Inside Financial Services

Be Very Afraid of the OFR

Its powers are enormous, and so will the temptation be to abuse them.

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It’s hard to believe, but the more we learn about Dodd-Frank, the worse it gets. Have you heard of the Office of Financial Research that the bill created? Don’t be fooled by that innocuous-sounding name: the OFR is an all-powerful, unaccountable bureaucracy with the authority to snoop into virtually every corner of your financial life, and there’s nothing you can do about it. It is a travesty.

The nominal purpose of the OFR is to provide the newly created Financial Stability Oversight Council (FSOC) the data it needs to identify potential problems in the financial system, in order to (this is the plan anyway) prevent the next crisis. As a practical matter, that means that the OFR will have unfettered authority to demand from financial institutions whatever data-trading positions, counterparty information, even proprietary data-that it wants. The idea is that if that a single agency has access to enough data from across the entire financial system, it can identify developing risks early on, much the same way meteorologists can identify budding weather patterns, and the FSOC can act to prevent them from becoming full-blown emergencies.

There are a couple of troubling problems with this. To begin with, it won’t work. The U.S. financial system is enormously complex. It’s doubtful any single bureaucracy, regardless how collectively brainy, would be able to drill down into the mass of data to be accumulated and make enough sense out of it to be able to identify potential problems before they occur. As far as that goes, prior to the last crisis, it was no secret that home prices were in a bubble. Regulators knew everything they needed to know, yet they still couldn’t bring themselves to tell lenders to lay off the subprime lending. (Actually, the government’s policy was to encourage more of it.) How would access to even more data the next time around be any help?

Even worse, though, the OFR (which is housed in the Treasury Department, but isn’t under the department’s control) will have sweeping powers that are stunning even by the standards of overreaching government agencies. To begin with, it will be self-funded, via levies it will lay on the banks. The OFR is not subject to annual appropriation of Congress, which, as a practical matter, means it’s not subject to meaningful Congressional oversight. There’s not even a statutory limit on how much the agency can tax: the OFR will just decide what it needs, and take it. Nor will the OFR be run by a multi-person board, as most other regulators are, but instead will be controlled by a single individual appointed to a six-year term by the president and approved by the Senate. Then once he’s in, he can’t be fired. By anybody. For any reason. Yet this individual will have virtually unlimited subpoena power. The OFR will be able to ask just about any institution for anything it wants. Proprietary trading positions. Consumer ATM and credit card transactions. Auto loan data. Anything. And since the agency is effectively under no oversight, it can do just about anything it wants with the data it collects. Indeed, Dodd-Frank specifically authorizes the agency to disseminate the information it collects to “the general public” and “financial industry participants,” among others. The potential for abuse boggles the mind.

This unchecked, unaccountable monstrosity created by Dodd-Frank is an affront to representative government, and an embarrassment to the legislators who voted for it. Like the Consumer Financial Protection Bureau (also self-funded and run by a single individual) the agency should be abolished-not because they’ll end up being counterproductive (though they will be), but because any country that considers itself a democracy should refuse to put up with its existence. The OFR is a terrible idea. We should be rid of it before it creates a problem.

What do you think? Let me know!

17 Responses to “Be Very Afraid of the OFR”

  1. c smith

    “The idea is that if that a single agency has access to enough data from across the entire financial system, it can identify developing risks early on…”

    The SEC had auditors INSIDE of Lehman Brothers for the final year of its existence, yet it was unable to detect the massive fraud and incompetence which brought LEH down.

    End of story.

  2. All Mass

    “This unchecked, unaccountable monstrosity created by Dodd-Frank is an affront to representative government, and an embarrassment to the legislators who voted for it.”

    Do we need any more proof that the majority of Senators/Representatives don’t really know what is in the legistation they vote on, and even if they do, they don’t understand it?!

  3. Ole

    The usual crap from the guys that were pumping First Marblehead a few years ago.

  4. rivvir

    Even better, let’s get rid of the 2nd guessers who blithely led us down the path of destruction while they gathered in their fund fees. Why was it, Tom, that you saw no evil, heard no evil, spoke no evil when evil was all around us. Now that evil’s been put in jail for awhile you want to let it go free. Not even on parole, simply a full pardon with no restrictions. You argue against every restriction put forth. Your logic does not compute.

  5. Frank Desantis

    It’s good for the companies we underwrite, it’s good for the employees of DLJ– and two outta three ain’t bad.

  6. Tom brown

    Ole and rivvir it’s time to step up your game. First Marblehead’s business was destroyed by the financial meltdown. I didn’t see it coming but it’s not the only investment recommendation/investment that I have made that didn’t work out yet my long term performance is quite good. Ole, get over it. Rivvir, how about commenting on specifics like I do rather than just support every stupid law or regulation that is passed. You two comment all the time but add nothing to a dialog; raise your game!

