President Donald Trump recently efforted (through an executive order and related memorandum) to make good on his call for repeal of the Wall Street Reform and Consumer Protection Act of 2010, otherwise known as Dodd-Frank. The law (portions of which I advised Congress) and the regulations (on which I helped write over 60) were put in place in order to address lax regulation that helped lead to the Great Recession. Repealing, or even rolling back major portions of the law, would be a monumental mistake on the part of the president. Here’s why.
1) Often times Congress overreacts when something calamitous occurs. Many argue that’s what occurred in the wake of the Great Recession with Dodd-Frank. While there might be a few areas where that has been the case, overall, the law better protects consumers, markets, our economy and our nation from ever again visiting such a sorry and sad circumstance.
The Financial Crisis Inquiry Commission (FCIC), put in place by Congress in 2009 following the immediate economic crisis, produced a report about what occurred. They provided two culprits. First, lax laws, rules and regulations that either were too lenient or simply didn’t exist. Specifically, FCIC pinpointed complex unregulated derivatives called swaps. Second, the captains of finance who took advantage of the little or nonexistent regulatory environment to make humongous risky bets. Those bets, primarily on big bundles of mortgages that had been sliced and diced into myriad and complex packages, were traded and traded and then traded again. When the housing bubble burst, those big and bad risky bets placed some of the largest financial institutions on the planet in jeopardy of failing. They were, however, too big to fail (TBTF) in that, if one or a few went bust, the domino impact through the financial sector and then through the economy could crater not only our nation, but the world. The result was a big government bailout of hundreds of billions of dollars to prop up these large TBTF entities.
They say history repeats itself, or at least it sings a similar song. With Dodd-Frank, we are less likely to hum that tune again. Without Dodd-Frank, we take our chances. In fairness, if there was any over-reaction on Dodd-Frank, lawmakers and regulators were merely endeavoring to be cautious and considerate in avoidance of another major magnitude misstep.
2) Higher capital requirements were put in place. That’s particularly needed for institutions like those that had come close to failing and needed the bailout. Dodd-Frank designated them as SIFI’s (Systemically Important Financial Institutions). The SIFI’s are now required to carry larger reserves in order to be better prepared for potential problems. They are also required to have detailed plans (called living wills) that are regularly updated and provided to government. These living wills ensure a liquidation road map is in place should it ever be needed. The large financial institutions don’t like that much and appear to have convinced President Trump that the provision should be repealed. My view related to the large financial institutions: Too bad. Your risky recklessness cost our people and our nation dearly. You acted as if you were on a dark desert highway with no speed limits. You shouldn’t be allowed to go down that dangerous road again.
3) The regulated markets — like stocks traded in New York or futures traded in Chicago — were never the problem. Those trading venues have done an excellent job at ensuring markets operate in the open in an orderly fashion. Our markets are the envy of the world. Are there problems every so often? Of course, but exchanges work relentlessly to avoid such and have done so in a proficient and professional manner, sometimes with the able assistance of regulators like my old agency (the Commodity Futures Trading Commission) or the Securities and Exchange Commission.
The terribly troublesome trading, as noted by the FCIC, was over-the-counter (OTC) trading of derivative swaps, specifically those called credit default swaps (CDS). There was zero regulation or oversight of these financial instruments. And, before anyone thinks this is a partisan issue for me, it is not. I served in the Clinton administration (at the Agriculture Department) and it was the financial forces within the administration, save the then chair of the CFTC (Brooksley Born), who opposed regulating swaps. She made effort after effort to try and ensure that the OTC market would never be an Achilles’ heel of our nation’s financial system, but lost. The Clinton admintration’s financial heavy weights, along with many Republicans and Democrats in Congress, simply protected those on Wall Street that didn’t want any stinking regulation.
Dodd-Frank finally (albeit too late) put OTC regulation in place. I worked very specifically on this. The OTC regulation is now being emulated to a large degree in the European Union and in other places around the world. These markets operate 24/7/365 and the focus now should be on harmonizing regulations with other regulators, not repealing them!
4) There are other important aspects of Dodd-Frank, like the Volcker Rule which stops banks from trading for their own books (proprietary trading) which are integrally important to the law. Volcker addresses a particularly problematic situation where some investment banks encouraged their own customers to invest in a particular fund, then once the fund was populated, the bank took the opposite position. Psych! Hundreds of millions in fines were levied against institutions that were caught doing this.
Was all that we did on Dodd-Frank perfect? Ha, of course not. We made some mistakes, had to pull back a few things and deliberate a few do-overs. Some required regulations were so complicated, they still are not done. (In fact, only about 80 percent of the regulations are finished.) It still isn’t perfect, but we are a hell of a lot better protected now than we were before the Great Recession.
I understand how easy it is on the campaign trail to rip on regulation. Heck, there’s never a cheering section for more regulation. But once someone has been elected, they have a responsibility to get down and dirty with the deets and understand what any changes might mean. Repealing or scaling back Dodd-Frank wouldn’t just be a poor policy decision, it could once again put us back in the circumstance where U.S. taxpayers might have to fund another big government, budget-busting bailout of Wall Street. Haven’t we had enough of that? People should simply say: heck no, we won’t go down that road again.
Commentary by Bart Chilton, a political and policy commentator. He is the former U.S. Trading Commissioner and author of “Ponzimonium: How Scam Artists Are Ripping Off American.” He served on the Obama transition team in 2007-2008.
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