 200 and 500-page rule makings. this also revealed attention that is there to this day. which is the chairman at the time chairman against her wanted to overlay the swaps market in the mind-set and the mold of equities. but the staff only understood futures. equities are a horizontal market with many trading platforms.

futures is a vertical market. so there's a disconnect in the rules which made it very confusing, which caused over 100 no action letters to be issued. and basically forced people to pull back from the market when trading first happened in 2012. now, trading has gone up a little bit from last year and this year. but there still isn't a substantial amount of liquidity people were hoping for. what you have seen is a bifurcation of liquidity pools. the euro dollar swap market, inter dealer market is in europe and you can't find it here. some of these rules put in place were done outside on the apa. staff letters on the eve before a rule was going to come into implementation was put into place. it causes compliance officers to stop traders from doing anything in the marketplace. one of these rules -- or one of these policies was actually a

good idea. it was called straight through proceedings. it glows through the a clearinghouse. there is no operational risk in the system. it's a good idea. but it should not have been put forth in an e-mail to clearinghouses telling them they had 60 seconds with which to accept a trade. the day before trading goes into place, staff issues guidance on this same topic, which causes confusion all over the markets. so there are ways to follow the apa and have public comment and prepare the public. not a lot of that was done in this situation. then there is the seth rule making. interstate commerce. any means of interstate commerce. fax, phone, e-mail, et cetera. but what the chairman thought it meant was order book trading. but for my boss's amendment at the last hour we would have had a seth with order books.

they have not taken hold in the market to this day. even though a false narrative said put products out there we'll trade them, don't worry about it, that hasn't happened. so when you end up with we have an rfq, our personal request quotes get them back and executes. the order book is empty. i commend the white paper that goes into a lot of depth on this topic. so where did that leave the cfdc? there is a provision that allows for cross-border regulation for derivatives trading. the idea is the u.s. will lead and everybody else will follow. well that's not true. and commissioner giancarlo said they are being used as a weapon of choice. the u.s. claimed we have to extend our rules into the eu and elsewhere because we know best how to regulate and other regulators will not act in our best interest to prevent risk from flowing back to the united

states. i can tell you i've gone to europe numerous times the last three years. each time i go they laugh at me. oh yeah, wasn't it you who imported your mortgage crisis into europe? we have to think about these things before we make policy like that. that interferes with international relations. a couple more things i know to talk about. there's been basis risks that's been created. basis risks is when you have a risk, you want to hedge the total risk. in order to do that you need a swap product. or use a futures product. but the future could leave you with almost 85% of your risk hedge and 15% just sits there and you absorb the risk. you pass it on to consumers. you pass it on in your prices. also, it sits there on your balance sheet. so we don't know how much of that is out there, but that is starting to happen. the other thing the derivative rules did is really put the hurt on futures commission margins. they caused prices to go up so

much it wasn't profitable. another thing we have to question that we can look at later. one good thing that these rules did is they did bring some price discovery through to the marketplace and there is a product, one product that is trading 93% electronically, cds investment grade. so that's very good. but the uptake hasn't been what was sold in congress or during the implementation period. so where does that leave us? central bankers took this time to watch and see what happened. politicians didn't break up the global banks. they just didn't do it. but as time passed, they have become emboldened. they are using a complex web of trading, margin liquidity and margin rules to discourage risk taking into the markets and force an end to the global banking model. the global banking model was bred indicated on holding companies being able to transfer

risks among affiliates and servicing large clients all over the world. they don't like that. the view is based on this simple fact. they believe they can contain any risks in their own jurisdiction and they can't regulate them outside their borders. so all these rules are designed to create that shift away from global branch bank to go fully capitalized subsidiaries under a holding company. this results in internal bifurcation of global trading and collateral functions. it makes you not just look at it a screen and click and be done with the trade and it goes to the back office but to think how do i collateralize that. how do i source it? what's the cost of it. fixed income and derivatives are inextricably intertwined. so it is reshaping the entire industry. it's good because you understand the cost of the trade and the transaction all the way through.

