A Year of Winning for Wall Street Since the Passage of Dodd-Frank

Jul 21, 2011Mike Konczal

too-big-to-fail-license-plate-banker-new-yorkOne year after the passage of Dodd-Frank, Roosevelt Institute Fellow Mike Konczal invited experts and those on the front lines to weigh in on what's happened so far and what's to come on financial

too-big-to-fail-license-plate-banker-new-yorkOne year after the passage of Dodd-Frank, Roosevelt Institute Fellow Mike Konczal invited experts and those on the front lines to weigh in on what's happened so far and what's to come on financial regulation. He caught up with Roosevelt Senior Fellow Robert Johnson, who served as Chief Economist of the US Senate Banking Committee under the leadership of Chairman William Proxmire and before that Senior Economist of the U.S. Senate Budget Committee under the leadership of Chairman Pete Domenici.

MK: It's been one year since the Dodd-Frank Act passed. There are dozens of articles saying it's going terribly, dozens saying we don't know how it's playing out, and even a handful saying progress is being made. How has the past year gone for financial reform and Wall Street?

RJ: For Wall Street, it has gone swimmingly. They have the process tied in knots and at the same time can complain about the muddle to further weaken government. For the rest of us, a weak bill is getting diminished further. It is the fate of money/lobby-driven political machinations to make everyone disenchanted with government.

MK: Bringing the over-the-counter derivatives market to the light is a major part of reform. How is that battle going?

RJ: As Bob Dylan would say, "It's not dark yet but its gettin' there."

MK: Worst case scenario: We wake up in November 2012 to President Bachman and a Republican controlled House and Senate. Alternatively, the GOP just takes the Senate. Will enough of the muscle of Dodd-Frank be put into place so that it holds, or will a lot of it be able to be compromised quickly under any future Republican administration?

RJ: It will be compromised and weakened regardless of whether Democrats or Republicans hold power.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

MK: What international reforms are necessary?

RJ: Cross-border bankruptcy harmonization, huge amounts of data collection, and sharing in real time across regulatory jurisdictions.

MK: Is the financial sector changing in response to the crisis and the implementation of the Act?

RJ: They are whining more. They are acting more burdened by regulation. They are doing whatever they please as they did before the bill.

MK: A decade from now, how will Dodd-Frank have changed the political economy of the country? Is it way too early to tell, or is it just not relevant to how Dodd-Frank is working?

RJ: It will have been a reflection of how powerful the financial sector was. Finance is too strong in politics, bailouts, and corporate governance imperatives. They are like a tax that descends upon society, collected for the bonus pool and used to defray the losses from past carelessness. The social contract between the financial sector and society is a pendulum rocked very far to one side. This tepid set of reforms in the aftermath of a colossal crisis will underscore how far the power of finance dominates our political economy. Inside Job indeed!

Share This

Dodd-Frank Can't Be the End of the Story

Jul 21, 2011Mike Konczal

too-big-to-fail-license-plate-banker-new-yorkOne year after the passage of Dodd-Frank, Roosevelt Institute Fellow Mike Konczal invited experts and those on the front lines to weigh in on what’s happened so far and what’s to come on financial r

too-big-to-fail-license-plate-banker-new-yorkOne year after the passage of Dodd-Frank, Roosevelt Institute Fellow Mike Konczal invited experts and those on the front lines to weigh in on what’s happened so far and what’s to come on financial regulation. Konczal checked in with Marcus Stanley, legislative director of Americans for Financial Reform. AFR is a coalition of more than 250 national, state and local consumer, labor, investor, civil rights, community, small business, and senior citizen organizations that have come together to spearhead a campaign for real financial reform and the best possible implementation of Dodd-Frank. Stanley and AFR have been at the front lines of the Dodd-Frank battles over the past year.

Mike Konczal: It's been one year since the Dodd-Frank Act has passed. There are dozen of articles saying it's going awful, dozens saying we don't know, and even a handful saying progress is being made. How has the past year gone for financial reform and Wall Street?

Marcus Stanley: Progress is being made. We can all make a list of things we believe should have been in Dodd-Frank and weren't. But there are important pieces that are there. Among the two most significant are the new Consumer Financial Protection Bureau and the new framework for derivatives regulation. Both of those efforts have made solid progress over the past year in the face of heavy opposition. The goal of that opposition is to erode the clear gains we did make in Dodd-Frank.

Some regulators are moving ahead in good faith - not perfectly, but in good faith - on writing rules. Examples are the CFTC and SEC on derivatives regulation. Others are resisting the changes they are required by law to make. The OCC yesterday put out a final rule on preemption that essentially defied Dodd-Frank reforms and restated their existing practice of sweeping overrides of state action to deal with abusive lending.

After 30 plus years of relentless deregulation, Dodd Frank's passage was just the first step in what will be a long fight. Pressing for effective implementation is part of that fight. It took almost a decade after the 1929 crash before all the key pieces of Depression-era financial legislation were passed and implemented. We are still in the middle of the battle.

MK: The first stop on financial reform is dealing with Too Big To Fail financial firms. How is making them less prone to collapse and more manageable to resolve when they do coming along?

MS: This is the area where many of us were most disappointed in the underlying Dodd-Frank statute. The bailouts of 2008 created an overwhelming perception that the largest and most important financial firms had an implicit government guarantee. The Congressional actions in the Dodd-Frank Act were not strong enough to reverse that perception. The financial sector today is even more dominated by the big banks than it was before, and the largest firms still have an unfair advantage in the market due to the belief that government will support them.

