This is the third in an 11-part series on the failed promises of the Dodd-Frank financial reform package and the continued, dangerous imbalances in our financial system. Click here for part 1 and part 2.
With the third anniversary of the signing into law of the Dodd-Frank Wall Street reform act approaching Sunday, one might assume that all the regulations called for in the legislation would be in place by now.
Not even close. According to the law firm Davis Polk, Dodd-Frank required the regulatory agencies to institute a total of 398 rules. To date only 155 have been finalized.
What are the consequences? Sheila Bair, former head of the FDIC, said it best: "This stuff doesn't get any better with time. The longer you wait to finalize the rules, the more they get watered down, the more exceptions that get built in, people's memories about the crisis start to fade and the pressure isn't there."
How did this happen? I believe failure was baked into Dodd-Frank from the beginning, when the President and Congress decided against writing a law with specific provisions that would solve the problem. Instead, Dodd-Frank provided vague guidelines to the federal financial regulators. It was up to them to produce the actual rules. And, as always, the devil is in the details.
Many of us in Congress fought this approach. We wanted to do what the President and Congress did after the 1929 stock market crash and the beginnings of the Great Depression. They created the Pecora Commission to study what had happened and to make specific recommendations. The result was the 37-page Glass-Steagall Act of 1933. It fundamentally changed our banking industry, and it helped protect us from a major financial crisis until it was repealed in 1999.
Glass-Steagall set rules for regulators to follow. Dodd-Frank kicked the can down the road to the same regulatory agencies that had helped cause the meltdown. For a number of years, they had been loosening or repealing regulations out of a belief that the financial industry could self-regulate. Chris Cox, who chaired the SEC from 2005 to 2008, was a vocal advocate for allowing the industry as much regulatory leeway as possible. But even he changed his mind. At the end of 2008 he said, “The last six months have made it abundantly clear that voluntary regulation does not work.”
When Dodd-Frank was enacted, the agencies that were told to formulate 398 new rules were still digging out from the financial crisis. They had their hands full just reexamining existing rules that had been poorly enforced or had been proven ineffective.
Yet at a time when their workloads had been greatly increased, regulators were threatened with cuts in their budgets. Right now, the House is threatening to freeze the CFTC budget at $195 million, 40 percent below the administration’s 2014 request. As Politico said recently, “the annual CFTC budget battle has become a thorn-in-the-side for the president as Republicans have sought to delay implementation of rules required under the Wall Street reform legislation enacted in July 2010.” The rule-writing process, said CFTC Commissioner Bart Chilton, “will mean nothing, squat, diddly, if we don’t get the resources to do the job.”
The SEC faces similar cuts. Congressional Republicans have also sent letters to the regulators calling on them not to move too quickly and the House has passed a bill that requires new and more complex economic analysis for every rule. The Wall Street Journal characterized it this way: “Critics, including top SEC officials, say the measure is intended to gum up the regulatory process and would further hamstring an agency with limited resources.”
Finally, within the SEC and CFTC there are commissioners who remain opposed to Dodd-Frank and try to hold up the process. CFTC Republican Commissioner Jill Sommers recently said, “The aggressive deadlines Congress gave us for promulgating the Dodd-Frank rules has put regulators and market participants in the difficult position of processing a massive amount of highly complex information in a brief period of time.”
True enough, if you think three years is too brief a time. Glass-Steagall revolutionized the banking industry within a few months of its passage. That was then, this is now. Clearly, the regulations Dodd-Frank envisioned that would help prevent another financial crisis have not been written and will not be for a long, long time.
