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Dodd-Frank’s Report Card

Elizabeth Warren speaking in front of a banner that reads Protect Your Retirement
Photo by Alyson Fligg, courtesy the Department of Labor

President Obama and Sen. Elizabeth Warren, D-Mass., think the Dodd-Frank regulatory regime is working peachy keen great. As the owner of a small business, I have to agree – if by “great” we mean making it nearly impossible for someone starting today to build the sort of business I did.

Small businesses create two of every three new jobs, according to the Small Business Administration. Peter Bolin, the director of consulting and analytics for Experian, argued last year that small businesses, especially startups, have been a major driver of the country’s overall economic recovery during Obama’s presidency. In a conversation with Forbes’ Ty Kiisel, Bolin suggested that this push arrived despite adverse conditions, especially where lending is concerned.

Yet small businesses have still performed well below their typical potential during the Obama years. This is reflected in all sorts of statistics, from low productivity growth, to a well-below-average rate of increase in gross domestic product, to the delayed and sporadic creation of new jobs and the falling rate of participation in the labor force. If small businesses are the engine of the recovery, one could argue we could have recovered faster and stronger if more of them got off the ground and became self-sustaining during the past decade.

Many older businesses, including mine, keep chugging along in difficult times. We have customers, products, distribution channels and financing in place to keep the wheels of our commerce spinning, albeit not always as rapidly as we would like. But a new enterprise – outside the technology and health care fields, where entrepreneurs can readily secure venture capital – lacks all of those advantages.

So most small and startup businesses turn to banks to try to secure financial support. But this is the point at which the smothering regulatory blanket that has descended on the private sector during the Obama years comes into play.

Again, my business illustrates what has happened. For the first 18 or 20 years after I launched the firm in 1992, I could go to the bank and get a credit line to finance expansion with just two things: proof that my business was generating income and a personal guarantee, in which I pledged my own assets to back up the loans to my company. Nearly all small business owners are required to make such guarantees, even if the business is incorporated. It is generally not a big deal.

But things changed in the last few years. As I have previously written, regulators now demand that banks prove that every loan is backed by enough security to ensure that hardly any loan will ever go into default. Instead of risk management, banks are in the business of risk elimination.

That is not a good omen for new small businesses that have an inherent amount of risk that can’t be avoided.

So my signature and personal guarantee is no longer good enough. My banks – and pretty much all banks these days – now demand that I offer hard assets as collateral to back the loans they make. My business provides financial advice and services; we have no factory robots or jet aircraft to put up against the loans. There is only my personal real estate. Fortunately for my company, I happen to have an adequate supply, so I can get a loan to keep my business moving forward. Someone 20 or 25 years younger than me, in most cases, cannot say the same.

Bad for everyone, but good for me – I suppose. Maybe.

Dodd-Frank is not the only job-killing deadweight dropped on American commerce these past eight years, of course. There’s the Affordable Care Act, which gives me a strong incentive to make sure my employee headcount never rises above 50, no matter how much our business grows. I got out of the business of buying health insurance for my employees back in 2010, and as long as the law remains in its current form, I intend to avoid getting back in.

There are also mandates from other regulators like the Securities and Exchange Commission, which requires us to hire independent auditors to perform surprise inspections costing thousands of dollars each year to prove that we are not running a Madoff-style Ponzi scheme. I am all for protecting the investing public, and I don’t mind paying for the auditors to come and verify that all our clients’ assets are where I claim they are, but such audits are a form of outsourcing of the SEC’s own responsibility. I can afford to pay for such outsourcing; a newly formed competitor probably cannot.

Do the collective benefits to society justify the cost in lost business creation? Well, nearly all the money my firm manages is housed at independent custodians like Fidelity and Charles Schwab, and our clients already get independent confirmation of their asset balances from those institutions. Yet there is no exception to the surprise-audit requirement covering this situation. Decide for yourself whether the benefits justify the costs in such cases.

Of course Warren and Obama think Dodd-Frank is working just fine, as they have observed repeatedly. They have never started or run a business and, apart from collecting future writing and speaking fees, they clearly never plan to do so. So from their perspective, there is no problem at all. The laws are just peachy.

I suppose they expect me to be grateful for being shielded from younger and hungrier competitors. Strangely, I’m not.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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