  7. Tom brown

    Ole and rivvir it’s time to step up your game. First Marblehead’s business was destroyed by the financial meltdown. I didn’t see it coming but it’s not the only investment recommendation/investment that I have made that didn’t work out yet my long term performance is quite good. Ole, get over it. Rivvir, how about commenting on specifics like I do rather than just support every stupid law or regulation that is passed. You two comment all the time but add nothing to a dialog; raise your game!

  8. KenGreenberg

    It’s out of control government like this that has the Founding Fathers doing 360s in their graves. They never have enough taxes or bureaucracy in DC. Now they want our pensions enough already!

  9. Blindspot

    OK Tom, please submit a proposal for better and fair regulation of the big banks. It is obvious to all (except for a few here) that the Big Bank drove the economy into and through the ditch and to the edge of the cliff. Oh, and who had to bail them out; a Republican Administration with a Wall Street Banker at the helm of the Treasury. And yet some of those same R’s in Congress that wanted the Big Banks to be bailed out, now state that they are against bailouts. And all of the $700 Billion has still not been accounted for and who got it all and how they used it all; obviously some used for investments against its real intent and increasing returns. Please, submit your proposal for what should be done because it is obvious the prior regaulatory framework was not enough to keep us out of the mess credited under a Republican administration with a handsoff policy, until the Big Banks put the economy through the wringer from which it still suffers, and then became all hands-on and all US taxpayer money in, to bail them out. And I am a moderate to conservative. But, I deplore hypocrisy and that is all we seem to have gotten previously and all that seems to be presented here.

  10. wallstreetcritic

    Tom, I have to say very simply if they have nothing to hide the financial institutions should not be concerned. Of course you and I know that they have plenty to hide or cloud over so they undoubtably will be concerned, well I say more power to the OFR. and the FSOC and the Consumer Financial Protection Bureau. Its about time the banks and other financial institutions who have screwed the public long enough start to mend their ways.

  11. sam

    but it will be good for insider trading articles in the wsj 18 months from now.

  12. jsc173

    The part about this that bothers me most is every regulator now thinks they know what a problem looks like. They think that the next time they see what they remember seeing in 2002 – 2004, the results will be the same as they have been since 2008. The problem with this “logic” is that each of the last few recessions have looked different. Or, as a good friend of mine once said, “What killed you the last time isn’t what’s going to kill you the next time.” I doubt regulators will be able to “see” the next problem before it happens if they’re looking for history to repeat itself.

  13. rivvir

    Tom, you’re like so many others on the right. You read but do not see. Granted there was nothing of substance i put into this thread, but when points are made that are opposite to your own they don’t compute. Your brain just doesn’t let them in. Instead of raising my game you try playing the same one i’m playing, blackhawks vs bruins, and stop seeing and thinking unilaterally, blackhawks vs, uh, nobody. I see what you have to say, the points you make. It’s a great deal of been there, done that, look at the mess it engendered. Why do you want to set us up to go through it again?. Why can’t you see what i and others who oppose you have to say? By the way, heebner’s long term performance is very good as well, but the last 2 or 3 years? Would you invest in him now? Me, i’m still with him though i have cut down and added it to yacktman. Yacktman doesn’t put out his political views as far as i know. He sticks to business and goes with the flow instead of trying to fight it. As for you, i still defend your expertise elsewhere, based on your financial knowledge. But you, like heebner, failed to change strategy when change was needed, visibly needed, after more than a year or so of the market telling you to change strategy, at least during the type period we just slogged through. Even i finally saw the need to change while you were still stuck in the same rut, and i’m usually among the last to do so. I hope you learn from the past. It’ll come around again some day. Even with whatever “safeguards” are in place to stop it. They won’t stop it but the better they are that much less severe they’ll let it get.

  14. Greg

    The SEC had offices inside Lehman Brothers and they couldn’t tell what was going on or predict what was going to happen. That was just one company. These guys are going to watch and predict the entire financial system? Laughable, purely laughable. On the other hand, if the system decides that Lehman Brothers are not prosecutable because of direct oversight by the Feds, a de facto “you are doing fine,” neither should anyone else under the omniscient eye of this agency.

  15. Greg

    wallstreetcritic, just think, you can use that same excuse for personal privacy invasion, wire tapping, data mining, searching your home without a warrant, torture, kidnapping, detention without cause, and all manner of civil rights abuses. “If you have nothing to hide you shouldn’t mind.” is the excuse of fascists and it screams “no presumption of innocence.” The Patriot Act paved the way for this behavior. Even the title of that act gives me chills. This OFR (unchecked power) should frighten everyone.

  16. Wow

    We are becoming Europe. Where some loser, that nobody has ever heard of, gets appointed not elected and has unbridled power to do anything to solve some problem politicians created in the first place. Such as, encouraging more risky loans, for one.

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