That said, over the past year we're seen some genuine progress in dealing with some of the risks that make failure -- and demands for public support in case of failure - more likely. One is the area of controlling excessive bank borrowing through capital regulation. 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 combination of Basel III and the implementation of the Collins Amendment will also create a firm maximum borrowing (leverage) limit for banks. The limits on bank credit exposures to other systemically important institutions - limits that include credit exposures through derivatives and off balance sheet instruments -- will also help address the "too interconnected to fail" problem related to excessive borrowing within a small circle of big banks. These limits will work to restrain some of the worst excesses we saw before the crisis involving short-term and off balance sheet borrowing. Derivatives regulation should also make the system safer and more transparent. As far as we can tell regulators are taking steps to enforce these limits, including for example by significantly increasing the number of on-site examiners at major banks.

Regulators are moving unacceptably slowly in other areas. Making sure that all large financial institutions -- including non-banks -- have regulatory oversight was a key reform goal. (One way that relying on capital charges can go wrong is that banks can arbitrage the system by routing their transactions through unregulated non-banks). But industry players are lobbying mightily to be exempt from designation. The new Financial Stability Oversight Council (FSOC) hasn't designated even a single non-bank financial entity for oversight yet, even the largest and most obvious ones. Indeed, the FSOC in general has gotten off to a slow start. The Council and its associated research arm (the Office of Financial Research, or OFR) were supposed to be the "central brain" of the regulatory system, and the answer to the fragmentation in financial oversight that contributed to regulatory failures before the crisis. We have not seen much action that matters from the FSOC thus far, and the Office of Financial Research does not yet have a director and has only hired minimal staff so far. It's hard to see how regulators will stay ahead of a constantly evolving financial system unless they coordinate their efforts and their information centrally. Open engagement with the public on these issues is also crucial.

In general, regulators have not been as aggressive as they could be in using the full powers granted to them under Dodd-Frank in controlling bank behavior. To take just one example that has gotten relatively little attention, Section 956 of the Act instructs regulators to ban pay and bonus practices that lead to excessive risk taking. The rule regulators have proposed to implement this provision took a step in the right direction by requiring the largest banks to defer full payment of executive compensation for up to three years. That's a valuable step in avoiding the kind of situation we saw with Bear Stearns and Lehmann, whose top executives walked away with $2.4 billion free and clear in the years before their firms collapsed. But the rule mandates that only one sixth of top executive compensation would be deferred for the full three year period. As the AFR comment to the regulators stated, when you consider the massive pay levels on Wall Street, that's not enough of a disincentive to risk taking. While AFR is asking regulators to do more, even the modest step they did propose is being vociferously opposed by industry. Over 70 percent of industry comments on this rule ask for some or all of their top executives to be exempted from any pay deferral whatsoever!

Beyond pay levels, there are many additional areas where Dodd-Frank gives regulators powers that could make a big difference if they're implemented boldly. These range from the Volcker Rule ban on proprietary trading to the FSOC authority to break up the largest banks if they pose a systemic risk. Such powers could be major levers for change. It would be a dramatic change from past behavior for regulators to be truly bold in using these powers. We are not expecting it to happen on its own. We do see it as a place to keep working and pushing. What can we do to make these opportunities matter?

MK: Related, bring new types of transparency and accountability to the derivatives market was a major push. How is progress there?

MS: Progress is pretty good, against a lot of pushback from industry. Regulators have actually laid out a comprehensive and fairly good set of rules on derivatives regulations, which should significantly improve the transparency and stability of the market and the financial system more generally.

These rules represent a real and a large improvement compared to the unregulated markets we have today. But there are potential problems and weaknesses. There is reason to be concerned that the few big dealers who currently dominate the derivatives markets would be permitted to have excessive control of key areas of the derivatives infrastructure, like clearinghouses or data repositories. This could permit them to gain unfair advantages over other market participants. The Justice Department's Antitrust division has weighed in strongly on this issue. Another danger is that if regulators don't police it carefully, the so-called "end user exemption" could be expanded into a significant loophole. Finally, one of the most obvious issues here is the sweeping exemption from derivatives regulation that the Treasury Department has granted to the multi-trillion foreign exchange swaps market.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

It's true that the derivatives rules will go into effect a little later than the one-year timeline in the Dodd-Frank Act. In retrospect that time line may have been slightly too ambitious. It's understandable if it takes a few extra months to roll out something as important as the new regulatory framework for several hundred trillion dollars in currently unregulated derivatives trades. Any delay should be limited, though, and we should see the first major rules put into effect starting around the end of this year. One area where we are seeing unacceptable delays, though, is in the enforcement of limits on speculation in our commodities markets. Dodd-Frank mandated that such limits begin to be put in place six months ago. However, the CFTC has not acted, and the rule they have proposed to limit speculation is in any case not strong enough to genuinely restrain commodity market speculation.

The threat we're most worried about in the derivatives area is the funding for the regulators who will enforce derivatives rules, which is under serious attack in Congress. The House has proposed to fund the Commodity Futures Trading Commission at just $177 million, 12 percent less than its current funding level and over 40 percent below the minimum funding required for the CFTC to implement its new derivatives responsibilities. (The CFTC will expand its oversight to $280 trillion in interest rate swaps, a seven-fold increase in the size of the market it supervises). The House-proposed funding for the Securities and Exchange Commission (SEC) is 20 percent below the level needed to implement Dodd-Frank. By way of comparison, JP Morgan Chase, which is among other things a major derivatives dealer, spends $4.6 billion annually just on information technology. That's more than three times as much as the proposed funding for both the CFTC and SEC put together.

MK: What's going to happen with the Consumer Financial Protection Bureau without a confirmed Director this week?

