Although various aspects of the Dodd-Frank Act have been attacked in the 10 years since passage, many reforms have survived and significantly strengthened the U.S. financial system, say key contributors, including Dodd and Frank themselves.
In a virtual reunion marking the Dodd-Frank Act’s 10th anniversary, the Act’s chief architects gathered in home offices and living rooms to celebrate successes, reflect on the current economic crisis, and mull remaining areas of reform. Former President Barack Obama himself welcomed prominent Dodd-Frank alumni to the event, which was co-hosted by Better Markets and the George Washington University Law School’s Business and Finance Law Program.
Christopher Dodd, former Senator and chair of the Senate Banking Committee, and Barney Frank, former Representative and chair of the House Financial Services Committee, shared stories of midnight negotiations in a high-pressure marathon session where every vote was needed. The former lawmakers agreed that the reforms put the American financial system on a much stronger footing that lasts to this day, despite attempts to roll back reforms. In turn, that has made the U.S. a place that draws investments, because investors know that strong regulation means their money is safe.
Joining the reminiscences were House Financial Services Chair Maxine Waters (D-Cal) and Senator Elizabeth Warren (D-Mass), who highlighted Dodd-Frank’s diversity achievements and the establishment of the CFPB, and also looked to the future with an eye to how the current crisis might boost pending legislation. Also featured in the event were Sheila Bair, former FDIC Chair, and Sarah Bloom Raskin, former Deputy Secretary Treasury and Fed Governor, as well as John S. Reed, former Citicorp/Citigroup CEO. The event was chaired by Dennis Kelleher, Better Markets Co-Founder, President & CEO.
Accompanying the event, Better Markets published two reports: "Ten Years of Dodd-Frank and Financial Reform: Obama’s Successes, Trump’s Rollbacks and Future Challenges" and "President Obama in His Own Words: Making Financial Reform a Reality 2009—2016."
Crisis and opportunity. Appearing against a backdrop of a well-appointed bookcase, former President Barack Obama explained in conference remarks:
"When Joe Biden and I came into office in 2009, we were teetering on the brink of a second Great Depression. Banks were collapsing, credit was freezing up, companies were shedding jobs and closing their doors. And, millions of Americans were losing their homes, incomes, and retirement savings. A lifetime of hard work was evaporating, almost in an instant. So as our administration worked quickly to stop the bleeding and recover from the crisis, we also worked to prevent recklessness on Wall Street from devastating folks on Main Street ever again."
As laid out in the 2011 report of the Financial Crisis Inquiry Commission, a "combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis." Fueled by low interest rates, easy and available credit, scant regulation, and toxic mortgages, a huge housing bubble built up. Complex and opaque mortgage-related securities, and derivatives based on those securities, embedded and concealed risk throughout the financial system.
When the bubble burst starting in late 2007, hundreds of billions of dollars in losses in mortgages and mortgage-related securities sent a shock wave through markets around the world, compounded by derivatives losses. A series of bankruptcies and bailouts unfolded throughout 2008 as regulators raced to contain the worst financial crisis since the Great Depression.
According to the Better Markets report, by October 2009, the real unemployment rate reached 17 percent, with 27 million Americans out of work or forced to work part time because they could not find full time work. Over the next few years, the cost of bailout measures rose to $29 trillion, and the crisis cost the U.S. more than $20 trillion dollars in lost GDP.
"Ferocious" industry opposition. As related in the Better Markets report, Obama met with his economic team and key economic leaders in February 2009 to develop a legislative response. The team outlined seven core goals for reform. Obama made clear that although he sought bipartisan agreement wherever possible, reform was coming with or without those opposed.
In a panel discussion with Dodd and Frank, Stephanie Ruhle, an anchor on MSNBC Live and senior business correspondent for NBC News, delved into details on industry opposition. She related that in 2009, Obama called out Republican leaders for summoning more than 100 key financial lobbyists to a pep rally and urging them to redouble their efforts to block meaningful financial reform. Ruhle noted that this was after industry had already spent $300 million on lobbying that year, and that this took place in the midst of the worst financial crisis since the Great Depression.
Ruhle asked if Dodd was surprised at the "ferocious opposition" from industry. Dodd said yes, he was surprised. To him, financial industry leaders had seemed "tone deaf." He recalled meeting with bank executive leaders at the Financial Services Roundtable.
