Dodd-Frank suffering a slow death

As we mark the first anniversary this week of the Dodd-Frank Wall Street Reform and Consumer Protection Act, what was already a weak bill is suffering a slow death by a thousand cuts.

The megabanks that owe their survival to the Troubled Asset Relief Program and extraordinary Federal Reserve measures are fighting any new regulation as if there had never been a financial crisis.

In fact, the banking industry has spent over $200 million lobbying against reform in the past year. Not that important members of Congress need much persuading. The new Republican chairman of the House Committee on Financial Services, Spencer Bachus, said last November, “My view is that Washington and the regulators are there to serve the banks.”

My own view hasn’t changed since I fought for real reform in the Senate last year.

If we learned nothing else from the financial meltdown of 2008, we should have learned that banks that are “too big to fail” are exactly that — too big. I said at the time that Dodd-Frank did not include the kind of tough laws that were passed by Congress in the midst of the Great Depression.

There was no real effort in the bill, as I had proposed, to put hard statutory limits on the size and complexity of our megabanks.

Instead, the Dodd-Frank legislation avoided tough standards and passed the buck to the regulators.

Efforts by regulators to require that megabanks maintain more capital have been weak.

The Basel Committee on Banking Supervision has proposed a 7 percent requirement for capital with a possible 2 percent to 3 percent megabank surcharge, but even that would not go fully into effect until 2019.

Instead of developing hard limits and pre-emptive measures to reduce the riskiness of megabanks, Dodd-Frank establishes a new “resolution authority” to shut down these behemoths without a taxpayer bailout.

Unfortunately, the prevailing view is that this authority is not credible.

What would be the effect on the markets if an institution the size and complexity of a Citigroup or JPMorgan Chase went down? This month, Standard and Poor’s said they believe that “systemically important financial institutions” could still receive government support.

The best way to curb the risky activities of megabanks would have been to reinstate a new version of the Glass-Steagall Act.

From its enactment in 1933 until it was repealed in 1999, Glass-Steagall required that commercial banks, insured by the FDIC, be separate from investment banks and the risky investments those banks make. Instead, Dodd-Frank includes a proposal by former Federal Reserve Chairman Paul Volcker requiring banks to separate proprietary trading from commercial activities.

Defining proprietary trading without creating giant loopholes is proving as difficult as some of us predicted.

No one questions the major role derivatives played in the financial meltdown.

The Commodity Futures Trading Commission was supposed to come up with regulations on derivatives by July 16.

The Commission recently announced that there would be a delay of six months or so.


Certainly because the task is complicated, but also because the Commission is dealing with a new Republican House of Representatives that believes Wall Street is already over-regulated.

The one part of Dodd-Frank that I thought would work was the Consumer Finance Protection Bureau. Most Americans identify the bureau with Elizabeth Warren, who as a special adviser to the president has been successfully organizing and staffing it.

Senate Republicans made it clear that, if nominated, she would never be confirmed as head of the CFPB. Last week, the president nominated Richard Cordray, former attorney general of Ohio, to become its director. But the future of the CFPB is still in limbo.

Senate Republicans say they will not confirm anyone unless the bureau first undergoes major structural changes. The bureau can make no new rules without a director.

So this is where we stand.

Just about any attempt to make sure we avert another, perhaps even more catastrophic, financial meltdown is under attack.

I can only hope that enough Americans make clear to their members of Congress, including Chairman Bachus, that Washington’s job is to serve the American people, not the Wall Street megabanks.

Originally published 24 Jul 2011 on