Dodd-Frank– Monster or Slayer in the World of Financial Business Reform: Its So Complex, No One Knows…

Two years after the sweeping Dodd-Frank Act was signed into law, banks are paring operations and ramping up compliance, regulators are drafting mountains of new rules, and observers still doubt the financial system is any safer than it was after the 2008 financial crisis. ~Dennis Kelleher

The Dodd-Frank ‘Wall Street Reform and Consumer Protection Act’ (Dodd-Frank) is U.S. federal law that places regulation for the financial industry in the hands of government. One main goal of Dodd-Frank is to reduce federal dependence on banks by subjecting them to a myriad of regulations, and breaking-up of any companies that are ‘too big to fail’.

The act created the ‘Financial Stability Oversight Council’ to address persistent issues affecting the financial industry and prevent another recession. By keeping the banking system under a closer watch, the act seeks to eliminate the need for future taxpayer-funded bailouts. According to Robert Kulak; the problem with Dodd-Frank is that it’s so long and ponderous that anyone can say anything about it and be right.

Consider the fact that the Act is 2,319 pages long. Republicans have attacked Dodd-Frank, in part accurately and in part from a partisan perspective. Democrats have defended Dodd-Frank, in part accurately and in part from a partisan perspective. That’s a pretty good debate for an act that neither side understands completely. A particularly contentious issue between banks and the Dodd-Frank is the ‘Volcker Rule’, which prohibit banks from risking depositors’ money on risky investments.

From 1933 to 1999, depositors were protected by ‘Glass-Steagall Act’ (formally, ‘Banking Act’ of 1933). In 2009, ‘Paul Volcker’ described how the ‘Volcker Rule’ should work, in the current economic environment, in a three-page memo. After Dodd-Frank became law, federal banking regulators expanded Volcker’s three-page memo to 298 pages covering 400 topics with 1,300 questions. Then, to provide further clarification, Sullivan & Cromwell, an 800 lawyer law firm, produced a 41 page synopsis (by contrast, the original ‘Glass-Steagall Act’ was 37 pages long, double spaced).

In fact, in their introduction, Sullivan & Cromwell said ‘… the Volcker Rule affects; larger U.S. banking organizations, non-U.S. banking organizations, other financial organizations with trading operations, asset management business or other operations’. Did they say non-U.S.? Did they say other financial organizations? Yes, they did… Also, Dodd-Frank identifies a new acronym– SIFI (systemically important financial institution).

Thus, it appears that Dodd-Frank also sets the stage for not only bailing out banks that are deemed– too big to fail, but also any other SIFI, e.g., insurance companies, real estate companies, Fannie Mae and Freddie Mac, and non-U.S. financial institutions– all would be regulated by Federal Reserve. According to ‘Richard Fisher’ at Dallas Federal Reserve Bank, said; If you are ‘too big to fail’, then ‘you’re too big’. It’s not that we don’t need to better regulate financial industry, we do. But Dodd-Frank, not with standing any positive aspects, is not the way…

In the article Two Years Later, Dodd-Frank Law Largely Stalled  by Bobby Caina Calvan writes: Nearly two years after the signing of the landmark Dodd-Frank legislation, many of the rules meant to restore public trust in the country’s financial institutions have yet to be enacted. Squads of lobbyists, lawyers, and accountants have overwhelmed the rule-making process, in minutia, with blizzards of paper, and hundreds of meetings.

As a result, regulators have missed more than half the rule-making deadlines, with just 120 of the 398 regulations enumerated by law; according to a tally by Wall Street law firm ‘Davis Polk’. Key provisions are still months away, most notably the so-called ‘Volcker Rule’ meant to rein in banks’ appetite for risky investments and prevent repeat of 2008 meltdown that led to the public bailout of some of the country’s largest financial institutions.

To complicate the matte, at least two lawsuits are pending, challenging various aspects of the law’s rule-making process: One filed by Texas community bank and another by several financial industry associations. The Dodd-Frank was a major victory for Democrats, in 2010: an offensive against what they viewed as free-wheeling culture of Wall Street.

Supporters envisioned stronger protections for consumers against predatory lenders, stricter rules for protecting bank deposits from being used for high-risk investments, and transformation of Wall Street into more accountable and responsible public citizen. But, even when finished, we still won’t have resources or people to implement it’, said ‘Gary Gensler’, commission chairman.

He likened the challenges to a football game without enough referees. According to ‘Cornelius Hurley’; to the extent that the purpose of this entire exercise is to restore confidence in the financial system, then that objective is far off… a deeply flawed statute is being implemented haltingly under very difficult circumstances’.

