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My, that was quick

By Daniel M. Ryan
web posted July 26, 2010

Normally, a law with something not quite right in it takes some time to exhibit said flaw. In many cases, the flaw is evident long before the works get gummed up. The best example would be Social Security. The way it was designed failed to account for lengthening life expectancy – a real irony given that Medicare was tacked onto it. The pay-as-you-go set-up has led to a huge amount of actuarial liabilities, which would be real ones had the Supreme Court not decided that future Social Security claims were not an asset. Because those claims are not the future recipients' property, the U.S. government is not obliged to count them as a firm liability; a future legislature could reduce them if necessary. Had the decision gone the other way, recipients could sue the government for the benefits promised. Had the decision gone the other way, the actuarial liabilities would have had to have been recorded as real ones. With Medicare included, the United States government would have been insolvent.

The problems with Social Security have been discussed since at least the 1950s, and some corrective action was taken in 1983. They're so widely known now that a real Social Security crisis in (say) 2020 or 2030 would be close to anticlimactic.

For other laws, the wait isn't that long. It took fewer than seven years for the Mondale Act of 1979 to turn from subsidizing child-protection agencies to subsidizing false accusations of child molestation. Since false accusations are crimes, the Mondale Act '79 can be said to have subsidized crime. It can also be said that the child-sex-abuse hysteria was the first example of a government-subsidized witch hunt. The more 'witches' were found, the more the money flowed.

The latter example is galling in a way that budget-busting laws aren't, but the unintended consequence was fairly subtle. It took some time to wreak its effect on people who, given the character type that's typical for their line of work, can be described as helpless. Caring people tend to be stricken, not outraged, by slanders.

Moving back to the more quotidian world of finance, it isn't often that D.C. unveils a law whose unintended consequence is revealed almost immediately. Thankfully, the sequence of events was more comic than cruel.


It took less than a day for the first bond offering to be "Dodd-Franked." Ford was planning to offer a bond issue, but yanked it because the rating agencies forbade their ratings to be put on the prospectus. Ford is required by law to include a rating, but the ratings agencies refused because they can be now held legally liable for their ratings. So, no bond issue.

Ford wasn't the only one. Those who know the role of Fannie and Freddie in the credit crisis will love this one: the interdict also blocked the sale of asset-backed securities.  This is the same market that the U.S. government threw lots of money at to keep afloat during the financial crisis. Given that effort, it's not too surprising that the SEC jumped right in with a six-month exemption from that legal requirement. I don't think I'll brook much controversy by observing that the right-quick exemption would have been iffier had it not been the ABS market that got entangled.

The Best And The Brightest

The Vietnam War was the first war fought with real input from system experts: "the best and the brightest." Before it turned into a quagmire, the phrase was used with a bit of pride. Afterwards, it was used slyly.

Thanks to the bond fiasco, there's another one that's ready for the sly: "We have to pass the bill to see what's in it." Well, they did and we found out.

It may be un-neighborly of me to compare it to "We have to bump against the wall to see what's in it," but such comparisons almost invite themselves.

Less lightly, it says something about the laws when the regulatory agency overseeing them has to cut in with a mandated exemption to break a logjam. To the extent that the Dodds-Frank fiasco is representative of less obvious snarl-ups, there's a crisis of enforcement brewing. What else would be ground to a halt if a future zero-tolerance policy were followed by regulatory agencies?

To put the question another way: if the Manhattan Project were set up today, and were run the way the real thing was run during World War II, how many laws and regulations would be broken? It's a question worth pondering, and not just as an after-hours exercise for regulatory lawyers. ESR

Daniel M. Ryan is currently watching The Gold Bubble.





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