it's a little bit more risk management discipline. it is also good because you are analyzing your customer relationships and product offerings. some product offerings are disappearing, like single name cdss. this is bad because you are analyzing your customers. some of your customers, not the big ones are being told you don't have access to liquidity any. the regulations flowing from dodd/frank have also forced market participants to use only u.s. treasury and agency debt to collateralize their trades. they force banks to hold u.s. debt ascap a tal and they permit u.s. debt to be prop traded. why? why is it that u.s. debt gets the sack row cinct level? why was it necessary to create an artificial demand for u.s. debt. is it designed to apiece the housing industrial complex by creating a permit spigot to prop up the housing market? i don't know, but we should ask.

is it because regularities were directed to create an incentive to buy our debt because of a political need to continue to finance deficit spend something we should ask. is it because regulators believe the u.s. debt is not subject to market forces in it's a question worth asking. whatever the reason one thing is clear, the health and stability of our financial system is based on price systems of u.s. debt. if we have another flash crash that causes foreign investors are reevaluate our treasury markets, we could have a big problem. with an $18 trillion deficit, our debt is hardly risk free. this regulatory planned market system is dangerous because it concentrates one form or debt on everyone's balance sheet across the system. and if markets move in an unexpected way, everyone will be

holding the same wrong-way risk at the same time. now, that should ring a bell here. because that's exactly what happened in 2007 and 2008 with the mortgage products. and i doubt -- i highly debt the fed and congress will sit by and do nothing. s as for tkod frank, margin volcker rules will continue to exacerbate. the basis risk that i referred to in the derivative markets will only become a concern when prices move against market participants and force selling through margin calls. but one thing is clear to me. margin calls and large price movements will become the new normal. government rules are trading decisions in the capital markets and decreasing liquidity and other asset classes. the net effect of all this forced change has been a decrease in sustainable sustainable liquidity in the u.s. swap and the corporate bond markets. and now even in our u.s. treasury markets. thanks. [ applause ]. >> thank you, chris.

you made a lot of points but you want i.d. to comment on one. it is quite clear governments always promote government debt. and the employees of governments, that is to say regulators, always promote government debt or the sponsored agencies of the government. and i think that's a big problem. j.w. >> all right thanks. i'm going to talk about title 8 and 9 in 15 minutes, which is a challenge. because i think there are hundreds of pages together. start with title 8. >> the chair is sure you will meet your challenge. >> yes. title 8 is a provision that is i think probably inspired by some of the central clearing provisions in title 7. title 8 provides for the designation of financial market utilities that are deemed to be systemically significant by the fsoc.

platforms provide for settlement clearing or payment systems. so a wide variety of types of fmus, dttc, which provides a settlement system for the trading of securities to the clearinghouses chips program interbank payment program. title 8 does two things essentially. it's said that when god closes a door he opens a window. here when regulators close a door they open a window. in this case it's the discount window at the federal reserve. so what designated fmu is deemed -- once deemed an fmu becomes designated for a special regulatory regime from either the federal reserve or in some cases for the sec and cdc. and they have automatic access to the federal reserve discount window, here to for limited to

commercial banks. there could have been another way to i think run this railroad. if title 7 and rule makings under title 7 allowed for more freedom in ownership of clearing and settlement systems you would have firms more willing to pony up to provide any liquidity needs of these firms. but the way title 7 was implemented there were very dangerous restrictions place said on the ability of these entities -- the ability of private parties to take ownership in central clearing entities. i also have some concerns generally about the motion of the federal reserve as a regulator, particularly of payment systems. because think about this okay. the federal reserve is the primary regulator of its primary competitor, the chip system run by the clearinghouse association. the federal reserve is also the primary regulator of the

clients, federal reserve and chips. it it is a competitor and primary regulator of many. i think that's central planning. i don't think the federal reserve manages those conflicts particularly well. george is here from kato. he has written about the fact that we don't need a central bank to run a wholesale payment system. the private sector can do it pretty well and has done it for a long time competing with the fed. on a transaction basis does it much more cheaply than the federal reserve. and to see that just go take a tour of one of the regional fed banks there. they're pretty nice places with private cafeterias even better than aeis, if that's possible. and i will close title 8, my colleagues have both written about a dangerous provision tucked away in title 8 that

