It is no secret that many powerful interests are working hard to obstruct implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Dodd-Frank calls for up to 400 new regulations and for a host of new regulatory and watchdog agencies, such as the Financial Stability Oversight Council, the Office of Financial Research and the Consumer Financial Protection Bureau. Unfortunately, as of October 1, 2012, a total of 237 Dodd-Frank rulemaking requirement deadlines have passed, and just 37.1% of the required deadlines have been met with finalized rules. This is due in large part to continued efforts to repeal or, at the very least, significantly limit the banking supervisory authority conferred by Dodd-Frank.
Historical Laws and Regulations
In the wake of the 1929 stock market crash, after thousands of banks failed and public trust in the banking system collapsed, as part of the New Deal, the Banking Act of 1933 (also known as the Glass-Steagall Act because it was introduced by former Treasury Secretary Sen. Carter Glass (D-VA) and Chairman of the House Banking and Currency Committee Rep. Henry B. Steagall (D-AL)), sought to limit speculation and make banks safer repositories for public money. One of the main provisions of the law was to separate commercial banks from investment banks in order to protect people’s bank accounts from risky investments. In 1999, after a decade of increasing financial industry deregulation as the result of bank lobbying efforts, this “wall” was torn down by the Financial Services Modernization Act, or as it is frequently called the Gramm-Leach-Bliley Act. This paved the way for the creation of banking behemoths like Citigroup, Bank of America, and JPMorgan Chase, which is widely considered a major cause of the 2008 financial collapse.
After the repeal of Glass-Steagall and prior to the “Great Recession,” large financial institutions such as Bank of America, Goldman Sachs, and JPMorgan Chase, were essentially able to gamble with their customers’ money. It is generally acknowledged that Glass-Steagall's repeal certainly contributed to the financial crisis, as banks took risks with their customers' deposits and debts that were previously illegal.
Yet, banks themselves were never at risk. Instead they were in a win-win situation: If their investments grew, they profited, but if their investments failed, taxpayers bailed them out. This paradigm was clearly lopsided. Dodd-Frank was meant to change this, but lobbyists’ and others’ efforts to eviscerate Dodd-Frank and maintain the status quo have limited its effectiveness.
The Volcker Rule
A perfect example of these delay tactics can be seen with the Volcker Rule, which is considered a cornerstone provision in Dodd-Frank. This rule prohibits banks that have access to Federal Reserve funds and have federally insured deposits from engaging in proprietary trading and other risky investment practices. This rule does not go as far as Glass-Steagall did in separating commercial and investment banking; instead it bars banks from making proprietary trades—using their own money to place directional market bets that are unrelated to serving customers. It does not, however, separate banking functions from investment functions.
Nevertheless banks have lobbied hard against the Volker Rule. So much so that in April the Federal Reserve issued a press release stating that the final version of the Volcker rule is still in the commenting period and therefore extended compliance with the rule until July 21, 2014. Only one month later JPMorgan Chase lost $5 billion on a failed financial gamble: the exact type gamble that the Volker Rule was supposed to prevent. Specifically, on May 10, 2012, JPMorgan Chase announced that it had $2 billion in trading losses on mistakes made in hedging the market. A hedge is an investment position intended to offset potential losses/gains that may be incurred by a companion investment. While these losses came from deals that began as a standard hedge, they morphed into speculation as the bank layered bet on top of bet. In sum, two years after the passage of Dodd-Frank, banks are still able to engage in risky investment practices. It appears the banks are winning this battle.
On September 19th, 2012, the House passed H.R. 2827. This bill was a response to Dodd-Frank’s provision regulating the practices of municipal advisors, which itself was a direct response the bankruptcy of Jefferson County, Alabama. JPMorgan Chase sold Jefferson County a bad financial product that eventually led the city to file for the largest municipal bankruptcy in U.S. history. As a result, Dodd-Frank now requires municipal financial advisors to file with the Securities and Exchange Commission (SEC) and to comply with a fiduciary duty to respect the best interests of the taxpayers and the municipal client. H.R. 2827 creates loopholes and exemptions to these requirements allowing municipal financial advisors much more leeway to continue profiting at taxpayers’ expense: yet another victory for banks.
S. 3468, Independent Agency Regulatory Analysis Act of 2012
Senators are also working to adjust the regulatory process to slow-down and derail implementation of Dodd-Frank’s overall rulemaking authority. S. 3468, Independent Agency Regulatory Analysis Act of 2012, would impose additional hurdles for independent regulatory agencies. Under the proposed law, the President could, by executive order, require agencies to increase their cost-benefit analysis of proposed rules and specifically tailor rules to be the least burden on businesses. Since many of the Dodd-Frank regulatory agencies are independent, including the Consumer Financial Protection Bureau, this would slow down the implementation process of Dodd-Frank, which as mentioned, is already failing to meet deadlines.
In addition to legislative- and executive-focused obstruction efforts, there are efforts to kill Dodd-Frank on the judicial level. As of September 20, 2012, three state attorneys general have joined in a lawsuit challenging the constitutionality of Dodd-Frank. These states are challenging the provision that empowers the Treasury Secretary to liquidate financial institutions that are essentially “too big to fail.” Under Dodd-Frank, if a financial institution’s collapse would threaten the stability of the banking system as a whole, the Treasury Secretary has the right to dismantle it. According to the written complaint filed on September 20, plaintiffs allege that this new treasury power “denies the subject company and its creditors constitutionally required notice and meaningful opportunity to be heard before their property it taken.” Like the constitutional battle over the Affordable Care Act, this suit has the potential to reach the Supreme Court—a currently free-market oriented Supreme Court.
We can expect banks to oppose the law because the status quo suits them just fine. But if we are going to provide financial stability and economic mobility to American households, we must get past the current broken system. We must move into a system where bankers are actually held accountable for bad financial decisions. We must implement Dodd-Frank before bankers invent a new way to swindle us again.
This blog post was coauthored by Alex Hoffman.