In the ongoing spirit of never letting a crisis go to waste, the Obama Administration unveiled vastly expanded regulatory powers over the nation’s financial institutions this week.
And while it travels under the guise of preventing the next financial crisis, the Obama plan is dangerously similar to another failed, big government attempt at financial reform: The Sarbanes-Oxley Act.
July 30 will be the seven-year anniversary of the passage of Sarbanes-Oxley, which was passed by Congress in the wake of the Enron and WorldCom scandals. Because both Enron and WorldCom defrauded investors by overstating their profits, Sarbanes-Oxley attempts reform by mandating that all companies document any risks where they could conceivably misrepresent their financial soundness.
That was the theory anyway. In reality, Sarbanes-Oxley set in place a series of mandatory reporting requirements that have functioned as a massive corporate tax on America’s business sector.
The costs of this mandate on American businesses – particularly small businesses and start-ups – have been massive. Analysts estimate that first year cost of compliance of just Section 404 of Sarbanes Oxley was $2 million, based upon an average of 12,000 hours of extra internal work, 3,000 hours of additional external work, and $590,000 of additional auditing fees.
This Sarbanes-Oxley mandate is a one-size-fits all catastrophe, forcing smaller companies to meet the accounting standards of the more risky, mega-companies. As a result, venture capital firms have fled to London and in Hong Kong, with survey data showing 90% of those companies cited Sarbanes-Oxley as a chief reason for listing in London’s market rather than in New York.
The financial regulatory regime announced by the Obama Administration is Sarbanes-Oxley on steroids; yet another power-grabbing, bureaucratic trap for the financial sector.
Especially troubling is Obama plan’s drastic expansion of the Federal Reserve’s authority over the economy, what the plan itself calls “the biggest changes to the Federal Reserve’s authority in decades.”
The Fed would become nation’s “systemic risk” regulator. It gains unprecedented authority to “unwind” any “troubled” firm, and the power to subpoena any document from any corporation—public or private—foreign or American.
Worse, under the Obama plan the impartiality of the Fed— key to the function of our financial system since the 1913 Federal Reserve Act—is replaced by politics. In some cases, the Fed would need to obtain written permission from the Treasury Secretary to perform certain actions.
So not only does the Obama plan expand the power of the Federal Reserve, it gives Treasury—an agency run by a political appointee—a vehicle through which to assert influence on how that power is to be wielded. This is a stunningly dangerous change.
What’s more, the new regulatory regime creates an alphabet soup of new bureaucracies – five new ones by our count. We will now have the FSOC (Financial Services Oversight Council), the NBS (National Bank Supervisor), the CFPA (Consumer Financial Protection Agency), the FCCC (Financial Consumer Coordinating Council), and the ONI (Office of National Insurance). Who will pay for the new FSOC, the NBS, the CFPA, the FCCC and the ONI? We will of course.
Call it the Bernanke-Bureaucrat Power Act. Like Sarbanes-Oxley, the Obama financial regulatory plan is another legislative means to empower bureaucrats. And just as with Sarbanes-Oxley, upon enactment of the Obama plan we will likely witness a massive flight of the investor class and corporate sector to less-regulated financial markets in London, Asia and the South.
Instead of doubling down on bureaucracy, Congress should repeal Sarbanes-Oxley and move America towards smarter, more effective financial regulation. After seven years, it’s past time for Congress to pause and consider the devastating impact the law has had on our economy before they make things worse with the Obama plan .
Sarbanes-Oxley has already proved that massive, one-size-fits-all financial regulations are not the best path for creating more transparency while simultaneously preserving America’s competitiveness in the global economy. Instead of enacting more reporting requirements, with more PCAOB-like government agencies and more bureaucrats who are hungry for power, we should repeal Sarbanes-Oxley and replace it with a regulatory structure that is pro-free market and enacts effective reporting requirements for all institutions and investors without stifling the private sector. Our economy depends on it.
Former Speaker of the House Newt Gingrich has published 19 books, including 10 fiction and nonfiction best-sellers. He is the founder of the Center for Health Transformation and chairman of American Solutions for Winning the Future. For more information, see newt.org. His exclusive column for The Examiner appears Fridays. Emily Renwick is a research assistant at the American Enterprise Institute and a rising first-year law student at Catholic University.
