A Risky Addition to an Otherwise Decent Dodd-Frank Reform

By Olivier Le Moal @ Shutterstock.com

Despite passing a major reform to the Obama-era Dodd-Frank financial regulation, Congress has unfortunately added a few unnecessary, and even risky, clauses to the bill.

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The one that worries me most classifies investment-grade muni bonds as “high quality liquid assets.” Some, repeat some, muni bonds are high quality assets. Many are not, even some of those that hold investment-grade ratings.

What’s worse is that few muni bonds are very liquid. They typically aren’t large enough to create the kind of investor pool necessary for high levels of liquidity. The editorial board at The Wall Street Journal summed up the clause like this:

The bill also reclassifies investment-grade municipal bonds as “high quality liquid assets” though they’re not. Muni debt isn’t actively traded, though its tax exemption makes it attractive for big banks to hold and reduces borrowing costs for state and local governments. Treating munis as liquid assets would expand demand for this debt. Do cities like New York need another spending subsidy?

E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.