allows for activity-based designation. and under their read, which i think is a very reasonable read and that provision in title 8, it could allow for potentially unfettered regulation of industries not intended to be regulated by dodd/frank, like, for instance, credit unions. it can be used as a method to regulate asset managers on an tif'd-based basis. so i would think very carefully about those provisions in title 8. let me move on to title 9. title 9 in dodd/frank is sort of a grab bag of securities and corporate governance provision and other things. if you have never been to a kids party, at the end you always get a grab bag. it is just a bag full of junk. it is is full of items that make no sense to each other. nobody really knows what to do with them. and that's the best description i can give -- that's right. a lot of sweeteners. in title 9. so just to run over a couple of

them, there are new enforcement powers for the sec and particularly with respect to civil penalties. i have some concerns about those powers particularly in the hands of the current enforcement regime at the sec look at the recent stories about what i would call scandal of due process scandal at the sec in terms of moving cases internally to administrative law judges making the appeals process much more difficult for litigants. by the way, the administrative law judges not surprisingly, enjoys much better win rate. so i have some concerns about those powers in the current regime's hands. whistle-blower award provisions in title 9. for those companies have internal compliance regimes that want to fix problems as soon as they are reported. they go straight to the sec to get a piece of the reward. i think there are unintended problems resulting there.

and speaking to the corporate governance provisions in title 9. let me point anyone interested in this to a book that came out around 2000 called "working capital." it is an accounting term. buff this was funded by union in looking how to further welfare agenda. so the working man's capital at work. it has a number of ideas included in title 9. so this is a 10-year-old ideas that they sort of saw a window to implement these particularly pay ratio disclosures. and they took it. and i think that's evidence enough that title 9 had very little to do with the financial crisis. so in terms of particular corporate governsance provisions we have an advisory vote on the executive compensation. we have disclosure of the ratio of ceo pay to the pay of the average worker. what does that have to do with the financial health of the

firm? i don't know. in fact, it is potentially damaging to the health of the firm because it is intended i think to discourage firms from metering executive compensation to financial, you know results. it's intended to implement a social welfare agenda on half of the unions. there's no other way to describe that. i think it's very dangerous. if you want to have that debate have it in another form other than the regulatory system is my review. there is a proxy access provision in title 9 of dodd/frank. this was the first rule make sec chose to do. and it was quickly defeated in court on the basis of lack of severe cost analysis, which resulted in the commitment at the sec. so in that sense it was good.

i have done an empirical study on the rule with my colleague at george mason tom stratman. we do a study of implementation and find it cost billions of dollars in shareholder losses. what's a better way to run a railroad here? what's the alternative? i would suggest that state-based competition and corporate chartering is. a lot of scholars suggested there are problems. delaware has been a dominant player. delaware takes a view of the market for corporate control as a disciplining advice. believe me the fact that they hired me means delaware is not perfect. i think a better way to run a railroad is to get rid of the federal overhang.

i think you have to eliminate the williams act as well, which is a constraint on the market for corporate control. i think if you do that or at a minimum change those provisions to optional for firms to opt into. before you tell me that's politically impossible, there are provisions to dodd/frank that are optional like the option of an independent chairman. number two you recognize the right of firms to provide for mandatory arbitration of shareholder claims which i think the act already provides. according to our interpretation of the act already provide. but the sec hasn't gotten the memo. they still refuse to accelerate your registration if you have such a provision. carlisle found that out recently. you need federal recognition of that right. a federal cot fiction of the internal affairs as a binding constraint on the sec from using its discretionary regulatory