MS: There is a great deal the Bureau can do without a director. And some of the things it can't do it might take a little longer to get to in any case, so not having a Director may not really hold them back. But not having a Director also limits its authority in ways that matter. The key distinction is between authority that is being transferred from other agencies and under existing laws, and new authority. Without a Director the Bureau cannot supervise non banks - like payday lenders, for example. And it cannot write rules under its new ‘unfair, deceptive, and abusive' practices authority.

Preventing the appointment of Director is also of course an effort to undermine the Bureau's authority beyond the specific power it is denied -- the 44 Senators who have said they will not consider any director unless the bureaus authority and effectiveness are diminished are presumably trying both to limit its ability to defend consumer interests in the long run by making these changes, and to make it harder for the Bureau to take aggressive action now because it does not have a head, and because it is under constant hostile scrutiny.

Meanwhile, the work of putting the bureau together has been going well. The agency has done a lot of its key hiring and system building, invested in building relationships with the public, consumers, and industry, got a sterling report from the Inspector General on its planning and implementation activities, and has started work on key projects in a thoughtful way that is winning good reviews from both industry and consumer advocates.

Some of the key actions already under way at the Bureau include the design of new transparent mortgage disclosure forms, so unscrupulous brokers won't be able to conceal the kinds of "tricks and traps" that led consumers into exploitative mortgages in the past. . They are about to start supervising the big banks for compliance with consumer laws. The Bureau also has the first module of a public complaint system -- focused on credit cards, with additional products to follow - up and running as of today. They have started the process of defining the larger non-bank financial market actors they will supervise, and they are developing a research capacity that can really look at the consumer financial marketplace to identify and understand emerging problems. The more you think about the details the more you realize what a difference doing all this right can make.

MK: Describe the atmosphere of rule-writing and drafting regulatory rules. It's a difficult process for outsiders to understand.

MS: We are outsiders ourselves of course. We're trying to create a public interest voice into a process that is overwhelmingly dominated by industry. From 2008 to 2010, the financial industry spent an incredible $1.4 billion on lobbying to influence the process in Washington. In 2011, the lobbying is just as intense, and the spending is at almost the same pace as it was during the Dodd-Frank fight in 2010. But a lot of it has switched from Congress to the regulatory agencies. More than 90 percent of the groups appearing in agency meeting logs are banks, hedge funds, or other financial industry companies. One of the things industry's money buys is the advantage of the "revolving door" -- over 240 former government insiders are working as financial industry lobbyists now.

At the same time, although we're outgunned on money and the sheer number of lobbyists and lawyers, it does matter that we represent the public interest. Many regulators know it's wrong to listen exclusively to financial firms with money at stake, so they do seek out a public interest perspective. And it matters that the public is with us. AFR and other public interest groups commissioned a poll this week that found that huge majorities of voters favored tougher financial regulation -- 77 percent wanted tougher rules and enforcement for Wall Street banks. And the support was bipartisan; 70 percent of Republicans supported it too. Over 70 percent of voters supported the Dodd-Frank reforms specifically. The challenge is to take the clear public desire for real reform and mobilize it against the money and influence of Wall Street.

The regulatory process is an interesting mix of extremely open and very closed. It's open because anyone can read the proposed rules and comment on them, and the regulators have to at least acknowledge your arguments. I should add that "anyone" most definitely includes the readers of this blog. Americans for Financial Reform welcomes input and assistance in our regulatory comments, especially from those readers who have deep knowledge of technical financial issues -- please feel free to contact us if you'd like to participate in our work.

But the process is also closed because the regulators have almost complete control over the final rule and it can be very difficult to understand exactly the considerations that drove their decision. There are also two extra complexities in financial regulations that make the process trickier to navigate than in other areas of regulation. The first is that many of the most important rules in Dodd-Frank are joint rules. They can be written jointly by as many as five major financial regulatory agencies (the OCC, FDIC, Federal Reserve, SEC, and CFTC) -- for example, the Volcker Rule is written by all five of these agencies plus the Treasury Department. In practice, this ‘rulemaking by committee' can mean that the most conservative agency exercises a kind of veto power, and it makes it even more difficult to understand the motivations at work from outside. It's yet another cost of the fragmented financial regulatory system we have.

The second complexity is that financial regulations often leave enormous discretion to the bank examiners and the regulated banks. The complexity of financial institutions is such that regulators often just prescribe very general risk management principles, which are then implemented in countless detailed interactions between examiners and the institutions they oversee. Since these interactions are confidential it's not easy to tell what actually happens when ideas that sound good are actually implemented. This makes financial regulations more difficult to police and comment on from outside than, for example, an environmental regulation that sets permissible levels of specified pollutant.

MK: High-level, but other have been worried about the relative power of the financial sector in the country. People worry about "financializaton" from the point of view of entrepreneurship, relative focus and power of economic sectors, a focus at the top instead of the bottom, short-term-ism, etc. A decade from now, how will Dodd-Frank have changed the political economy of the country? Is it way too early to tell, or is it just not relevant to how Dodd-Frank is working?

MS: This is an extremely relevant question for the long run. As we said to start, Dodd-Frank is the first step in a long process of reform. And key to that process will be combating the excessive influence of finance in our economy. Even before the financial crisis, the diversion of private sector investment into a speculative housing bubble and the replacement of wage growth by unsustainable debt as a source of family income were obvious economic problems.

If it is implemented well, Dodd Frank has the promise of restricting the worst speculative excesses, lessening the market advantage of systemically significant financial institutions and protecting families from having their income drained by exploitative and abusive financial contracts. These can all address the diversion of money and talent into finance. The greater Dodd-Frank oversight could also bring to light more information that will help us understand better what else we need to do.