"There were basically two issues they wanted to bring up. They were frightened to death of a Consumer Protection Bureau. And they wanted to talk about executive compensation It was just stunning to me that the major issues they wanted to talk about were their pay, and a bureau that would protect the very customers they tried to service every day from being taken advantage of," said Dodd.
Dodd added that at 1:30 in the morning before the TARP vote, then-Treasury Secretary Hank Paulson tried to kill restrictions on executive compensation as a condition for bailouts. According to Dodd, Paulson was "very upset" about the proposal and threatened to pull support.
"I said, You're kidding. We're asking the taxpayer to write a check for $100 billion, and you still want to be able to get bonuses That was sort of the mentality," said Dodd.
Frank agreed, adding that Paulson said that financial executives specifically threatened they would not participate if the bill included restrictions on executive compensation. This was a program that would save the American economy, said Frank, and these were people "making more in two years than any human being could probably spend in two lifetimes, and they were objecting to a fairly small reduction in their compensation." Frank also recalled "ridiculous" comments by Goldman Sachs that they were doing "God’s work." These were people used to being lionized, said Frank, and now they were being yelled at. They couldn’t believe the country could be so ungrateful to them after all the great benefits they had given. Frank likened the mentality to the prince in War and Peace who said, "My God, they’re shooting at me, whom everybody loves!"
Passage of Dodd-Frank Act. Despite vociferous opposition, there was enough bipartisan support in Congress for reform to succeed. Although the bill did pass largely along partisan lines, Frank observed that all the major regulators appointed by President George W. Bush agreed with the basic outlines of the bill. Dodd agreed that there were important bipartisan successes, including that the bill followed the principles laid out in the G20 agreement that Bush had signed. He noted that Democrats and Republicans shared responsibility for key parts of the bill, including Sens. Jack Reed and Judd Gregg working on derivatives issues and Sens. Dodd and Richard Shelby working on the Consumer Financial Protection Bureau. He also pointed out that of the 60 amendments that were debated, about half were Republican, and about 10 were accepted unanimously.
The Dodd-Frank Act was passed on July 21, 2010. Key components included:
- Prudential bank regulation, including capital, liquidity, and leverage standards, as well as enhanced prudential standards for megabanks;
- Creation of the Consumer Financial Protection Bureau (CFPB);
- Creation of the Financial Stability Oversight Council (FSOC) to address systemic risk and the shadow banking system;
- The "Volcker Rule," which restricted proprietary trading by banks;
- Reforms to securities markets to increase investor protection, including measures relating to investment advice, credit risk retention, and whistleblower programs;
- Reforms to derivatives regulation, including requirements for derivatives instruments to be traded on regulated exchanges and centrally cleared, new registration and reporting obligations, and margin for uncleared swaps transactions.
Reform accomplishments. Asked where the U.S. would be now if Dodd-Frank had not been enacted, given what is happening economically, Dodd said, "I think we would have collapsed economically. And I don’t know of anyone who disagrees with that." According to Dodd, the Dodd-Frank reforms made banks stronger in terms of capital, liquidity, profitability, with the result that they have weathered the last 20 weeks of economic turmoil arising from the global coronavirus pandemic.
In comments by email, Kelleher concurred that Dodd-Frank "unquestionably" prevented the pandemic-caused economic crisis from becoming a banking crisis. A recent Better Markets report, "No Financial Crash Yet Thanks to Dodd-Frank and Banking Reforms", explores this in detail.
Frank agreed that the Act strengthened institutions and the financial system, saying it has helped internationally that American financial institutions, including U.S. stock markets, have a reputation for being very well regulated. It’s a source of strength and one of the reasons why the dollar is so strong, said Frank.
"This is still a place people want to put their money. And one of the reasons is that they're safe here. And so you have this competitive protection against inappropriate action. You have the reputation for safety. And the fact that frankly, we knew what we were doing. And what we banned, and what we prevented, is people incurring more debt than they could handle," said Frank.
Frank observed that without proper regulation, there can be competitive pressure to do things that encourage more debt. In any industry, including the banking industry, there is a pressure to go to the bottom. If competitors are engaging in activities that are immoral but look profitable, you can be hurt if you don’t follow suit, said Frank.
