Streetwise Professor

October 19, 2011

Frank-n-Dodd’s Unintended Consequences: Chapter . . . I’ve Lost Count

I’m in New York.  No, I’m not joining OWS down in Zuccotti Park.  Quite the opposite.  I was speaking at event sponsored by the object of their ire, at the JP Morgan Chase Commodity Forum.

I spoke about Dodd-Frank and commodity trading.  I did my shtick, and it went over pretty well: I was surprised that “Frank-n-Dodd” was something most hadn’t heard before.  The audience found the phrase amusing, and more than a few people remarked on the phrase afterwards.

Substantively, the most interesting thing I heard was said by Morgan’s head of commodities, Blythe Masters.  She noted that F-n-D imposed huge compliance and administrative burdens.  Huge.  Moreover, these are fixed costs.  So Frank-n-Dodd increases economies of scale in banking, which will favor the big over the small, and encourage the big to get bigger and the small to go away.

In other words, something ostensibly intended to address too big to fail will encourage big banks to get bigger through regulation-induced scale economies. The effect will be the exact opposite of the intent.

The road to hell is paved with good intentions.  Frank-n-Dodd just well may be the world’s largest paving company.

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  1. Every time you go to a movie you are helping pay Chris Dodd’s salary as head of the Motion Picture Association of America. He is the president of the MPAA and that group represents the movie industry in Wash. DC. Funny how things work in Wash. DC. Voted out of office for questionable dealings with businesses he was in charge of overseeing their regulators and ran interference for said businesses only to rise from the ashes of shame to a prominent position that is in charge of lobbying his buddies in government.

    Comment by Bob — October 19, 2011 @ 10:34 pm

  2. Sorry for the off-top, but happy birthday, Professor!

    Comment by a.russian — October 20, 2011 @ 9:31 am

  3. Thanks! No apology needed, certainly.

    The ProfessorComment by The Professor — October 20, 2011 @ 11:39 am

  4. “She noted that F-n-D imposed huge compliance and administrative burdens. Huge.”
    Maybe this is true for banks, just for the fact that banks are huge and complex.
    But this does not have to be the case for smaller, niche players, that will have the opportunity to participate in this market, as soon as it is regulated, standardized and on a proper exchange. Do not believe everything the incumbent ‘players’ in these markets have to say…

    Comment by Lawrence — October 20, 2011 @ 2:53 pm

  5. I think you are quit wrong, Lawrence. The administrative, operational, and compliance burdens are a nightmare. They will affect everyone who trades derivatives, and will affect with particular force any firm designated swap dealer or major swap participant. My bullshit detecter is always on high, so I don’t credulously accept what incumbent players say. But I can tell you from discussions with myriad medium and smaller players who find the burdens that will be crushing.

    The ProfessorComment by The Professor — October 20, 2011 @ 3:03 pm

  6. how about FrankenDodd

    Comment by Surya — October 20, 2011 @ 7:55 pm

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