Following the release of the 2,000-page Dodd-Frank financial regulation bill last Friday, fixed-income portfolio manager Christine McConnell told Businessweek: “Clarity is good. [Once financial institutions] understand the rules of the road they’ll be able to accommodate their business models.” There is only one problem: passage of the Dodd-Frank bill doesn’t provide any clarity. In fact, it does the exact opposite. The New York Times explains: “The bill, completed early Friday and expected to come up for a final vote this week, is basically a 2,000-page missive to federal agencies, instructing regulators to address subjects ranging from derivatives trading to document retention. But it is notably short on specifics, giving regulators significant power to determine its impact.”

In other words, this law is going to be continually rewritten by federal bureaucrats for years to come. And the continued uncertainty it will create is just the beginning of its faults:

Permanent Bailout Authority: The Dodd-Frank bill creates an “orderly liquidation” process by which regulators are empowered to seize financial institutions that they believe are in danger of failing and liquidate them. While the lack of a broadly accepted process for closing down large financial institutions helped lead to the massive bailouts of 2008 and 2009, this liquidation process is problematic. Federal regulators are granted broad powers to seize private firms they feel are in danger of default, and these powers are subject to insufficient judicial review. Such governmental discretion to seize private property is constitutionally troubling.

Trusting the Same Regulators that Failed Last Time: The legislation establishes a new 10-member Financial Stability Oversight Council composed of regulators that would be responsible for monitoring and addressing system-wide risks to the financial system. This council would also have nearly unlimited powers to draft financial firms into the regulatory system and even force them to sell off or close pieces of themselves. Unfortunately, it is extremely difficult to detect systemic risk before a crisis has occurred, and the council would serve mainly as a group to blame for failing at an almost impossible task. On the other hand, its huge powers are much more likely to destabilize the financial system by stifling innovative products while failing to detect dangers posed by existing ones.

Brand New Innovation Killing Regulators: The bill also creates a new Bureau of Consumer Financial Protection with broad powers to regulate the financial products and services that can be offered to consumers. The new agency would nominally be part of the Federal Reserve System, but it would have extraordinary autonomy. This autonomy would impede the efforts of existing regulators to ensure the safety and soundness of financial firms, as rules imposed by the new agency would conflict with that goal. For many consumers, this would make credit more expensive and harder to get.

Micromanaging the Market: The conference committee also added a form of the “Volcker rule” which would largely prohibit any bank or other institution with FDIC-insured deposits from undertaking proprietary trading or from owning or sponsoring hedge funds or private equity funds. While the legislation does reject the near-total ban on such investments, the difference between legitimate and traditional activities and those the Volcker rule seeks to ban would be difficult, if not impossible, to determine. Attempting to do so would require an intrusive, expensive regulatory compliance system that by its nature would micromanage day-to-day activities.

Fannie and Freddie Forever: Despite much rhetoric about ending bailouts, the bill does nothing to address Fannie Mae and Freddie Mac, two of the largest recipients of federal bailout money. These two government-sponsored enterprises, now in federal receivership, helped fuel the housing bubble. When it popped, taxpayers found themselves on the hook for some $150 billion in bailout money. The failure to address their future is a serious error and shows just how hollow are claims that this agreement will prevent future crises.

These are just some of the major flaws in a bill that is just one House and Senate vote away from President Barack Obama’s desk (a fuller list can be found here). But final passage is not as sure today as it looked Friday. The passing of Sen. Robert Byrd (D-WV) leaves the majority one vote short of the 60 needed to move for a final vote. In addition, the insertion of an estimated $20 billion in new taxes has Sen. Scott Brown (R-MA) reconsidering his original vote in favor of the measure. Scott released a statement explaining: “My fear is that these costs would be passed onto consumers in the form of higher bank, ATM and credit card fees and put a strain on lending at the worst possible time for our economy. I’ve said repeatedly that I cannot support any bill that raises taxes.”

Explaining that the Dodd-Frank bill would force banks to either take on more risk to recoup earnings diminished by reform or behave too conservatively in order to avoid losses, financial analyst Chris Mutascio summarized the ultimate effect of the legislation: “Pick your poison—neither tastes good to us and we believe neither is particularly good for the economy and job growth.”

Quick Hits:

  • This morning, the Missile Defense Agency and U.S. Army soldiers of the 6th Air Defense Artillery Brigade successfully conducted a successful intercept test for the Terminal High Altitude Area Defense (THAAD) missile defense element of the nation’s Ballistic Missile Defense System.
  • Shallow water drillers tell CNN that President Obama’s deep water oil drilling ban has become a stealth ban on all Gulf drilling forcing hundreds of layoffs with many more on the way.
  • House Majority Whip James Clyburn (D-SC) is trying to insert a provision into the war supplemental funding bill that would compel volunteer firefighters to join unions, threatening the survival of America’s nearly 26,000 volunteer fire departments.
  • The lead attorney in the victorious Chicago Second Amendment case promises: “There will be future cases, I will be bringing cases in the days and weeks to come.”
  • President Obama’s political director Patrick Gaspard failed to disclose that he was slated to receive a nearly $40,000 payout from the Service Employees International Union (SEIU) while he was working in the White House.