For example, Frank asked Chuck Prince, former Citicorp CEO and Chairman, why he would use an accounting technique that allowed the bank to incur debt but keep it off the balance sheet. Prince replied that if he didn’t, Goldman would beat Citicorp in the market because their balance sheet would look better. Frank noted the well-known quote by Prince: "When the music’s playing, you gotta dance."
One area where reform has worked particularly well is derivatives, said Frank. It was through derivatives that the financial problems ricocheted through the system. Now, derivatives must be traded on exchanges, among other reforms, and the system is less interconnected as a result. Consequently, if a particular private equity fund gets into trouble and gets hurt, it’s more possible now to let it take the loss. Frank also believes there’s a "strong role for antitrust," and Rep. David Cicilline (D-R.I.) and Sen. Warren are looking at antitrust implications of agglomerations.
Warren pointed to the CFPB as a lasting major success. The agency has survived direct attack, having recently been found constitutional by the Supreme Court. But more than that, Warren said, deep down, Donald Trump and the Republicans are afraid of the CFPB. Partly this is because "they’re buddies with the Wall Street banksters that the CFPB stands up to." According to Warren, far from "draining the swamp," Trump filled his transition team and administration with lobbyists, special interests, and corporate insiders, to the point where "Goldman Sachs could open up a new branch at 1600 Pennsylvania Avenue."
But on a broader level, said Warren, Republicans are afraid of the CFPB because it is a "roadmap for big structural change." The CFPB shows that government can be a "powerful force for good." In nine years of operation, the agency has handled more than 2.2 million complaints, helped more than 26 million Americans directly, and forced banks and financial institutions to return more than $12 billion directly to people. Warren believes that the CFPB provides a model that can be used to "rewrite the rules of power all across our broken systems."
"The creation of the CFPB teaches us that we can make government work, not just for the wealthy and well connected, but we can make it work for everyone," said Warren.
Waters is particularly proud of her contributions to Section 342 of the Act, which required most of the Federal financial agencies, services, and each of the Federal Reserve banks to establish Offices of Minority and Women Inclusion, known as OMWI. To further diversity work, Waters created a Subcommittee on Diversity and Inclusion, which has held hearings on the lack of representation of women and minorities in the financial sector, board diversity, the racial and gender wealth gap, diverse asset management, and the lack of diversity in America's largest banks, among other areas. The subcommittee has released a staff report on bank diversity data, making recommendations on why banks and others must make diversity and inclusion of priority in their employment pipeline, on their boards and with suppliers.
Waters led the passage this year of legislation to promote diversity including bills to require companies to disclose the demographics of their boards and C suite executives, and to require Federal Reserve banks to consider diverse candidates. Further, Waters has overseen the advancement of H.R. 3621, the Consumer Credit Act, which makes comprehensive reforms to the credit reporting system, and H.R. 5332, the Protecting Your Credit Score Act of 2020, which provides easier access and stronger protections for consumers in the credit reporting system.
One area where Frank regretted not being able to accomplish more is risk retention. He explained that during the legislative negotiations, one holdout senator had been approached by mortgage brokers who wanted an exemption from the restriction that provided that you couldn’t securitize without holding onto some of the risk. Frank said he worried about carving out an exemption, but he had to give in order to get the vote, which was needed for passage. As a result of the amended language, the exception ended up swallowing the rule, effectively eliminating the risk retention requirement, said Frank.
Kelleher agreed on the importance of getting risk retention requirements in place.
"The risk-retention (RR) provisions of the Dodd-Frank Act were inadequate and they have been gutted by regulators and courts since the law was passed," said Kelleher. "We have fought on the Hill, at the agencies and in the courts to have the strongest RR provisions possible, for example [in comment letters on joint proposed rules and the SEC’s Credit Risk Retention Rule; testimony before the Senate Banking Committee, and reaction to the final rule]. The regulators need to get serious about requiring issuers to have "skin in the game" or the dangerous "originate to distribute" model that fueled the 2008 crash will make a big comeback," said Kelleher.
Attacks on reform. Regarding attempts to scale back or repeal the Act, Dodd said that it has not come under as much attack as the Affordable Care Act has. The structure and architecture are still in place. Although the head of the CFPB was lost with the change to the Trump administration, and the recent Supreme Court decision in Seila Law v. CFPB declared the agency’s leadership structure unconstitutional, the agency itself has survived.
