Chris Dodd and Barney Frank are experienced wheeler-dealers and savvy backroom players, so it’s no surprise there’s a lot of clever wheeling and dealing in the financial regulation bill they pushed through conference committee last week. But around 3:00 a.m. Friday morning, they may have made a mistake.

The bill, as it then stood, had a net cost of $20 billion. Dodd and Frank wanted to make the bill revenue neutral. So, at 3:00 a.m., they slipped into the bill a provision that wasn’t in the legislation that passed the Senate or the House. This provision--Title 16 of the bill--would require the Financial Stability Oversight Council (FSOC) to raise approximately $19 billion for a Financial Crisis Special Assessment Fund by assessing (i) "financial companies" with $50 billion or more in assets, and (ii) "any financial companies that manage hedge funds with $10 billion or more of assets under management."

Leave aside the fact this would be a tax increase on investors, passed on through banks and hedge funds. Leave aside that a lack of support caused the removal from previous versions of the bill a liquidation fund, of which this seems a bastard cousin snuck back in. Leave aside the fact this would move productive capital out of the financial system and into the hands of the federal government. Leave aside that the FSOC would have extensive "information gathering" powers to require a financial company or hedge fund to open up its books to regulators so they can determine a proper assessment figure.

What’s amazing about this "assessment" is how arbitrary it will be, and how contrary it is to any recognizable principle of the rule of law in taxation. No rate for the tax is specified, as with a normal tax. No principle of equal treatment for similar entities is there to limit the Council’s arbitrary discretion. Rather, the Council is to review a bunch of vague criteria, including “the extent of the company’s leverage,” “the extent and nature of the company’s transactions and relationships with other financial companies,” “the nature, scope and mix of the company’s activities,” culminating in #13, “such other risk-related factors as the Council may determine to be appropriate.” The Council will weigh these criteria as it pleases, hit upon a figure for each firm, and simply impose it as an “assessment” on that firm.

As observers turn their attention to this section of Dodd-Frank, the fate of the bill is being called into question. Scott Brown and the three other Republicans who did support the financial regulation bill in the Senate are apparently having second thoughts about supporting the conference report with this newly-added lawless and arbitrary tax added to it. And Russ Feingold, who voted against cloture the first time, isn't budging: "As I have indicated for some time now, my test for the financial regulatory reform bill is whether it will prevent another crisis.... The conference committee's proposal fails that test and for that reason I will not vote to advance it."

So the Democrats may not have the votes in the Senate to end debate on the conference report this week. They may have to reconvene the conference and pull the tax--which would probably and unfortunately save the rest of the bill, but would nonetheless be a victory for the rule of law.

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