What Did the New Financial Regulation Law Miss?

According to Karl L. Rubinstein, a retired business litigator whose experience includes dealing with troubled financial institutions, mortgage insurance insolvencies, in addition to drafting and litigating over new legislation, there are certain "loopholes that may reduce the new law's effectiveness."

Rubenstein worries that despite its many benefits, the new law has plenty of red tape.

His perspective?

"The bill's laudable ambition is marred by significant omissions and complexity," he says.

"Every line of a statute carries weight, and it's easy to forget for every action there can be an equal and opposite reaction. The financial industry doesn't consider the fight over just because the law passed. Moreover, the messy litigation we face won't compare to the mess that the law's new bureaucracy will generate. I worry it'll be like the Marx Brothers all trying to go through a door at the same time."

The new legislation trouble spots include:

* Fannie and Freddie -- It totally omits reworking of Fannie and Freddie Mae, which hold 40% of subprime mortgages. These mortgages were part of the root cause of the financial crisis, so this door was still left wide open by the law.

* New Agency -- The law creates a new consumer protection agency tasked with protecting you and me from financial institution abuses, which is a great idea in concept. The problem is that executing this mission will require a huge new bureaucracy, smacking of Big Brother style government, creating potential conflicts with state law and state administrations.

* Litigation -- Many of the law's features require the creation of complex regulations, a situation that will consume time for those affected in the financial industry to understand. Since the industry is none too happy about the law to begin with, we can expect them to file lawsuits early and often.

* Overreaching -- The law probably bites off more than can be chewed, particularly where it seeks to replace state government activities, such as in the insurance industry. The states have always regulated insurance, and they're not going to like Washington regulators telling them how to run things. And don't forget the insurance industry is still reeling from hurricanes, floods and the BP oil spill. The approach is like trying to eat a hamburger in a single bite, but cutting your fries up into tiny pieces so they can be better digested.

* Red Tape, Red Tape, Red Tape -- Passing a law is one thing. Holding the feet of those who are being regulated to the fire can be a daunting task. Expect any kind of enforcement or real protection to be hobbled by red tape.

"There is no doubt that the U.S. and global financial crisis was the result of a combination of governmental failure to adequately regulate the industry and the irresponsible investment practices of individuals, industry, and government," Rubinstein added. "I've heard they say in Washington D.C. that there are two things you never want actually to witness: How they make sausage, and how they make laws. What started out as a noble and necessary legislative mission has resulted in a law that may or may not actually work, depending on how these issues are addressed."