The Financial Regulation Overhaul: Good Thing Or Bad Deal?
At 2,000 plus pages of political- and legal-speak, the financial regulation overhaul is, understandably, not on everyone's shortlist. Fortunately, there are some things anyone can glean from the bill without even picking it up. I provide my take on a few of them here.

The Public Service Payroll Will Grow
One easy call is a prolonged growth in the public payroll aimed at carrying out the broad outlines of this overhaul. For every member of the new Financial Stability Oversight Council (FSOC), there will be office staff, assistants, lawyers, etcetera, etcetera – all either pulling a salary from the public purse or billing Uncle Sam at contract rates that only a government concerned with fiscal responsibility could offer without shattering under the irony. (A president's campaign trail promises often come up against economic reality. Check out Talk Is Cheap: Campaign Promises And The Economy.)

And the FSOC is only one of the new authorities. The Consumer Financial Protection Agency will no doubt need many times the staff to handle all the appointments it'll be having with lobbyists and special interest groups. This will be good news for recruitment agencies, as it will give them a new labor force to pull from when looking for former government workers who are ready to make the leap to consulting for Wall Street as - wait for it - lobbyists in Washington.

In Pictures: 5 "New" Rules For Safe Investing

Enforcement Will Continue to Be Political
A skeptic might wonder why Madoff was too much trouble to look into with his sophisticated fraud over 10 years, while Goldman Sachs (NYSE:GS), and its legal transaction, was pounced on within a year. Of course, the same skeptic would probably point to the fact that the settlement and the passage of the bill were closely correlated – implying that Goldman was only on the hook while its high-flying ways were needed to stoke public anger. Fortunately, there are no skeptics in government, so the SEC and the new regulatory authorities are being given broader powers. (Learn more in Goldman Sachs: By The Numbers.)

This makes an odd sort of sense in that, having failed to prevent the real fraud, the SEC must need more resources and manpower to be successful in the future. In another way, it makes no sense at all. When an employee fails to do the job time and time again, do you keep giving him raises and hoping for the best? The fact is that most SEC cases, from insider trading to tunneling, are legal matters in the end and could be handled by the legal system - or a division within it - from start to finish. The idea that a separate regulator (now several separate regulators) dedicated to financial fraud are required is highly suspect.

In my opinion, it would be cheaper to fold the SEC into the existing legal departments they already liaise with on cases. Unfortunately, there is sharp contrast between what is practical and what is politically useful.

Wall Street Will Find a Way
Despite all the talk about reforming Wall Street, the U.S. financial system will bend but not break. The same transactions, including derivative bets on the market, will still take place because there is a profit in them. Whether they will be pushed off market or simply take another form outside of the regulatory framework is hard to predict. The overhaul itself is surprisingly short on details despite its length – meaning that lobbyist will have a lot of room to work with in terms of creating loopholes and exceptions. (Corporate lobbyists have the power, influence and political backing to affect your portfolio. Find out how in Lobbying: K Street's Influence On Wall Street.)

You Will Be Poorer
The saddest truth out of the overhaul is that you are paying for it several times over. First, you are paying for the regulatory expansion via taxes. Second, if you are an investor, you are paying by giving up profits so that the companies you invest in can spend millions sending people to have dinner with the regulators you are, as mentioned, paying for too. When it is declared that (according to president Obama) "the American people will never be asked again to foot the bill for Wall Street's mistakes," one wonders where these lucky Americans are, because they must live a unique life in which they pay no taxes and hold no investments.

The Bottom Line
Any attempt to add regulations creates unintended consequences. The revolt of the rating agencies is just one small example of what is to come. At the core of this is a problem of moral hazard and legal shields. More rules encourage risk-taking within a regulatory framework. Essentially, companies cede their personal responsibility to regulators who are, in turn, constantly drifting closer toward the company's way of thinking because of lobbying and so on. This is like two friends daring each other closer to the edge while secretly hoping the other one will call it off. I can't help but think that less regulation and more consequences for screwing up would be a far cheaper and lasting solution – and very likely a much shorter read than 2,000 pages.

Catch up on your financial news; read Water Cooler Finance: The Unrelenting Claw Of Bernie Madoff.





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