Dodd-Frank Is Much More Than Regulatory Overreach Jul 23rd 2013, 08:00
US President Barack Obama listens as newly sworn-in Director of the Consumer Financial Protection Bureau, Richard Cordray, speaks in the State Dining Room of the White House July 17, 2013 in Washington, DC. Obama spoke about the recent confirmation as Richard Cordray as the Director of the Consumer Financial Protection Bureau who was sworn in earlier that day. (Image credit: AFP/Getty Images via @daylife)
By George Pieler & Jens Laurson
The anniversary of the Dodd–Frank Wall Street Reform and Consumer Protection Act has caused a lot of nail-biting of late. There are worries that this omnibus financial services hyper-regulation act didn't really end "too big to fail" for big institutions (true, it made the problem worse), that it needs to be more decisive in restoring the old Glass-Steagall regime that divides traditional banking from other financial services, that it lacks adequate resolution authority for failed institutions and so on. All these concerns presume Dodd-Frank is basically a reasonable proposition and that, if anything, its regulatory matrix just isn't wide-ranging enough.
But there are also critics who lament that the Senate, during the nomination of Richard Cordray to head Dodd-Frank's Consumer Financial Protection Bureau (CFPB), missed an opportunity to educate the public on the dangers of authorizing an unaccountable bureaucrat to wield large and undefined powers over the entire financial industry. This should have particularly troubled Congress, because Mr. Cordray's CFPB is buried in the Fed budget and not reachable by Congress's constitutional power of the purse.
There are also complaints over the designation of non-banks, including major insurers, as "systemically important" which makes them subject to heightened oversight as too-big-to-fail. At the same time "systemically important" status might intimidate smaller competitors who can't claim that special protection for themselves. The Financial Stability Oversight Council (FSOC), charged with "comprehensive monitoring of the stability of our nation's financial system" under Dodd-Frank, has just exploited its expansionary powers over nonbanks in the cases of AIG, GE Capital, and Prudential Prudential). Finally there is concern over the dearth of regulatory clarity created by the slow, slow rollout of the specific rules financial institutions must adhere to thanks to D-F.
Not slow enough, though, for financial institutions who must comply: nearly 14,000 pages of regulations have been cranked out to implement the new law, according to the Davis-Polk law firm's very thorough tracking system. They calculate this, alternatively, as 28 War and Peace-length novels, but without the redeeming social value.
Jacob Lew, U.S. Treasury Secretary, shares none of these concerns and has a sunny attitude toward the future of Dodd-Frank. Mr. Lew's motto is the boldly optimistic "Forward!" Secretary Lew tells the Financial Times that "Members of Congress who want to alter financial reform before it is fully in place should carefully consider implementation efforts that are approaching completion" while leaving open the possibility of even more rules defining, as needed, when banks are really too big to fail. Nor did Lew object to the ideology of restoring the Depression-era Glass-Steagall rules—just not right now.
This sounds all rather confused. But that may just be the point of Dodd-Frank: to keep everything churned up so that no one is sure at any given point what the rules really are. That way financial institutions (very broadly defined in D-F as banks, insurers, and anything else that might conceivably qualify) have to constantly ask for help and guidance from busy and powerful financial regulatory bureaucrats in figuring out what they may or may not do. The incomprehensible D-F is in a strong sense a convenient short leash, in other words, tightly held in many cases by the CFPB and FSOC, both of which are carefully insulated from the congressional oversight we would expect from important institutions in a modern democratic republic by virtue of being insulated by the Federal Reserve's 'independence' umbrella.
Back when the electronic ink was barely dry on the Dodd-Frank enactment, we wrote in Forbes that "A grossly ill-defined law, assigning massive authority over the entire financial sector (banking firms with assets $50 billion or more, plus nonbank financial firms as subjectively determined by the Fed, FDIC, et al.), is much more than a problem of regulatory overreach. It is a direct assault on the notion that government must have defined limits. What is more, the 'systemically important' strictures of Dodd-Frank put the Federal Reserve—probably the institution of the federal government least accountable to the public—in the driver's seat."
That warning seems more poignant still today, as does our 2010 conclusion that Dodd-Frank ought to be scrapped unless financial regulators are compelled to produce clear, bright-line guidance as to what banks et al. may or may not do. They haven't—despite ample time and opportunity to prove they can. Perhaps a wiser slogan for financial regulation today would be "Backward!"—back to rationality and fair competition and certainly back to the drawing board.
YOUR COMMENT
