Rep. Joe Pitts: Real Wall Street Reform

Real Wall Street Reform

By Congressman Joe Pitts

In September 1997, two Stanford graduate students registered the name for their new search engine. Their innovative idea for searching the web was radically different from the most popular search engines of the day.

The pair received their first major funding from, Andy Bechtolsheim, a co-founder of Sun Microsystems — $100,000 that they used to prove to other investors that they had a serious product. Less than a year later they had $25 million from various investors and in just a few short years their product would be internationally known—Google.

What does Google have to do with reforming Wall Street? The current financial regulatory reform bill proposed by Sen. Chris Dodd (D-CT) would place new rules on so-called "angel" investors like Bechtolsheim. Such investors are typically wealthy entrepreneurs who see the promise of a new idea and invest substantial sums of their own money. "Angels" have not only been responsible for Google, but also other big name start-ups like Starbucks, Costco and Facebook.

Currently, there are few restrictions on this type of investment since it is private investors freely using their own money. Unfortunately, Sen. Dodd's bill would require a 120-day review and impose a morass of new regulations. If you want to invest your own funds in a company of your choice, the government won't let you spend it without triple-checking to make sure that it’s a good idea.

This is just one small problem with the legislation currently being considered in the Senate. A far bigger problem is the potential to create a permanent culture of bailouts on Wall Street.

Under the proposed new bill, federal regulators would be authorized to extend endless federal guarantees and loans to firms that are "too big to fail." Essentially, the law would create a separate class of large financial firms that would operate under different rules and regulations.

Firms with the implicit guarantee of the government could receive lower rates for lending and could appear to be a safer investment. This could distort the market in favor of the largest firms, perversely leading to new mergers and acquisitions that make the potential failure of one of these firms even more destructive.

Wall Street desperately needs reform that disentangles government, not reform that makes government an even bigger player in the market. We don't want Wall Street firms rising and falling because of their political connections, we want them to sink or swim based on their own merits.

I'm a cosponsor of Republican legislation, H.R. 3310, based on three principles: no more bailouts, ending government picking winners and losers, and restoring market discipline.

The bill would end bailouts by enhancing our nation's bankruptcy laws. One of the reasons that the government feared sending large firms into bankruptcy courts was the extremely complex nature of these firms. We need to update bankruptcy laws so that regulators and courts can work together to ensure that experts are dealing with complex organizations.

The bill would establish a Market Stability and Capital Adequacy Board that would monitor the financial system and identify risks that could threaten the stability of the system. It would also bring new transparency to the Federal Reserve and ensure that Congress can disapprove of emergency actions.

The Bernie Madoff scandal showed that federal regulators were asleep at the wheel. To protect consumers, this bill would strengthen anti-fraud enforcement, improve disclosure and streamline resolution of complaints.

Most importantly, the bill would reform government sponsored enterprises Fannie Mae and Freddie Mac. Fannie and Freddie were directly responsible for trillions of dollars in bad home loans and yet the Dodd bill does nothing to fix these institutions. These failed firms have already cost the taxpayers nearly $400 billion.

My greatest concern with financial regulatory reform is the possible impact on job growth. Government has the potential to do lasting harm at a time when nearly 10 percent of Americans are unemployed. For instance, firms funded by angel investors represent less than 1 percent of all companies but account for 10 percent of new jobs.

Stopping the bailouts and eliminating "too big to fail" should be our first priority. I don’t think reform should let the big Wall Street firms get bigger while making it harder for small businesses and entrepreneurs to attract investment.

U.S. Rep. Joe Pitts is a Republican who represents Pennsylvania's 16th Congressional District in parts of Berks, Chester and Lancaster counties.

Originally posted at TONY PHYRILLAS