Today, Americans for Tax Reform (ATR) sent the below letter to all Senators urging them to vote "no" on Monday’s scheduled cloture vote to proceed to consider Sen. Dodd’s flawed "financial reform" farce – click here for the PDF

Dear Senator,

On behalf of Americans for Tax Reform (ATR), I strongly urge you to vote “no” on the cloture motion to proceed to consider Sen. Dodd’s (D-C.T.) Restoring American Financial Stability Act of 2010.

ATR WILL RATE against a cloture vote for this bill in our annual Congressional Scorecard. Voting in favor will negatively affect your contention for ATR’s annual Hero of the Taxpayer Award.

This legislation, as drafted, has several contentious elements, but perhaps most egregious is the creation of the Bureau of Consumer Financial Protection (CFPB), the Financial Stability Oversight Council (FSOC), and the regulation of Over-the-Counter (OTC) derivative exchanges. These new autonomous agencies will be sheltered within the Federal Reserve, insulating their decision making from the established traditional regulatory framework. Further, the result of a mischaracterization of OTC derivatives has led to unnecessary calls for heavy regulation.

The establishment of the CFPB virtually guarantees conflict with other regulators focused on the safety and soundness of financial markets. The CFPB will do little more than restrict consumer options while increasing costs.

Additionally, Sen. Dodd’s bill creates a powerful Financial Stability Oversight Council (FSOC), made up of nine existing agencies, with power to “draft” financial institutions into a regulatory structure. Once institutions are forced into this structure, the FSOC can regulate the products or services they sell or provide, order them to break-up, or simply shut down. 

The FSOC would be given almost unlimited regulatory power. The FSOC would collect data through another newly established agency within the Treasury, the Office of Financial Research and their “Data Center,” which is tasked with determining company’s contributions to the financial stability of the United States. This data will ultimately be used to decide the future fate of these companies.

Further, a $50 billion Orderly Liquidation Fund will be established which the FDIC will have authority to tap, and the Fund will have privilege to borrow unlimitedly from the Treasury. This fund is nothing more than a permanent, unlimited TARP program that will be used to bailout politically important financial institutions. The cost of this Liquidation Fund will be paid for by financial firms with assets over $50 billion. However, the real cost of this will be passed on to American consumers.

While Americans everywhere support financial reform that improves transparency, accountability, and stability in the nation’s financial markets; heavily regulating Over-the-Counter (OTC) derivatives will do little to improve Americans’ financial security.

Many companies, or end users, utilize OTC transactions to manage risks associated with standard business operations; including fluctuations in interest rates, currency exchanges and commodity prices. In fact, more than 90 percent of Fortune 500 companies employ OTC derivatives trades, the vast majority of which had no role in the recent economic downturn.

Senator Dodd’s bill would require OTC derivative transactions to pass through a government monitored central exchange, either the Securities Exchange Commission or another entity. Companies participating in this mandated government exchange would be required to keep high cash margins to back their OTC derivatives.

Requiring OTC derivatives to pass through a clearinghouse and maintain high cash levels will increase the costs associated with OTC derivatives, making it more expensive for a company to insulate itself from risk. Inhibiting OTC trades for end users would unnecessarily lock up capital that a company would have used to invest, grow, and retain and create jobs — effectively removing liquid capital from corporate balance sheets. In order to satisfy new standards set by the Dodd bill, many companies would have to establish new credit lines or sell current assets.  

Our free market system was built on risks. This choice allows citizens to risk little and play it safe, or risk a lot in hopes of winning big. By over-regulating, Sen. Dodd’s bill attempts to control the entire financial sector and completely absolve citizens of personal responsibility, and the freedom to make decisions.

Do not be fooled by Sen. Dodd’s claims that he proposal is “reform:” The establishment of hidden, sheltered regulatory agencies, increased red tape and a permanent, unlimited bailout in form of a “Liquidation Fund” are not reform, they’re restrictions.

For these reasons and more, Americans for Tax Reform urges all Senators to vote “no” on cloture to proceed to consider this bill.

For more information, contact Federal Affairs Manager Brian Johnson at [email protected] or 202.785.0266 in my office.

Grover G. Norquist