authority to impede innovation and state corporation law. if you do those three things you get a much more robust state chartering system. then i think when you combine that with a very exciting world of crowd funding, that is coming pretty soon and free market security lawyer, this is the only exciting thing i have seen in the last 75 years of securities regulation. i think you need a new way of doing corporate governance state chartering competition to innovate at the scale and speed that crowd funding will require. i think these three provisions will sort of encourage the kind of innovation we need to see in corporate governance. and i think crowd funding will be the first form where we see that happen if we can do that. one experiment i would point to in how it can work, if you have the freedom to do it from the federalover lay, there's one very small inspection that trade

generally are energy companies. nysc exempts these firms from a couple of the listing requirements, including some board committee requirements. as a result, what we have seen is an incredible amount in government structures for master limited partnerships. one of the trade-offs we see is rather than things like fiduciary duty litigation and particularly structures for committees, we see a regime in which mlps distribute all their excess capital every quarter to shareholders. they don't need participation corporate democracy. they just get their money every quarter. if the mlp needs new money, it has to raise it from public markets. i think the more -- the less federal overhang we have the more we will see in governance. it is an experiment that shows us why. i will close with one last thing i think we could see. if we have incentives to

innovate in corporate governance which it inhibits, i think we could see cities get involved as well as states. why not silicon valley. inclement bar is more motivated than anyone to come up with whatever innovations. i can't even think of them. that's how innovation works. i think it is probably best equipped to deal with particular needs of on those kinds of firms. so i think it could be a very interesting world. it requires a couple of things. cod fiction already in the law. recognition of arbitration right. it is already a right. thirdly, a switch to optional for provisions and socs, title 9 and with respect to the williams act. that's already an approach that some parts of title 9 has taken.

i think it's perfectly reasonable and exciting. i think in these uber lift crowd funding world i think we need a modern corporate governance system. and getting rid of the overhang will be key there. >> thanks. mark. while mark is getting up there, j.w. mentioned the unpredictability of future innovation, of course. surely the financial stability oversight council can predict all of this innovation. >> right, sure. >> mark. >> i have a comment i think i have heard a new phrase. free market securities lawyer. >> there's two. hopefully a growing trend. first, let me thank peter and alex. i really appreciate the invitation. as laid out, we're going to be taking different sections. i will take parts of title 9

that j.w. did not talk about. and title 10. more specifically, the credit rating agencies. you think about moody's standard & poor's, fitch. and then i will talk at the end about the qualified mortgage rule and qualified residential mortgage rule. before i start, you know, i would like to just quickly bat aside what i think is a common strong man i hear. i'm sure many of the rooms we hear that you know skep tiptics want to go back. that's ridiculous. i don't know anybody who likes financial crises. certainly i have seen people who enjoyed them. i'm not sure i saw barney frank happier than when they were doing the t.a.r.p. the concern is really whether these things work or not. and i think we could hopefully put aside all the straw man spin we're going to hear today. before i talk about those issues, i want to associate

myself with what has been said by my colleagues. i stated two weeks ago before the committee that i do not believe dodd/frank has made us safer, neuer do i believe it ended bailouts. it's not just an issue of reducing burden some cost regulation. it is bringing stability to our financial system. again, i don't think dodd/frank does that. so let me get to the rating agencies. this is actually something where dodd/frank tries to go in the right direction. unlike previous housing booms and busts, like the savings and loan crisis the recent one was particularly tied to our capital markets. and i think it made it much more destructive in the same way, not forgetting the savings and loan crisis was expensive. we had a recession. as peter mention said one of the three recessions that took longer than usual was the post savings and loan crisis. again, there was something special about this one. to be one of the things that was something was securitization and the way our mortgage and houses

markets were lincolnedked to capital markets. it would have been impossible without the ratings agencies. what we witness said was outsourcing of due diligence. and of course let me first say i think the rating agencies provide valuable in sights. they certainly have an important role. but i also believe it works best when there is a diversity of perspectives. we don't just rely on one particular viewpoint. so section 939 of dodd/frank gives a nod to this problem. you should remove statutory references to the rating agencies. unfortunately, that removal ended there. dodd/frank required, of course regulators to do a study. i forget the number of studies in dodd/frank. it is almost 400 required rule makings and other studies. what is required from the the regulators is do studies about the reliance on the radiance. there's no requirement for the