But several decades of deregulation have created a vicious cycle in which growth of the financial sector feeds greater profits and power for Wall Street, which in turn creates more political influence. We have been struck by how often non financial businesses who we contact for assistance in our work say that they are afraid to speak out publicly against the influence of their bankers, even when it would be in their interest to do so. The same can be true of small community banks when their interests conflict with the major Wall Street institutions.

Dodd Frank can't be end of the story. We'll need more financial reform, and we'll still need to put financial reform into the context of a much broader economic agenda.

Share This

Dodd-Frank is Far from Dead on Arrival

Jul 21, 2011Mike Konczal

too-big-to-fail-license-plate-banker-new-yorkOne year after the passage of Dodd-Frank, Roosevelt Institute Fellow Mike Konczal invited experts and those on the front lines to weigh in on what's happened so far and what's to come on financial

too-big-to-fail-license-plate-banker-new-yorkOne year after the passage of Dodd-Frank, Roosevelt Institute Fellow Mike Konczal invited experts and those on the front lines to weigh in on what's happened so far and what's to come on financial regulation. First up is a financial lawyer at a New York law firm who writes under the pseudonym, 'Economics of Contempt'. EoC spent over 20 years as an in-house lawyer at one of the big investment banks and passed the majority of his professional life in and around US financial law. He has followed the Dodd-Frank rulemaking process very closely and blogs at economicsofcontempt.blogspot.com/

Mike Konczal: It's been one year since the Dodd-Frank Act passed. There are dozens of articles saying it's going terribly, dozens saying we don't know how it's going, and even a handful saying progress is being made. How has the past year gone for financial reform and Wall Street?

Economics of Contempt: On the whole, I'd say it's going pretty well. But part of the problem with assessing the Dodd-Frank rulemaking process is that most people think of "the regulators" as a single, coherent entity. The reality is that there are at least seven different agencies that are writing the regulations for Dodd-Frank, and within the main regulatory agencies, each rulemaking task is assigned to a different team of staffers and lawyers. Some of them are doing an excellent job, and some of them are doing a poor job. Of the proposed rules and final rules that have been issued so far, there are many more good rules than there are bad rules. (Sadly, most pundits like to to seize on one example and extrapolate out to "Dodd-Frank implementation" in general, which is beyond illogical.)

Unfortunately, it's still too early to make any definitive pronouncements, simply because most of the major/consequential Dodd-Frank rulemakings are still outstanding. We have "proposed rules" for some of the major rulemakings, and most of those proposed rules are quite strong. The proposed rules for resolution plans (a.k.a. "living wills"), reporting requirements for hedge funds and private equity funds, and the capital and margin requirements for OTC derivatives all stand out as strong rules.

Of course, there have also been some disappointments. The Fed relented on interchange and raised the swipe fee cap from 12 to 21 cents in its final rule, which was disappointing. Treasury also exempted FX swaps and forwards from Dodd-Frank's clearing and electronic trading requirements, which I wish they hadn't done. But again, the good rules clearly outnumber the bad rules.

MK: The first stop on financial reform is dealing with Too Big To Fail financial firms. How is the process of making them less prone to collapse and more manageable to resolve coming along?

EoC: I think this is going well. We basically knew what the rules for the resolution authority were going to look like already -- they were going to be very similar to the rules governing FDIC resolutions of commercial banks. The real movement in this space has been in the so-called "resolution plans" that the major banks have to submit (and regularly update). The proposed rule on resolution plans was very strong -- it ensures that the FDIC will have all the information it needs when it comes time to actually resolve a major bank. That's crucial, because a successful resolution of a major bank will have to be planned out in advance and be reasonably comprehensive. The proposed resolution plan rule also allows the FDIC and the Fed to identify any legal or funding structures that would cause problems in a future resolution, and gives the FDIC the authority to force the banks to restructure in a way that would make a future resolution easier.

The FDIC and the Fed were supposed to vote on the final rule for resolution plans earlier this month but ended up pushing the vote to next month. (I think the final rule just wasn't finished in time, which is understandable.)

MK: There are a lot of articles saying that the Volcker Rule is, or will be, dead on arrival and easily avoidable for high-end financial firms. What's your take?

EoC: I said from the outset that the Volcker Rule, as drafted by Sens. Merkley and Levin, would be way too easy to circumvent. There are simply too many loosely-drafted exceptions to the proprietary trading ban. The industry has definitely come around to my interpretation, and it's true that most people in the industry don't expect the prop trading ban to be effective in practice.

That said, I can't claim vindication yet. The Fed hasn't issued the proposed rules implementing the Volcker Rule yet (although they're expected by the end of the summer). Until we see the Fed's proposed rules, it's impossible to say that the Volcker Rule is dead.

MK: Relatedly, bringing new kinds of transparency and accountability to the derivatives market was a major goal. How is progress there?

EoC: Progress is very good there. The CFTC and SEC have both proposed robust derivatives trade reporting rules -- if anything, the CFTC's proposed rule on post-trade reporting is a little too robust. The CFTC proposed a rule requiring that most swap trades be publicly reported immediately after they're executed (the so-called "real-time reporting" requirement). Block trades and large notional swap trades would only be given a 15-minute delay under the CFTC's proposed rule, which pretty much everyone not named Gary Gensler thinks is far too short a delay. I expect the CFTC to lengthen the delay in its final rule (and I suspect that was Gensler's plan all along -- cagey bastard), but the delay for publicly reporting block swap trades definitely won't be longer than one day. I don't know how you describe that as anything other than a win for Dodd-Frank.

Of course, some people will inevitably look at the lack of transparency in the derivatives markets today and declare that Dodd-Frank is a failure. But transparency is only achieved through robust reporting requirements, and designing and implementing a robust reporting regime (from scratch) takes time.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

MK: What's going on with the ratings agencies? Do they just get a free pass on everything?

