Dodd-Frank on Its 5th Birthday – Can it Ever Leave the House?

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July 2015; Public Citizen

The fifth anniversary of the Dodd-Frank legislation to rein in the out-of-control financial sector that brought this nation to the brink of economic collapse has sparked commentary from the defenders of Wall Street, but supporters of stronger controls are also writing about Dodd-Frank and hoping that more can be accomplished.

Public Citizen’s new report, “Dodd Frank Is Five (and still not allowed out of the house),” says “this law remains largely incomplete—either yet un-codified into specific rules, enforcement dates set into the future, or rules not fully advantaged.”

“Dodd Frank Is Five” contains a very useful summary of the status of the key provisions of the legislation. The report instructively demonstrates something very important to nonprofit advocates, that passing legislation is only one step in the policy process. The promulgation of regulations and the government’s ability to implement are key to translating the promise of legislation into reality. As seen by Public Citizen, the promise of Dodd-Frank is yet to be realized.

  • Volcker Rule: Section 619 of the legislation is supposed to shut down banks engaging in “proprietary trading”—that is, stopping banks from “attempt(ing) to gain a profit the way speculators do, through the frequent purchase and sale of a security.” The originator of the rule, Paul Volcker, had argued that banks should be making profits from making loans with the money they get from depositors, not from using depositors’ money to gamble in the markets. But the banks are circumventing the Volcker Rule by engaging in what they call “market making,” purchasing and selling securities that are allowable because they “are in service of their customers.” Regulators haven’t quite figured out the metrics to distinguish proprietary trading from market making, and the banks have done so much market-making that it seems like they’ve simply changed their terminology, not their behavior. A favorite tool of the banks for circumventing the rule? No surprise, hedge funds.
  • Lincoln Amendment: Blanche Lincoln got Section 716 into Dodd-Frank aimed at stopping financial firms from engaging in exotic investments—derivative contracts or “swaps”—with federally insured banks. Speculators like derivatives because the transaction costs are small, and during the financial crisis, excessive speculation in derivatives was widespread. According to the report, “Not only did much of this serve no economic utility, it exacerbated risk.” However, Public Citizen observers that “four and a half years after passage of Dodd Frank, the regulators had taken no steps to implement” the regulation that requires that swaps contracts must be executed in separately capitalized affiliates and “pushed out” of the banks. In fact, Congress attempted to repeal the Lincoln Amendment in 2014, and later Citigroup lobbyists and personal lobbying by JPMorgan’s Jamie Dimon almost got the “swaps push out” repeal included in a spending bill. It’s still there, due to the intervention of Senator Elizabeth Warren, but still unimplemented.
  • Living Wills: Remember the notion of some banks being “too big to fail”? In Section 165, Dodd-Frank required banks to have a credible plan for resolution should they become bankrupt, meaning having a plan for dissolving once their liabilities were greater than their assets. Obviously, the Lehman Brothers collapse and the bailouts of other failing banks precipitated this requirement in the legislation. According to Public Citizen, the major banks have failed to submit credible plans. JPMorgan has submitted a plan, but its plan is 200,000 pages long—yes, that’s the number in the Public Citizen report—which suggests that regulators would be hard pressed to read it, much less figure out whether the plan is credible or not. Bank of America has announced that it would not be able to submit a plan until 2017. It seems like the regulators haven’t figured out how to get the banks to file credible “living wills” that regulators might be able to read and understand.
  • Banker Pay: Public Citizen notes that the executives of failed Wall Street firms such as Bear Stearns and Lehman Brothers took home millions in salary while their companies collapsed and repaid none of it to the American taxpayer. The report also points out that 1,500 employees of JPMorgan and 1,000 employees of Goldman Sachs have annual pay of $1 million or more. Because many observers believed that Wall Street salaries with “inappropriate risk” incentives encouraged banks to make unduly risky investments, Section 956 of Dodd-Frank gave regulators the authority to restrict how bank compensation packages might build in such incentives in executives’ compensation. Although the law called for regulations to be promulgated by 2011, it still hasn’t happened. According to Public Citizen, the banks have flooded Capitol Hill with lobbyists arguing against restrictions on executives’ compensation and have been helped by lack of action by the Securities and Exchange Commission, which is supposed to be part of the rule-making on bankers’ pay.

This report is a prime example of the important public policy functions of nonprofit advocacy organizations. Public Citizen has given us a very useful treatise on the shortcomings in the implementation of Dodd-Frank to date, spurred by bank lobbyists and undoubtedly helped along by the Obama Administration’s coterie of bankers and bank lawyers populating agencies such as the Department of Treasury (Jack Lew, who used to be at Citi) and the SEC (Mary Jo White, who was a Wall Street defender at Debevoise & Plimpton). Dodd-Frank is five years old, but some elements of its implementation are yet to be born, and it will be up to nonprofit advocates to ensure that Dodd-Frank reaches six with some ability to rein in a re-empowered Wall Street.—Rick Cohen