regulators to reach certain conclusion. there's no requirement for the regulators to reduce the reliance. and sadly the regulators have chosen to increase it in many instances. so that would be not a big deal if most of the reliance on our laws came from statutory rather than regulation but that's not the case. the vast majority of reliance comes for the decision of regulators, and dodd-frank doesn't change that. so to me where we have a fig leaf we needed a forest. we needed reform of the agencies. the first thing we needed was to prohibit regulators from outsourcing their job to the rating agency. the notion a bank regulator would look under the hood and say this is aaa rated and my job is done, it ends there. to me it's just ridiculous. that's the demand side. the supply side is just as bad. sadly dodd-frank gets this wrong as well. dodd-frank actually increases barriers to entry in such as

those found in section 936. so i give dodd-frank a very small amount of credit for recognizing the problem with the rating agencies but unfortunately they completely missed the ball on it and fell far short of where they needed to go. an area however, that dodd-frank gets completely wrong in my opinion is the role of consumer protection and the crisis in the subsequent creation of the consumer financial protection bureau. so while of course there was fraud, i don't think anybody would deny that. of course, there was abuse. i think it's more likely the case that acid bubbles generate fraud and abuse more than the other way around. i think it's also important to think about it in this way, asset bubbles come from credit being too cheap not too expensive. so let me maybe walk you through quickly what an example would be. if you assume a fixed monthly payment or expand a monthly payment when you bid for a house, the problem is borrowers

were having fees and interest rates added on, that means they could only bid less for the same amount of house and stay within the same monthly payment rather than the other way around. if consumers were being gouged, that would have pushed housing prices down, not up. so again i think we need to think critically about that. i also mentioned the turn in housing prices, the influction point in housing projects. so housing price declines caused the defaults rather than the other way around being the mayor driver. so again i would emphasize we did not see a failure of consumer protection. we saw, as peter mentioned, a coordinated federal effort to for underlying stalndards across the board. i think we can all stipulate most of the non-bank lenders had nothing to do with the crisis. i don't think joe and paul argues that payday lenders and auto dealers and debt collectors

caused the financial crisis, yet, that's who they are going after. so you don't see them going after fan flee and freddie. you see them going after the unrelated industries that have zero to do with the crisis. that's not to stay the industries may or may not have needed different levels of regulation. but again what we saw, most of dodd-frank was a bait and switch. it was okay, we're going to end bailouts. we're going to predict a system. but don't look while we put all this unrelated stuff in here that has nothing to do with it. sometimes i hear the argument that we needed to create the cfbb so banks would have a level playing field with nonbanks. let's first start with the observation there's not a level playing field anyhow. the small consumer guys they don't have access to ensured guaranteed deposits. they're not going to get bailed out. the argument that poor little citi bank will have to compete with cash america and we need the cfp to protect it strikes me

as ridiculous. so let's emphasize a lot of focus on people who had nothing to do with the crisis. to me one of the most dangerous precedents is the mechanism of cdfp. the consumer agency is off budget. it's funded essentially by the earnings of the federal reserve. quite frapgly every federal agency should be on budget. i also think this is a direct violation of our constitution that requires appropriations to be done by law. the notion that we would allow an agency to set its own budget and determine its own funding to me is really offensive to our good government structures and what congress was elected to do. this might come as a surprise given our current budget situation. but members of congress were elected to make hard decisions about spending. a dollar that goes to here is a dollar that doesn't go to health care or whatever. and what is the stop us from it? why don't we have peanut

subsidies or whatever. and then we don't have to worry about ever raising taxes again? i've occasionally heard that we need to do this, you know, we need to take it out of the appropriations process to protect it from bank lobbyists. i think what this means is they're trying to protect it from democratic accountability. every agency gets lobbied. and they i can encourage you to go up there in some time. in no way would that provide justification for taking dod out of the justification process. let me note a more troublings a sect p its engaged in a massive data collection effort. it might put nsa to shame. they are working towards coverage of 90% of credit card accounts. let manye quote the great defender of free speech, justice william douglas. a checking account may well record the beliefs as fully as the transcripts of his phone records.

