August 23, 2010
Much recent attention has focused on Section 342 of the Financial Reform Bill (Dodd-Frank Bill). The section calls for the creation of Offices of Minority and Women Inclusion at all Federal financial institution regulatory agencies. While most blog comments on the Section have been negative, there has been a lack of accurate information about just what this section calls for and why.
Let's start with why. As we noted (at http://twisri.blogspot.com/2008/11/what-we-said.html) in 2003 and 2006:
"Envy, hatred, and greed have flourished in certain capital market institutions, propelling ethical standards of behavior downward. Without meaningful reform, there is a small (but significant and growing) risk that our economic system will simply cease functioning." (2003)
and
"Individuals and market institutions with the power to safeguard the system, including investment analysts and rating agencies, have been compromised. Few efficient, effective and just safeguards are in place. Statistical models created by the firm show the probability of system-wide market failure has increased over the past eight years. Investors and the public are at risk." (2006).
On April 22, 2009 (at http://twisri.blogspot.com/2009/04/commercial-and-investment-banks-used.html), we noted that "Commercial and investment banks used their size and money to..evade any meaningful effort to impose common sense and transparent risk controls in the public interest, known as regulation. Markets are ruled by two emotions: fear and greed, and these institutions got greedy, very greedy. They created financial products that served no real purpose, other than to generate profit for the bank. To keep customers (their only regulator) from understanding the banks true intent, they made these products horribly complicated. These products were, in part, simple bets. These bets were layered on top of each other until only the product designers had any hope of realistically estimating what little value actually existed in the products.
Commercial and investment banks came to act as if they understood that giving these products a veneer of social utility would help them hide their true motivation, so they tied a small fraction of these bets, now known as 'derivatives,' to subprime lending and passed the bundle off as the invisible hand of the free market at work. Subprime lending products allowed white banks to engage in highly negative and discriminatory practices. Such practices 'intentionally assigned black customers subprime mortgages while giving whites better rates.' " On June 24, 2009 (See: http://twisri.blogspot.com/2009/06/black-neighborhoods-churches-targeted.html) Wells Fargo was sued by the City of Baltimore for "discriminatory and predatory lending."
As we said on March 14, 2009 (at http://twisri.blogspot.com/2009/03/why-market-failed.html), quoting an article by Michael Lewis, "There weren't enough Americans with (bad) credit taking out loans to satisfy investors appetite for the end product. (Investment banks) used (financial bets) to synthesize more of them..they werent satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldnt afford..they were creating them out of whole cloth. One hundred times over Thats why the (financial crisis) losses are so much greater than the loans."
None of the blogs we read on Section 342 mentioned these facts.
Section 342 is actually called for by Adam Smith (see:http://twisri.blogspot.com/2009/04/adam-smith-on-current-financial-crisis.html), who said, in The Wealth of Nations that, "To promote the little interest of one little order of men in one country, it hurts the interest of all other orders of men in that country, and of all men in all other countries." The section seeks to broaden "one little order of men in one country" to include minorities and women.
What the section actually says.
Section 342 does not declare "that race and gender employment ratios, if not quotas, must be observed by private financial institutions that do business with the government." It does not insert "race and gender quotas into America's financial industry." There is no language in the section that would make either of these statements reasonable.
Section 342 calls for the development of "standards for—
(A) equal employment opportunity and the racial, ethnic,and gender diversity of the workforce and senior management of the agency
(B) increased participation of minority-owned and women-owned businesses in the programs and contracts of the agency, including standards for coordinating technical assistance to such businesses and
(C) assessing the diversity policies and practices of entities regulated by the agency."
The term "standards" is key. Here is what the legislation says about them: "The standards and procedures developed and implemented under this subsection shall include a procedure for (making) a determination whether an agency contractor, and, as applicable, a subcontractor has failed to make a good faith effort to include minorities and women in their workforce."
This seems reasonable. While "Section 342's provisions are broad" there is no reason to assume that they "are certain to increase inefficiency in federal agencies," unless you assume all women and minorities inefficient, a biased and bigoted assumption, to say the least.
Likewise, to suggest that "the federal government is moving from outlawing discrimination to setting up a system of quotas" or that "the only way that financial firms doing business with the government would be able to comply with the law is by showing that a certain percentage of their workforce is female or minority" is wrong. This is the kind of fear mongering heard after Brown v. Board of Education. It was wrong then. It is wrong now. No quotas are called for, and a firm can certainly comply with the law even without having a single women or minority of staff, assuming it has made a good faith effort to include minorities and women in their workforce.