Ben Bernancke celebrates the Act, but Robert Reich says it’s been murdered! Very importatant reading, indeed.
On this anniversary, it is worth reminding ourselves of why the Congress passed sweeping financial reforms a year ago. The financial crisis of 2008-09 was unprecedented in its scope and severity. Some of the world’s largest financial firms collapsed or nearly did so, sending shock waves through the highly interconnected global financial system. Critical financial markets came under enormous stress. Asset prices fell sharply and flows of credit to American families and businesses were disrupted. The crisis, in turn, wreaked havoc on the U.S. and global economies, causing sharp declines in production and trade and putting millions out of work. Extraordinary actions by authorities around the world helped stabilize the situation, but, nearly three years later, the recovery from the crisis in the United States and in many other countries remains far from complete.
In response to the crisis, we have seen a comprehensive re-thinking and reform of financial regulation, both in the United States and around the world. Among the core objectives of both the Dodd-Frank Act and the global regulatory reform effort are: enhancing regulators’ ability to monitor and address threats to financial stability, strengthening both the prudential oversight and resolvability of systemically important financial institutions (SIFIs), and improving the capacity of financial markets and infrastructures to absorb shocks. I will briefly discuss each of these objectives.
First, to help regulators better anticipate and prepare for threats to financial stability, legislatures in both the United States and other developed economies have instructed central banks and regulatory agencies to adopt what has been called a macroprudential approach to supervision and regulation–that is, an approach that supplements traditional supervision and regulation of individual firms or markets with explicit consideration of threats to the stability of the financial system as a whole. Under a macroprudential approach, regulators are enjoined not only to look for emerging financial risks but also to try to identify structural weaknesses or gaps in the regulatory system, thereby helping the regulatory framework keep pace with financial innovation and other market developments.
As you know, the Dodd-Frank Act created a council of regulators, the Financial Stability Oversight Council, to coordinate efforts to identify and mitigate threats to U.S. financial stability across a range of institutions and markets. The Council’s monitoring efforts are well under way, and this new organization has contributed to what has been a very positive atmosphere of consultation and coordination among its member agencies. The Council is also moving forward with its rulemaking responsibilities, including rules under which it will be able to designate systemically important nonbank financial institutions and financial market utilities for additional supervisory oversight, including by the Federal Reserve. For its part, the Federal Reserve has also made organizational changes to promote a macroprudential approach to regulation. Among these changes is the establishment of high-level, multidisciplinary working groups to oversee the supervision of large, complex banking firms and financial market utilities, with a strong focus on developments that have implications for financial stability. We have also created an Office of Financial Stability Policy and Research to help coordinate our efforts to identify and analyze potential risks to the broader financial system and to serve as liaison with the Council.
A second major objective of financial reform is to mitigate the threats to financial stability posed by the too-big-to-fail problem. Here the Dodd-Frank Act takes a two-pronged approach. The first prong empowers the Federal Reserve to reduce a SIFI’s probability of failure through tougher prudential regulation and supervision, including enhanced risk-based capital and leverage requirements, liquidity requirements, single-counterparty credit limits, stress testing, an early remediation regime, and activities restrictions. The Federal Reserve and other agencies face the ongoing challenge of aligning domestic regulations with international agreements, including the Basel III requirements for globally active banks. These efforts are going well; in particular, the Federal Reserve expects to issue proposed rules on the oversight of SIFIs later this summer and, working with other banking agencies, is on schedule to implement Basel III.
Ending too-big-to-fail also requires allowing a SIFI to fail if it cannot meet its obligations–and to do so without inflicting serious damage on the broader financial system. Thus, the second prong of the Dodd-Frank Act’s effort to end too-big-to-fail empowers the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) to reduce the effect on the system in the event of a SIFI’s failure through tools such as the new orderly liquidation authority and improved resolution planning by firms and supervisors. In particular, the Federal Reserve is working with the FDIC to require SIFIs to better prepare for their own resolution by adopting so-called living wills. A joint final rule on living wills is expected later this summer.
Reducing the likelihood of a severe financial crisis also requires strengthening the resilience of our financial markets and infrastructure–a third major objective of the Dodd-Frank Act. Toward that end, provisions of the act improve the transparency and stability of the over-the-counter derivatives markets and strengthen the oversight of financial market utilities and other critical parts of our financial infrastructure. We and our colleagues at the Securities and Exchange Commission, the Commodity Futures Trading Commission, and other agencies are moving this work forward, in consultation as appropriate with foreign regulators and international bodies. The U.S. agencies are also working together to address structural weaknesses in areas not specifically addressed by the Dodd-Frank Act, such as the triparty repo market and the money market mutual fund industry.
To be sure, any sweeping reform comes with costs and uncertainties. In implementing the statute, the Federal Reserve is committed to the promulgation of rules that are economically sensible, appropriately weigh costs and benefits, protect smaller community institutions, and, most important, promote the sound extension of credit in the service of economic growth and development. A full transition to the new system will require much more work by both the public and private sectors, and no doubt we will learn lessons along the way. However, as we work together to implement financial reform, we must not lose sight of the reason that we began this process: ensuring that events like those of 2008 and 2009 are not repeated. Our long-term economic health requires that we do everything possible to achieve that goal.