of course today's checking accounts or credit cards and debit accounts. and of course, the notion that it's not going to look at the data. i will certainly say is an organization that accepts donations from credit cards. the last thing i would want to think about is looking to see how he gives to kato institute. i certainly think that's troubling. and unfortunately a long trend in this country of using bank examination records to abuse political opponents. i will be sad to say this would not be new if it does happen. hopefully they're not listening too closely. to those who care about the fourth amendment, which i do, and i hope most of us do and care about protecting consumer privacy, i don't think there's a bigger threat. given this financial collection also leaves consumers very vulnerable today that security breaches. i assume i'm not alone in the room in being a former federal employee who got data being hacked.

so to me it's unfortunately doing hackers a great service by consolidating all the credit card data in one place. that will be a real risk. and they recognize this in the audits. that it leaves consumers at risk of having their data hacked. so to me again dodd-frank missed an important opportunity to rationalize our flawed consumer finance laws. instead of those laws transferred to an unaccountable agency whose bureaucrats can force their efforts on consumers. the agency will do what the federal government has done to mortgage market, which is peter demonstrated, royally screwed it up. let me spend my last few minutes talking about the qualified residential mortgage rules. so this is something i think there's great agreement on. even if you look at peter and the other dissents and the

majority opinion. there's actually one consistent observation from all of the committee members. and that's problems underwriting in the mortgage market. that's agreed upon. what's not agreed upon is why. so dodd-frank does recognize the special role. unfortunately dodd-frank and the regulators in this instance screwed that up, too. the qualified mortgage is an extension of the truth and lending act. both contained substantial liability. the qualified mortgage is essentially targeted at helping to generate consumer class actions next time around. i will note with the qm for my friends in the lending industry who thought it was hard to foreclose this time around, you ain't seen nothing yet. it will be very difficult, if near impossible to foreclose in the next downturn. the only avenue for avoiding this is to meet the safe harbor

provisions. so to meet one of the twisted ironies of dodd-frank is that one of the reasons for the public demand for action and passage is the american public was asked to bail out the mortgage market. what do we have today as a result of dodd-frank? over 90% is directly on the bhak backs of the taxpayers. so again these things could have worked out well. i will note he said last year he saw them as the most significant parts of dodd-frank. the the liability was always going to be an issue, but these could have done something to reduce mortgage default. they certainly started out well with down payment and credit standards. but unfortunately the regulators caved to pressure and would ultimately ended up with a gutted qrm that even barney

frank says was mishandled. so why is that necessarily? so one of the debates is what exactly mortgage products cause the crisis. some of my friends in the consumer advocacy world told you caused by prepayment penalties and low documentation, and exploded arms. i would point you to a number of analyses that gao has done. certainly an objective party in this instance, as well as a number of other empirical studies. even the results are quite clear. the main drivers of default -- i would like to say this as a side. you can even look at the studies by organization by center for responsible lending. their own studies show the main drivers of default are loan devalue, borrower credit score. everything else is literally a rounding error. and so of course, the final dodd-frank rules essentially abandon the things that actually drive default. and endless servicing

requirements, again making it near impossible to foreclose. my opinion is the rule increased foreclosures last time around rather than decrease them. and the harder it is and the mission has nothing to do with financial stability. the mission is to use the the regulatory system to force prudent borrows to subsidize imprudent. we all knew the crisis was quite costly. it also will provide a cover for massive expansion and government powers. >> one minute. >> i'm not even go i think to need that. so i would say and would say avoid financial cryises. i think a repeal is not enough. the presystem was broken. it was flawed. and to me one of the real flaws of dodd-frank is it extends the precrisis system. the theme of dodd-frank is,

let's expand bank like regulation to everybody else. so again, think about it that way. the notion of dodd-frank, if only agi was regulated as well as city bank was regulated everything would have been fine. >> thank you mark. i'm going to let each of the panelists, in order add something if you would like or take up something somebody else said or reiterate a point. maybe two minutes each. peter peter? >> thanks. there were a couple of things that occurred to me we might add a little bit. first of all, i've heard about the costs of swaps. you didn't cover that as much as we might have covered it, but that and also the question of hedging under the voca rule. that's also a problem.