EoC: Basically, yes. That's easily Dodd-Frank's biggest shortcoming. I wish I knew how to fix the rating agency problem, but I genuinely don't. The rating agencies are so hard-wired into the financial system that it's very difficult to experiment with untested reform proposals. That's why Barney Frank balked at the Franken Amendment, which was a toy model masquerading as a reform proposal.

MK: When financial firms are lobbying against Dodd-Frank, what does it look like? Do they have receptive audiences? Are they coordinating well or throwing each other under the bus?

EoC: Lobbying in the rulemaking process is done primarily through comment letters and face-to-face meetings with regulators. Whether the audience is receptive, especially for face-to-face meetings, very much depends on the regulator who's in charge of writing the particular rule. Sometimes they genuinely want to hear the banks' feedback, and other times they have absolutely no interest in the banks' grumbles. Typically, banks use face-to-face meetings to underscore what their top issues/concerns are and to make any arguments that rely on proprietary data. Hedge funds tend to favor face-to-face meetings so that they don't have to detail their concerns in publicly available comment letters.

The big financial firms have been coordinating well with each other on some issues and throwing each other under the bus on other issues. Due to the sheer range of issues being addressed in the Dodd-Frank rulemaking process, this was inevitable. Big foreign banks have different incentives than big US banks on some issues (e.g., extraterritoriality), but they're aligned on other issues (e.g., clearinghouse ownership). To be honest, I've seen more coordination between the major banks than I expected, but I think that's primarily because the trade associations (SIFMA, Financial Services Roundtable, ISDA, etc.) have been so eager to get paid and stay involved.

MK: Worst case scenario: We wake up in November 2012 to President Bachmann and a Republican controlled House and Senate. Alternatively, the GOP just takes the Senate. Will enough of the muscle of Dodd-Frank be put into place so that it holds, or will a lot of it be able to be compromised quickly under any future Republican administration?

EoC: That is scary. If that nightmare scenario came to pass, I suspect that some very important pieces of Dodd-Frank would stand a decent chance of getting repealed. Republicans would obviously go after the CFPB first. The other measures I'd expect them to target would be the regulation of "systemically important financial institutions," the Volcker Rule, and the derivatives end-user exemption.

MK: During the financial reform debates, there was a group of people who thought Dodd-Frank wasn't going far enough. In general, they were dubious about rule-writing and regulators, how well resolution authority could work in an international world during a crisis moment, loopholes for derivatives and thought that the size of the largest firms made those firms too dangerous, politically and otherwise. For the "Dodd-Frank hasn't gone far enough" group, what's something that has happened that has proven them wrong, and something that has happened that has proven them right?

EoC: As you say, the "Dodd-Frank didn't go far enough" crowd tends to think that one of the main reasons why the major banks should be broken up is that they have a dangerous amount of political power. I think that the big banks' political power, especially after the crisis, is massively overrated by pundits, and I think the interchange vote proved this. The big banks spared absolutely no expense in trying to roll back the Durbin Amendment (i.e., the interchange rules). The big banks mounted an all-out, eight-month lobbying campaign against the Durbin Amendment, and they even had the powerful community banks on their side. But they still lost the vote. (Yes, the Fed compromised in its final rule by raising the swipe fee cap to 21 cents, but that isn't what the banks wanted and wasn't what their lobbying campaign was aimed at. They wanted the Durbin Amendment gone, and they were rebuffed.)

Now for something that's proven my side wrong. I think it's fair to say that my preferred regulatory regime relies fairly heavily on the regulators. The past year has, unfortunately, proven that you can't always count on regulators having adequate funding to perform at the level envisioned by my side.

MK: Others have been worried about the relative power of the financial sector in our country. People worry about "financializaton" from the point of view of entrepreneurship, relative focus and power of economic sectors, a focus at the top instead of the bottom, short-term-ism, etc. A decade from now, how will Dodd-Frank have changed the political economy of the country? Is it way too early to tell, or is it just not relevant to how Dodd-Frank is working?

EoC: A decade from now, I think Dodd-Frank will have changed the political economy in the sense that it will make high finance less profitable and less attractive to talented employees -- but the changes will be at the margin. One of the problems with lamenting the "financialization" of the US economy is that no one ever explains what they would consider a successful de-financialization. Finance is a global industry and US financial institutions provide significant financial services to foreign investors. It's also fair to say that the US has a comparative advantage in financial services. So given that comparative advantage, and the global nature of the financial industry, where is the line between a healthy US financial industry and the unhealthy "financialization" of the US economy?

So coming back to Dodd-Frank, I think that it will inevitably reduce the financial industry's share of the economy, simply because it will make the industry less profitable. But will it achieve the "de-financialization" of the US economy? That depends on how you define a successful de-financialization. I haven't spent enough time looking at the numbers to have a fully articulated view on the appropriate size the US financial industry, so I'm afraid I'll have to give a terribly unsatisfying answer: I don't know.

Share This

Thoughts on Dodd-Frank Birthday: Everything is Broken

Jul 21, 2011Robert Johnson

The weakness of Dodd-Frank illustrates a crisis in governance that is sapping the vitality of the country.

The weakness of Dodd-Frank illustrates a crisis in governance that is sapping the vitality of the country.

Legislation is incremental. It is a reflection of compromise. Yet rarely in the history of the United States post WWII has legislation been so revealing. Revealing because, in relation to the velocity of circumstances that revealed the inadequacy of our regulatory framework, and in relation to the damage that was done to lives and living standards across America and around the world, this legislation did very little to rebalance the relationship between finance and larger society.

