March 31, 2010

Senator Dodd's Magnum Opus

I haven't yet made my way through the 1336 pages of Senator Dodd's massive (but, as recent events suggest, necessary) overhaul of financial regulation (full text here), but the basic elements (very helpfully summarized here) look promising. The Bill promises to bring some transparency to the shadow banking system through required disclosures to financial authorities. It increases the government's power to shut down failing financial enterprises (and even requires companies to submit their own "funeral plans" providing a road map of how they should be shut down). It requires some "skin in the game" for securitization (certainly a controversial requirement). It also modifies compensation arrangements to require banks to have the right to clawback executive compensation if it was based on inaccurate financial accounting statements (broader clawback rights might also be justified for such activity as excessive risk-taking, but these might also be effectively required by changes to the Basel capital adequacy guidelines--at least for the entities covered by Basel).

Much of the public focus--and political debate--will be on the proposed Consumer Financial Protection Agency, but the systemic risks addressed elsewhere in the proposal are likely more important in terms of avoiding a future systemic financial collapse. 

I have coauthored a paper with Randall Costa of Citadel Investment Group on the virtues of central counterparty clearing for credit default swaps, a key step in Senator Dodd's financial reform. The paper, Clearing Credit Default Swaps: A Case Study in Global Legal Convergence, has just been published in the Chicago Journal of International Law.