Larry Ribstein coined the phrase. Roberta Romano has written about the question, while inventing the term "quack corporate governance." And, of course, my book Corporate Governance after the Financial Crisis
Now Paul Mahoney offers a complementary theory of bubble laws:
Critics argue that the statute imposes disproportionately large compliance costs on small community banks, institutionalizes “too big to fail,” and drives up the cost of banking services to consumers. Comparing Dodd-Frank to past securities reforms, particularly those of the New Deal, shows that these three problems are related and are nearly inevitable features of post-crisis legislation. ...
Every major financial reform in U.S. history was enacted in the aftermath of a substantial decline in equity prices. Each, in other words, was crafted during a time of public anger that politicians hoped to deflect from themselves to Wall Street. The congressional authors always compose a narrative of the stock market crash that blames unscrupulous financial intermediaries or public companies and insufficient regulation of the markets. Just as inevitably, proponents studiously avoid any suggestion that their own prior regulatory innovations had unintended consequences that contributed to the crash. Meanwhile, firms in the regulated industry concentrate on determining who the winners and losers may be under a new regulatory regime, so they can make sure they end up on the winning side.
This routine ensures that the primary losers from financial reform are investors and small, regulated firms. Costly new rules simultaneously serve the ends of Congress and the major financial institutions. They allow Congress to argue that it filled the regulatory gaps that it claims caused the crisis. Large firms can spread the new costs over a large number of transactions, giving them a structural advantage over their smaller and previously nimbler competitors. All firms will seek to pass on to their customers as many of the regulatory costs as possible.
All of this would be unfortunate but bearable if the new regulations generated benefits in excess of their costs. But that is unlikely with post-crisis legislation. The objective is to show the public that Congress is doing something and time is short. Congress knows relatively little about the details of market practices and so relies on the financial industry for information. The largest firms have skilled lobbyists and contacts with legislative staff. They argue, often successfully, that their ways of doing business are “best practices” and their competitors’ practices are shoddy or unfair. The process almost guarantees that the legislation will harm competition and therefore investors.
I think Mahoney's take is consistent with the story that Ribstein, Romano, and I told. Perhaps I should welcome him to the "Tea Party caucus" of corporate law.