In essence, it was revealed that in this era of money politics people are basically defenseless against the concentrated power (even more concentrated after 2008!!) of the financial sector. As Senator Durbin exclaimed in a 2009 radio program, "[Banks] frankly own the place". The clarity of that thought was revealed by the contrast between the magnitude of the crisis and the harm that it has done, and the lack of meaningful reform in Dodd Frank. Real balanced legislation would have gone much further to curtail embedded leverage and complexity of instruments. Real legislation would have contained a mortgage modification dimension like the Home Owners Loan Corporation. We do not have those things because they would have threatened reported profits, bonus pools and campaign contributions. This is not just a problem of government, as distinct from the private sector, it is a problem of the governance of the concentrated powerful interests who spent years shaping legislation and regulatory enforcement to unshackle themselves until they imparted great harm to the rest of society and handed it a bill for the cleanup.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

This is not a problem of governance that is confined to the financial services industry. It was also in evidence in the healthcare legislation where insurance and pharmaceutical interests had their way. It is true in the realm of national security where analysts lament that our force structure is still oriented toward a threat paradigm from the cold war and that we cannot respond because of the providers of pork. This is not a problem of the Democratic party. No, the Republican party was feeding at the same fundraising trough throughout the Dodd-Frank deliberations. This is a problem of governance that is harming a broad range of what has been the quality of life and vitality of the United States of America. If Dodd Frank's weakness makes that one point clear by unmasking this ugly process, then it has the potential to be of value. On the other hand, its weak result, which diminished trust in government, may serve to feed the anti-government sentiments. In that case, it could mark a foundational episode in the deterioration of America.

Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

Share This

Dodd-Frank: Whose Law Is It, Anyway?

Jul 21, 2011Tom Ferguson

One year later, the big banks are more dangerous and reckless than ever. And they are crafting the very legislation meant to keep them in check.

Who would have guessed that the World Spirit has such a sense of humor?

One year later, the big banks are more dangerous and reckless than ever. And they are crafting the very legislation meant to keep them in check.

Who would have guessed that the World Spirit has such a sense of humor?

A year to the day after Dodd-Frank allegedly gave regulators the powers they need to save us from reckless banks that are too big to fail, government officials, bankers, and regulators are meeting in Europe. They are trying to cobble together yet another rescue plan for Greece, while Portugal and Ireland wait desperately in the wings and Spain and Italy hold their breath. If the Eurocrats fail, any number of banks could knock over, bringing the world a "Lehman in reverse." Only slightly less sensationally, there is a real chance that the European pow wow could lead to a "credit event" that would force financial houses that sold credit default swap protection (aka: insurance) against loan defaults to pay up.

Now here's the really fun part: Remember AIG? American financial houses are widely believed to have written billions of dollars worth of those credit default swaps. Alas, the Fed and the Treasury do not know who is on the hook for how much. They hope, but cannot say for sure, that another AIG is not out there somewhere, capable of triggering chain bankruptcy again or starting big runs on money market funds.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

That's the Dodd-Frank "reform" in action. Sure, you can respond that this is only to be expected since, as Michael Hirsh reported in Newsweek, Congressman Barney Frank's committee allowed Goldman Sachs to proffer nine pages of amendments to drafts of the bill covering derivatives.  But I think this is too tepid. What's happening with financial reform is not just business as usual. The money-driven American political system has now spun completely out of control. It imperils us all. We may escape this time, but the incentives are still there for the monsters to keep taking risks until they have to be bailed out by us again.

Thomas Ferguson is Professor of Political Science at the University of Massachusetts, Boston and Senior Fellow at the Roosevelt Institute

Share This

Dodd-Frank Made No Structural Changes to Banking System

Jul 21, 2011Matt Stoller

A former Congressional staffer sees Dodd-Frank as a lost opportunity to rebuild a financial system in line with public needs. (Follow Matt Stoller on Twitter at @matthewstoller).

A former Congressional staffer sees Dodd-Frank as a lost opportunity to rebuild a financial system in line with public needs. (Follow Matt Stoller on Twitter at @matthewstoller).

I was a staffer on the Dodd-Frank legislative package, and the whole process seemed odd from the very beginning. There was no attempt initially to ask the question, "what happened and what should we do about it?" There was no examination of the purpose of a banking system, and how to rebuild a system that aligns the public with the financial industry. There was no attempt to build legitimacy through a public education campaign about what Congress and the administration was doing, and why. Instead, legislators and very serious men in suits started throwing around terms like "systemic risk regulator" and "resolution authority", and then used the idea of a Consumer Financial Protection Bureau as a palliative for liberals.

My specific focus on the bill was the provision to audit the Federal Reserve, which was one of the bright spots (another could be the Consumer Financial Protection Bureau). This provision opened up the Fed's emergency lending facilities and its discount window to the spotlight, allowing for the beginning of a real debate over our monetary system. But overall, the Dodd-Frank bill was significant for its lack of significance.

In retrospect, this was by design. Congress created a panel -- the Financial Crisis Inquiry Commission -- to examine the cause of the financial crisis. But this panel had a mandate to deliver its recommendations after the passage of Dodd-Frank. In other words, Congress and the administration did not design Dodd-Frank to prevent another financial crisis. So what was the purpose of the bill? I suspect this can only be answered by looking at the overall policy thrust of the government since the beginning of the financial crisis.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

The clearest explanation is by Roosevelt Institute Fellows Tom Ferguson and Rob Johnson in their series on the Paulson Put. While a shadow bailout took place through the Federal Home Loan banks and the Federal Reserve from 2007 onward, eventually a fiscal and regulatory solution would become necessary. The first significant legislation in this thrust was the famous Bazooka bill (or Housing and Economic Recovery Act) signed in June 2008 that allowed Treasury Secretary Hank Paulson to take over and pump unlimited sums into Fannie and Freddie. The second was the TARP. Both of these bills were pivotal to providing the government with enough firepower to overcome the solvency crisis.

