Dodd-Frank isn't the abject failure the financial reform law's critics claim it is, nor the bulwark against catastrophe that proponents maintain. Now one-year-old, it is both deeply flawed and a promising start. That last word is key, for in isolation, without other laws to build on its achievements, Dodd-Frank is sure to fail.
Perhaps Dodd-Frank's greatest success to date opened its doors on Thursday in Washington: The Consumer Financial Protection Bureau. Yes, the CFPB still lacks a director, and Republicans are trying to smother the new agency in its cradle, but at least it exists. For instance, consumers may now file credit card complaints at the bureau's Web site or through a toll-free number. Struggling homeowners may also get a referral to housing counselors.
This represents a vast improvement over the pre-financial crisis status quo, when the job of protecting consumers from the abuses of financial firms was split among numerous regulators, all of whom neglected the job.
Progress is also being made on regulating derivatives, which Wall Street firms and other investors used to speculate on the housing sector. Wallace Turbeville, an expert on swaps and a former executive with Goldman Sachs (GS), notes that the use of clearinghouses and exchanges for trading derivatives "is set to massively increase" because of Dodd-Frank. Rules proposed by the SEC and Commodities Futures Trading Commission should make the swaps business safer and more transparent.
Dodd-Frank's requirement that banks hold more capital to offset potential losses, coupled with similar standards imposed by global financial regulators, also makes its harder for Wall Street to gamble with borrowed money. Says Marcus Stanley, legislative director of advocacy group Americans for Financial Reform:
Capital regulation alone won't be enough to address systemic risk. But there's no question capital charges get banks' attention, and there's no doubt that the new Basel III capital framework approved by regulators this year creates a substantial boost in capital charges for some of the riskiest activities we saw prior to the crisis.The curse of bigness
Unfortunately, the law's greatest shortcoming also represents its greatest threat -- failing to reduce the power of "too big to fail" financial institutions. Big banks' market strength has only increased since the housing crash. Emboldened, the firms have allied with Republicans in Congress in a brazen attack on Dodd-Frank, with at least two dozen bills aimed at stalling or abolishing the law altogether.
And while supporters of Dodd-Frank contend that the FDIC now has authority to close these institutions if they get in trouble, serious concerns remain that such companies remain too structurally complex to shut down and that their political might would bar regulators from taking action.
As the Street's aggressive lobbying against the law shows, the financial industry's enormous political clout is undiminished. Lobbyists are swarming Washington by the thousands in a move to blunt the law. It's hard to argue with former Labor Secretary Robert Reich's conclusion:
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.A brick in the wall
That should be no surprise, however. As Vermont Law School professor Jennifer Taub notes, after the Great Depression it took a blizzard of legislation to shore up the financial system. That included two separate versions of the Glass-Steagall Act, the Truth in Securities Act, the Securities Exchange Act, and many other securities and investment industry laws enacted over the course of nearly a decade. She writes:
Previous reformers did more than lambast the limitations of a fledging statute. And, this approach paid off. For example, the New Deal era financial reforms kept us free from major panics and crashes for about fifty years. But this was not the result of a single statute.As tempting as it is to write off Dodd-Frank, in short, that's counterproductive. With the vast majority of its 243 rules yet to be written (by comparison, Sarbanes-Oxley created 16 rules), the law's ultimate impact is uncertain. To be sure, the process is moving slowly, empowering Big Finance and exposing the law to the vagaries of politics. The seeds of the next financial crisis may be sown before Dodd-Frank reaches its second birthday.
For now, however, it's all we've got. It is up to our political leaders and financial regulators not only to ensure the law is fully implemented, but to push forward with other fixes to the financial system (Let's start with what to do with the credit rating agencies, shall we?). If Dodd-Frank is to serve as the cornerstone of reform, the only answer is to keep building.
- Goldman Sachs Goes to Washington. . . to Snuff Out Dodd Frank
- Why Liz Warren Won't be Leading the Consumer Financial-Protection Charge
- Big Bucks and Hired Guns: Why Financial Reform Is Stalling
- GOP Lawmakers Finally Settle on Who They Want to Lead the CFPB: Nobody
- Corporate Interests Rev Up Campaign Against Financial Reform