we talk about market making. market making is a problem. you can't distinguish it, but it's also a problem with hedging. a lot of activity that banks engage in is hedging activity. that also looks a lot like prop trading. so how -- today i think is the day that the the dodd-frank, that the rule goes into effect. how are banks going to deal with this? >> well they're going to hire a lot of lawyers in this room. >> good. that's always good. and a lot of them are done. and there's a political compromise inside of agencies. and this rule in particular had six different agencies working on it. and each one of them had to get a pound of flash at the last minute. and what we have is you will do hedging, if you're a bank, out of your bank account. but you could also be doing

hedging because there is a reasonable anticipatory demand that your customer, who you know holds the same products as you, may also want to hedge. but then you have to explain the transaction and tell people why it's not changing. so this is why i think you're going to see pull-back and you're going to see flow out of the fixed income corporate markets and into the safe markets. into the markets that are easy to value easy to collateralize, easy to mark on a daily basis, and when prices move up and down, you don't have a problem. because you don't have to deal with that rule. and again, this is very bad for the real economy. corporate treasurers need the hedge. they need these instruments and they need them and they also need to know that when they issue their debt into the capital markets that if the debt is not fully subscribed, that the banks will take the debt down and stand behind it to make a market whenever markets move up and they move down. and it's not clear to me that if

there's a bankruptcy or an issue with specific debts and we could have an issue coming very slowly here in the the high yield energy oil and exploration area coming in the next six to eight months, whether banks are going to step in and take on the liabilities that they used to for fear of holding inventory too long or being told they're not hedging. that hedge turned out to be a prop trade because the customer's reasonably anticipatory demand vanished. so i agree with you, peter. this is a very, very -- this is micro management. of the capital markets. >> all right, chris. that took up peter's time. but now you have another two minutes if you want to add something else. >> well, i mean i wanted to agree very much with what mark said. i was an attorney during the crisis. and what we did, my entire industry was predicated upon taking advantage of rules.

it was basically you took advantage of the risk weighted capital requirements in the banking book and changed that into an aaa rated security that got less, that you had to hold less capital against and put nit the trading book. and to me, that is again, that's government interference that created an incentive for people to act and create an asset bubble. and you accurately stated the credit rating agency reform didn't really happen. and to me i think the basil capital risk weighting rules are still a huge problem that haven't been addressed. and i think what you're going to see because there's global growth stagnation all the sudden, the idea is going to be well, infrastructure bonds and emerging markets, united states frublgt bonds infrastructure bonds, all these things should get better capital. they should be treated more like government debt. i wonder what your comments are. >> let me say i fully agree with

that. so basil is out there ha has not been affixed. and let's keep in mind that basil told us greek debt was risk free. that fannie mae was risk free. it's only a small improvement of the same basic framework. also take this as a moment to plug bipartisanship. we were very, very fortunate in this country that our banks did not adopt basil two before the crisis. i acontribute toe that being there and saying don't end this thing. you will end up with less capital. it gets to a different theme. one of the themes is to hand ever more discretionary power to the reserve m and you talk about a string of regulatory failures.

scholes's paradox named after my friend professor bernie schole is no matter how much the fed messes things up and no matter how bad the blunders with each crisis it gains more power and authority. and it's historically true. and dodd-frank is the last example. jw, further comments? >> sure, i just want to touch on another issue that i see in dodd-frank perpetuated -- perpetuating a problem that long proceeds dodd-frank the inclusion of immaterial disclosures. conflict minerals or minerals developed in the congo. they finance the bad guys. they finance the good guys and they finance people completely uninvolveded in the war. but they decided that we should stop purchases of conflict minerals in the west, and so there's a mandatory requirement