THE UNCERTAINTY PRINCIPLE - II / THE WALL STREET JOURNAL REVIEW & OUTLOOK ( HIGHLY RECOMMENDED READING )

REVIEW & OUTLOOK

JULY 16, 2010.

The Uncertainty Principle—II

Only 30 times more complicated than Sarbanes-Oxley.

The Dodd-Frank financial reform bill passed by the Senate yesterday promises to generate historic levels of red tape. But apparently the 2,300 pages are so complicated that a debate has broken out over precisely how many new regulatory rule-makings it will require.

This week we reported on an analysis by the Davis Polk & Wardwell law firm that at least 243 new federal rule-makings are on the way, not to mention 67 one-time studies and another 22 new periodic reports. The attorneys were careful to note that this was a low-ball estimate, counting only new regulations mandated by the bill.

Now comes Tom Quaadman of the U.S. Chamber of Commerce, who doesn't quarrel with the Davis Polk estimate but has added rule-makings authorized by this legislation to those that are mandated and says that American businesses should expect a whopping 533 new sets of rules. To put this number in perspective, Sarbanes-Oxley, Washington's last exercise in financial regulatory overreach, demanded only 16 new regulations. Thus he reasons that Dodd-Frank "is over 30 times the size of SOX."

Mr. Quaadman may be selling Dodd-Frank short. Neither his analysis nor the one from Davis Polk counts duplicative rule-makings, when various agencies create different rules governing the same activity, as they are empowered to do in various Dodd-Frank provisions.

While it might seem that the regulatory uncertainty created by the bill won't last much longer than a decade as new rules are implemented, that also could be optimistic. When regulators are granted new authorities without expiration dates on their powers, the rule-making possibilities are infinite.

President Obama and the 60 Senators who made this possible—including Republicans Scott Brown, Olympia Snowe and Susan Collins—hailed it yesterday as new discipline for Wall Street. We'll believe that when we see how it works in practice. History tells us that whenever financial laws and regulations are ambiguous, a river of excessive credit runs through it. That includes very recent history, a la Fannie Mae and Freddie Mac.

The most likely result of Dodd-Frank in the near term is a generally higher cost of credit, and a bigger market share for the largest banks that can more easily absorb the new regulatory costs. In the longer term, do not expect it to prevent the next financial mania and panic.

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