"They didn’t go to the heart of what we’ve done. The heart of what we did 10 years ago is a law of the land today in the United States," said Dodd.
Ruhle asked if there was no political will to repeal the Act because at the end of the day, it worked. Ruhle observed that although some of the biggest bank CEOs were devastated when Dodd-Frank was first introduced and thought it would crush their business, in subsequent years, they said that in fact it had made the banks better and smarter and stronger.
Frank agreed that political fear has kept Republicans from moving too strongly against the Act. Even during the Dodd-Frank negotiations, Republican leaders were told by most of their members that they did not want to have to vote against the Act, said Frank.
While many parts of Dodd-Frank have been successfully implemented and survived subsequent attack, some areas have been scaled back or undone completely. Kelleher said the pared-back areas he is most concerned about are reductions in capital requirements and lifting of restrictions in proprietary trading.
"The only thing standing between a failing bank and a taxpayer bailout is the bank’s capital cushion," said Kelleher. "The less capital, the easier and quicker it will fail and, if it’s a Wall Street too-big-to-fail bank, taxpayers will be on the hook to bail it out when its own capital should have been used to absorb its losses. Weakening the Volcker Rule ban on proprietary trading incentivizes Wall Street banks to engage in highly leveraged, high-risk gambling with taxpayer deposits. Doing such dangerous trading with less capital is literally asking for trouble that taxpayers are going to get the bill for again."
Kelleher also observed that Dodd-Frank consumer protection reforms have been severely attacked under the Trump administration, which could lead to increased systemic risk.
"The failure to stop the predatory subprime lending before 2008 was not only consumer abuse but was the kindling that ignited the 2008 crash," said Kelleher. "That illustrates how the failure to stop consumer abuses can have systemic implications. Unfortunately, Trump’s appointees have changed the Consumer Financial Protection Bureau (CFPB) into the Financial Predator Protection Bureau, which is bad for consumers and systemic stability. For example, payday lending rules have been gutted; the consumer complaint database has been weakened; enforcement has dropped to very low levels and penalties are laughably low; and they are about to gut the protections against time-barred debts. Collectively these actions unleash financial predators and send a signal to would-be lawbreakers in the marketplace that there is no cop on the beat and, even if you happen to get caught, the penalty will be minimal. The systemic implications of these actions won’t be known for years."
Despite the many attacks on reform, focusing on this could obscure Dodd-Frank’s many achievements, said Kelleher.
What’s next? Changing the focus to today, Dodd believes that providing financial assistance due to the coronavirus pandemic is necessary and important. According to Dodd, with the coronavirus pandemic now exceeding the Spanish Flu pandemic from 100 years ago, not to step up and give support would be "reprehensible."
Frank agreed that economic stimulus is needed and said he is not as worried about a lack of oversight as some of his friends. Although the question was about PPP loans to businesses, Frank pivoted to the individual economic stimulus, and said the individuals needing assistance are not the ones who caused the crisis, as was the case in the 2008 financial crisis. Also, the current assistance is much broader based than the 2008 bailouts. Many, many people are getting something, which is helpful, said Frank.
Kelleher related his reform priorities:
- "First, the largest financial firms need to be forced to have more capital, not only so they don’t fail, destabilize the system, and require bailouts, but also because better capitalized firms have a greater ability to support the real economy during times of crisis like now," said Kelleher. "Second, the country needs mechanisms as robust, quick, powerful and effective to save Main Street during a crisis as it has with the Fed to save Wall Street during a crisis. Third, the so-called safety net for Main Street families has more holes than net and must be repaired to ensure that hardworking Americans are treated at least as well as Wall Street bankers during a crisis."
On whether a crisis is always needed to get momentum for change, Dodd said they did a good job 10 years ago, but people have moved on from the crisis and have lost the "urgency of now." Many problems pose systemic risk that should be addressed, including climate change and the pandemic. There is also a lot more to be done in other areas as well, said Dodd, like making sure that underserved communities get served, particularly minorities in rural communities.
"You've got a crisis in front of you. Let's take advantage of it here, now, and make sure we can do some things we've talked about for years," said Dodd.
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