One full year after the financial reform bill spearheaded through Congress by Christopher Dodd and Barney Frank was signed into law, Wall Street looks and acts much the way it did before. That’s because the Street has effectively neutered the law, which is the best argument I know for applying the nation’s antitrust laws to the biggest banks and limiting their size.
Treasury Secretary Tim Geithner says the financial system is “on more solid ground” than prior to the 2008 crisis, but I don’t know what ground he’s looking at.
Much of Dodd-Frank is still on the drawing boards, courtesy of the Street. The law as written included loopholes big enough to drive bankers’ Lamborghini’s through — which they’re now doing.
What kind of derivatives must be traded on open exchanges? What are the capital requirements for financial companies that insure borrowers against default, such as AIG? How should credit rating agencies be funded? What about the much-vaunted Volcker Rule requiring that banks trade their own money if they’re going to gamble in the stock market – how should their own money be defined? What “stress tests” must the big banks pass to maintain their privileged status with the Fed?
The short answer: whatever it takes to maintain the Street’s profits and perquisites.
The law included a one-year delay, ostensibly to give regulators time to iron out these sorts of details. But the real purpose of the delay, it’s now obvious, was to give the Street time to expand the loopholes and fill the details with pablum — when the public stopped looking.
Since Dodd Frank was enacted a year ago, Wall Street has spent as much – if not more – on lobbyists and political payoffs designed to stop the law’s implementation than it did trying to kill off the law in the first place. The six largest banks spent $29.4 million on lobbying last year, according to firm disclosures — record spending for the group. This year they’re on track to break last year’s record.
According to the Center for Public Integrity, the Street and other financial institutions engaged about 3,000 lobbyists to fight Dodd-Frank – more than five lobbyists for every member of Congress. They’ve hired almost the same number to delay, weaken, or otherwise prevent its implementation.
Meanwhile, the portion of the law that’s now supposed to be in effect is barely being enforced. That’s because the agencies charged with enforcing it, such as the Securities and Exchange Commission, don’t have enough money or staff to do the job. Congress hasn’t seen fit to appropriate these necessities.
Several of these agencies are still lacking directors or commissioners. Senate Republicans have refused to confirm anyone. They wouldn’t even consider Elizabeth Warren to run the new consumer bureau.
Many of same business leaders who blame the sluggish economy on regulatory uncertainty are complicit in all this. A senior vice president of the Chamber of Commerce told the New York Times that “uncertainty among companies about the rules of the road is keeping a lot of capital on the sidelines.” The Chamber has been among the groups responsible for keeping Dodd Frank at bay.
But it’s the biggest Wall Street banks – the ones that got us into this mess in the first place, and got bailed out by the public – that have taken the lead in killing off Dodd-Frank. They can afford the hit job.
At the same time, their executives – enjoying pay and bonuses as large as in the boom days of the housing bubble – are busily bankrolling both political parties, although Republicans are favored in this election cycle. A significant portion of Mitt Romney’s sizable war chest has come from the Street. President Obama is no slouch when it comes to pulling at the Street’s purse strings.
Bankers try to justify their shameful murder of Dodd-Frank by saying tightened regulatory standards will put them at a disadvantage relative to their overseas competitors. JP Morgan’s Jamie Dimon had the nerve to publicly accost Ben Bernanke recently, complaining that the law’s implementation would harm the Street’s competitiveness…
The real reason Wall Street has spent the last year bludgeoning Dodd-Frank into meaninglessness is the vast sums of money it can make if Dodd-Frank is out of the way. If you took the greed out of Wall Street all you’d have left is pavement.
Wall Street is the richest and most powerful industry in America with the closest ties to the federal government – routinely supplying Treasury secretaries and economic advisors who share its world view and its financial interests, and routinely bankrolling congressional kingpins.
How else can you explain why the Street was bailed out with no strings attached? Or why no criminal charges have been brought against any major Wall Street figure – despite the effluvium of frauds, deceptions, malfeasance and nonfeasance in the years leading up to the crash and subsequent bailout? Or why Dodd-Frank has been eviscerated?
…Face it: The only answer is to break up the giant banks. The Sherman Antitrust Act of 1890 was designed not only to improve economic efficiency by reducing the market power of economic giants like the railroads and oil companies but also to prevent companies from becoming so large that their political power would undermine democracy.
The sad lesson of Dodd-Frank is Wall Street is too powerful to allow effective regulation of it. We should have learned that lesson in 2008 as the Street brought the rest of the economy – and much of the world – to its knees. Now we’re still on our knees but the Street is back on top. Its leviathans do not generate benefits to society proportional to their size and influence. To the contrary, they represent a clear and present danger to our economy and our democracy.
They should be broken up, and their size must be capped. Congress won’t do it, obviously. So we’ll need to rely on the nation’s two antitrust agencies — the Federal Trade Commission and the Antitrust Division of the Justice Department. The trust-busters are now investigating Google. They should be turning their sights onto JPMorgan Chase, Citigroup, and Goldman Sachs instead.