In the article Five Myths about Dodd-Frank by Christopher Dodd (co-author of the bill) writes:  Even though the Dodd-Frank is only beginning to take effect, critics are launching false attacks against the law in an effort to undermine it. Whether they are intentionally misleading or misguided; they are wrong about the law’s purpose and impact. Now, to debunk five of the myths:

  • Dodd-Frank is deepening the economic slowdown: Even though only 10% of Dodd-Frank’s provisions are implemented, so far, critics claim that the law perpetuates ‘job-killing’. In fact, it was the uncertainty inherent in a non-transparent and reckless financial system that made Dodd-Frank necessary in the first place.
  • Dodd-Frank hurts small businesses and community banks: The law is squarely aimed at better regulating the largest and complex Wall Street firms– ones that were most responsible for the crisis and still present the most risk.
  • Dodd-Frank failed to truly reform Wall Street: Dodd-Frank fundamentally transforms the financial system. Requires banks to keep more capital on hand as buffer against bad loans. Establishes process for unwinding firms, if they fail and prohibits Federal Reserve from bailing them out. Brings more transparency and accountability to derivatives market. Shuts down ineffective regulators and insists remaining ones share information to expose next financial trouble spots. Establishes single agency whose mission is to protect consumers.
  • Congress didn’t fix Fannie Mae and Freddie Mac: The issues  with the housing market– as well as, the debate over the future roles of Fannie and Freddie– remain complex and contentious, but they have hardly been ignored.
  • It’s time to repeal Dodd-Frank: In short, repealing Dodd-Frank would invite disaster, putting working families, U.S. businesses and the global economy at risk of an even worse meltdown.

In the article Morning Bell: Dodd-Frank Financial Regulations Strangling Economy by Amy Payne writes: There’s a reason the financial regulation law has been called ‘Dodd-Frankenstein’. This monstrous creation will swell the ranks of regulators by 2,849 new positions, according to ‘Government Accountability Office’ (GAO). It created yet another new bureaucracy called ‘Consumer Financial Protection Bureau’ (CFPB) that has truly unparalleled powers.

This bureau is supposed to regulate; credit and debit cards, mortgages, student loans, savings and checking accounts, and most consumer financial product and service: It’s not even subject to congressional oversight. Frighteningly, the CFPB’s regulatory authority is just as vague as it’s vast. More than half of regulatory provisions in Dodd–Frank state that agencies ‘may’ issue rules or ‘shall’ issue rules as they ‘determine are necessary and appropriate’. Congress avoided making real law with Dodd-Frank, and passed the responsibility for ‘fixing’ the financial sector to these newly minted bureaucrats… which hasn’t been going well.

As Heritage’s ‘Diane Katz’ explains in a two-year checkup of the law: As of July 2012, implementation of Dodd-Frank is behind schedule with 63% of target deadlines missed, which has intensified the cloud of uncertainty surrounding the finance sector and the economy, since passage of the law. Thousands of businesses do not know what the law demands– that they do differently or when they must do it.

The results of this haphazard regulation are dire; Katz says, consumers will have tighter credit, higher fees, and fewer service innovations. Job creation will suffer… financial firms of all sizes are shelling out hundreds of millions of dollars for regulatory compliance officers, accountants, and attorneys rather than making loans for new homes and businesses’. In effect, the law that was supposed to fix the financial sector is hurting consumers rather than ‘protecting’ them…

Scope and structure of Dodd-Frank are fundamentally different than those of its precursor laws, notes ‘Jonathan Macey’, at Yale Law School: Laws classically provide people with rules. Dodd-Frank is not directed at people… It’s a ‘law outline’ directed at bureaucrats, and it instructs them to make still more regulations and to create more bureaucracies.

According to ‘Ron Ashkenas’, HBR blog network; Dodd-Frank passed in the wake of the financial crisis, has the potential to be classic example of ‘controls’ imposed to ‘fix’ a problem, and ‘fix’ becomes so complex that it create other problems. This leads to increasing bureaucratic cycles of more breakdowns, more complex fixes, and more breakdowns. This law’s various sections deals with– bank bailouts, derivatives and swaps markets, mortgage reform, consumer protection, and other issues.

According to ‘Daniel Horowitz’; Dodd-Frank regulations are so complex that most of them have not been formally drafted; causing thousands of businesses to halt expansion and new hiring until the government provides them with some clarity. It’s nothing short of wholesale takeover of financial services and the banking industries; much like Obamacare to healthcare industry.

One of law’s most vocal critics is ‘Jamie Dimon’, who cites not only the cost of compliance, but also difficulty of actually making the regulations work effectively. Another critic ‘Karen Petrou’, says; ‘Dodd-Frank’s implementation is creating ‘complexity risk’ for the financial system. If we don’t understand cross-cutting effects and inherent contradictions in all of the stringent standards now being written into final form, we risk doing real damage.

Responding to criticisms, ‘Treasury Secretary Geithner’ argues; ‘Wall Street is suffering from amnesia about the recent financial crisis… if banks and other financial institutions don’t follow regulations, we’ll have another meltdown’... In fact, we do need effective controls to close gaps that allowed financial systems to fall apart. However, if regulations are unreasonably complex, they will not only create unnecessary costs, but are likely to be unenforceable and eventually ineffective.

What’s clearly needed is something in the middle– simple and practical controls that banks can understand and regulators can enforce. Getting there– requires dialogue, compromise and coordination. Wall Street institutions, government regulators, and other parties need to get together in constructive forums and create realistic and workable practices that fulfill the spirit and intent of Dodd-Frank guidelines. Leaders on both sides should convene key parties, map out, and streamline the regulatory process…