After the immediate crisis was contained, losses were socialized, and profits returned to financial executives, Congress had to put together a "solution". It would have a giant bite at the apple in restructuring our regulatory apparatus. But in order to perpetrate the oligarchic banking structure, it would be important that no structural changes to the industry be implemented. Not one regulator was fired for his or her part in the crisis. The Justice Department adopted a posture of legalizing financial control fraud by refusing to prosecute anyone involved in the meltdown, and continues to allow millions of cases of foreclosure fraud to continue. Ben Bernanke was renominated, and the administration fought a bitter below-the-radar battle to secure his confirmation. With a few modest exceptions, the risk-taking and leverage in our financial markets continues apace, and the deregulatory neoliberal mindset is still dominant. The Federal Reserve has been audited, but the system is now accountability-free for high level operatives in finance and politics. And now that Elizabeth Warren has been thrown overboard by the administration, the lockdown of the financial system is nearly complete.

And mostly, that's what Dodd-Frank accomplished. It rearranged regulatory offices and delivered a new set of mandates, but effected no structural changes to our banking system. Congress never asked what happened, or why, or even, what kind of banking system do we want? And that's because Obama's Treasury Secretary already had the answers to these questions.

The one dangling thread, and this is what worries the administration, is the housing market. But we'll save that problem for another day.

Matt Stoller is a Fellow at the Roosevelt Institute and the former Senior Policy Advisor to Congressman Alan Grayson.

Share This

The CFPB Moves Ever Closer to Getting Out on its Beat

Jul 20, 2011Bryce Covert

Tomorrow it takes on a host of oversight powers, and the nomination of Richard Cordray as director is one more step toward full functionality.

Tomorrow it takes on a host of oversight powers, and the nomination of Richard Cordray as director is one more step toward full functionality.

It was disappointing to find out over the weekend that Elizabeth Warren won't be picked as the first director of her brainchild, the new Consumer Financial Protection Bureau. Warren was the one to envision such a thing in the first place, wondering why toaster ovens were better regulated than mortgages -- when being seduced into a subprime loan could explode a consumer's financial life. She's been an outspoken -- and plainly spoken -- advocate for the average consumer for many years.

But Obama's pick, Richard Cordray, is no lightweight in consumer advocacy and is likely to do some real good at the helm of the Bureau. As Mike Konczal put it in an earlier post, "Cordray took the problems in the foreclosure fraud crisis very seriously while in Ohio, going as far as to sue GMAC when the robosigning scandal broke last October... Beyond GMAC, Cordray sent letters to Bank of America, JPMorgan Chase, Citi and Wells Fargo to question their use of robosigning." He has a record of being unafraid to challenge banks over sketchy practices, which is just what we need.

The even more exciting news about all of this, though, is that the CFPB is closer than ever to being fully operational. With or without the Cordray pick, starting tomorrow the CFPB assumes the powers to oversee banks that were already housed in other agencies. That includes sending examiners in to inspect the books of banks with more than $10 billion in assets, ensuring that the biggest banks are abiding by credit card laws (including the CARD Act), crafting new rules to go after banks that try to circumvent credit card laws, finishing up rules banning lenders from doling out mortgages without verifying income, creating new rules under existing consumer protection laws, and making sure that a consumer who's denied a loan based on a bad credit score can see a copy of the score for free. As Warren herself put it, "On Thursday, the CFPB makes its transition from a start-up to a real, live agency with the authority to write rules and to supervise the activities of America's largest banks." Consolidating these oversights and cracking down to make sure big lenders are following the rules is a huge step forward for all consumers.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

There's still some bad news, though. Without a Senate-confirmed director, the Bureau can't take on any new powers that weren't previously housed somewhere else. While Obama has nominated Cordray, he still has to pass muster with the Senate -- where 44 Republicans have vowed to block not just Warren, but anyone nominated to the post without serious (and totally debilitating) changes made to the Bureau's structure. If no director is confirmed, the Bureau lacks the authority to supervise nonbank lenders, which haven't ever really been under regulatory scrutiny before. Nonbank lenders have a far reach into Americans' pockets -- 17 million of us are considered unbanked, which means they don't have a relationship with a traditional bank such as a checking account. Those people, and others who traditional banking products don't serve for various reasons, have to turn to payday lenders, check cashers, prepaid debit cards, and other unregulated, costly alternatives. These products can lead to over $1,100 in fees each year and they tend to prey upon low-income communities. No one has had oversight over these kinds of lenders, although there is clearly the need for reform and transparency.

The nonbank industry itself, however, is already welcoming the fact that it might skip oversight. Bill Cosgrove, president and chief executive of nonbank lender Union National Mortgage Company, told the Huffington Post it would be a "positive" for the industry. It likely would. And that means a negative for consumers.

Bryce Covert is Assistant Editor at New Deal 2.0.

Share This

Jeff Madrick on NewsHour: The CFPB is about "Straightforward" Economics

Jul 19, 2011

Last night, Roosevelt Institute Senior Fellow Jeff Madrick went head to head with David Hirschmann of the Chamber of Commerce over the CFPB. Creating this Bureau to protect and inform consumers isn't "wide-eyed liberal stuff," Madrick said. "We're talking about straightforward, laissez-faire, conservative economics."

Watch the full episode. See more PBS NewsHour.

Last night, Roosevelt Institute Senior Fellow Jeff Madrick went head to head with David Hirschmann of the Chamber of Commerce over the CFPB. Creating this Bureau to protect and inform consumers isn't "wide-eyed liberal stuff," Madrick said. "We're talking about straightforward, laissez-faire, conservative economics."

Watch the full episode. See more PBS NewsHour.

"Finance is a very complex subject," Madrick pointed out. "It's easy to trick and deceive." And in fact, many consumers were deceived into products they didn't need in the lead up to the credit crash. If the CFPB had existed before then, he said, "much of the credit crisis we had would have been avoided." Yet despite Hirschmann's claims that many regulators were already policing consumer finance, "we haven't had consumer protection in the financial area before," Madrick said.

It’s free! Sign up to have the Daily Digest, a witty take on the morning’s key headlines, delivered straight to your inbox.

Hirschmann contended that the CFPB is meant to narrow choices for consumers, not just clarify them -- which Madrick pointed out is pretty much false. But even so, "We don't need more consumer choice," he added. "We need standardized products that can be understood." And he scratched his head as to why the Chamber and other business groups are so heavily against this idea. Everyone, including business, should benefit from its reforms. "I would think, frankly, business would applaud it. It would allow them to sell on a level playing field."

Share This

Tom Ferguson Takes on Austerity at Home and Abroad

Jul 15, 2011

Austerity is all the rage in the U.S. and Europe these days, but Roosevelt Institute Senior Fellow Tom Ferguson tells The Real News' Paul Jay that deficit hawks are leading the global economy down the rabbit hole.


More at The Real News

Austerity is all the rage in the U.S. and Europe these days, but Roosevelt Institute Senior Fellow Tom Ferguson tells The Real News' Paul Jay that deficit hawks are leading the global economy down the rabbit hole.


More at The Real News

On the debt ceiling debate, Tom says that while a deal must made, President Obama's approach is "Alice in Wonderland" logic and "there is just no justification for the type of package the president is proposing." To tackle the deficit intelligently, "you could try stimulating the economy, getting people back to work, and getting tax revenues up. But the White House long ago decided not to do that."


More at The Real News

Meanwhile, as the eurozone crisis deepens, Tom maintains that austerity is not a one-size-fits-all solution. Instead, he says "it's the unwillingness to confront the banks and the demands that they have no haircuts ... that is bringing this whole show down." He adds that "The sort of worldwide press for austerity is simply killing growth. It's making it impossible to pay any of these debts, and it's just enlarging deficits around the world."

Share This

Troops Fighting Wars Abroad, Fighting Banks at Home

Jul 13, 2011Bryce Covert

Protecting service members from predatory lending at home is the least we can do to thank them for protecting our interests overseas.

This week's credit check: Most service members make less than $31,000 a year. Payday lending can cost military families over $80 million in fees each year.

Protecting service members from predatory lending at home is the least we can do to thank them for protecting our interests overseas.

This week's credit check: Most service members make less than $31,000 a year. Payday lending can cost military families over $80 million in fees each year.

Our military takes good care of its troops. As Nicholas Kristof pointed out in a recent column, it gives them access to excellent health care, provides superb child care to enlisted parents, and invests in service members' education. "[I]t does more to provide equal opportunity to working-class families -- especially to blacks -- than just about any social program," he says. "It has been an escalator of social mobility in American society because it invests in soldiers and gives them skills and opportunities." Those risking their lives in the line of duty deserve such treatment. They also deserve support once they return home.

But that's not what awaits them. Instead, they often find themselves victim to predatory lending. Service members, in fact, rate financial stresses as second only to work and career.

The most egregious case surfaced earlier this year when it was revealed that JP Morgan Chase and Bank of America had violated the Servicemembers Civil Relief Act by improperly foreclosing on almost 50 active duty military families. Under the SCRA, active duty troops are protected from suits such as foreclosure so that they don't have to worry about financial troubles at home while serving their country. On top of this, it was revealed that JP Morgan overcharged 4,000 military families on their mortgages. Troops can have their mortgage interest rates lowered to 6% under the SCRA, but Marine Capt. Jonathan Rowles brought to light the fact that his family was being overcharged at rates above 9 or 10 percent and then hounded by debt collectors for the extra amount they didn't owe, up to $15,000.

Join us at the Hamptons Institute July 15-17 to hear distinguished speakers take on today’s most pressing issues!

But these aren't the only abuses they face. A 2006 report by the Department of Defense found, "Predatory lending practices are prevalent and target military personnel, either through proximity and prevalence around military installations, or through the use of affinity marketing techniques, particularly on-line," including payday loans, car title loans, tax refund anticipation loans, and rent-to-own operations. The report describes how military personnel are perfect targets for predatory lenders, who make loans based on income but not on the long-term ability to pay. In fact, 48% of enlisted service members are under 25, making them less experienced and less likely to have savings; they are away from any family that might be able to help out with financial troubles; they're paid regularly and aren't likely to lose their jobs; they're geographically concentrated; and there's even a military policy explicitly stating that they must pay their debts. On top of this, their pay isn't very high: most make less than $31,000 a year. It may be little wonder, then, that in 2005 active-duty military personnel were three times more likely than civilians to take out a payday loan. In fact, payday lending cost military families over $80 million in fees each year.

There is some good news for our troops. In 2006, the John Warner National Defense Authorization Act was passed, making it illegal for lenders to charge military members and their families interest rates above 36%, among other helpful provisions. The Justice Department settled with a JP Morgan unit and Bank of America for $22 million over the wrongful mortgage charges and foreclosures to provide relief to more than 170 active-duty personnel. And the new cop on the beat, the Consumer Financial Protection Bureau, just announced an agreement with the Judge Advocate Generals of all military branches "to provide stronger protections for service members and their families in connection with consumer financial products and services." Protecting our troops from predatory lending is almost literally the least we can do to thank them as they come home.

Bryce Covert is Assistant Editor at New Deal 2.0.

Share This

Pages