If it weren’t for the deep disdain in which right-leaning voters hold President Obama’s health care legislation, it’s a fair bet that the phrase "Rescind" on all those GOP rally posters would be followed by “Dodd-Frank” instead of "death panels."
Nothing angers a true Romneyite—the pin-striped Republicans who are his only true natural constituency—like the idea of Uncle Sam meddling in the free-market jungle of global finance. His wider, red-state, populist constituency wouldn’t know Dodd-Frank from a Ball Park Frank. But Romney hammered away against it anyway. Even with a guy as pliable as Romney, the acorn doesn't fall far from the money tree.
Amazingly, to this day, many of the most important parts of Dodd-Frank remain unimplemented. Obama’s re-election should change that, and the beating U.S. banking stocks took Wednesday gives you a sense that investors agree. On Wall Street, which hoped Romney could scuttle or declaw some of these rules, executives will have to take solace in knowing that the huge hiring spree on compliance departments and legal specialists won’t go to waste.
Still, Dodd-Frank is not the Frankenstein's monster bankers made it out to be. In many ways, the bill fails completely to grapple with the “creativity” at the center of 2008’s near-death experience, the fact that too much power is in too few (unaccountable) hands. But it does try to do a few good things. For instance, Dodd-Frank:
- Prevents commercial banks (which are ensured by the FDIC and thus the taxpayer) from taking huge risks with their own “proprietary” accounts, a cause of much of the trouble in 2008. This is known as the Volcker Rule.
- Orders the largest banks to draw up plans for how they would unravel all their liabilities if they should ever fail—the so-called “living will”—and makes them hold more money in their vaults in case of trouble.
- Gives Securities and Exchange Commission and the Commodity Futures Trading Commission the power to regulate previously unexamined “swaps”—the market that precipitated of the collapse of Lehman Brothers.*
- Gives the government the power to protect investors from fraud, both in the mortgage markets and traditional bond and equities spaces.
- Creates new oversight of the “give everyone AAA” credit ratings agencies, which have been a bit tougher of late (see: U.S. credit downgrade in summer 2011 and Jan. 1, 2013—the latter if the fiscal cliff is not dealt with).
- Adds rules aimed at making asset-backed securities (for instance, mortgage-backed securities like those AIG stupidly insured) able to be valued and their owners more easily discerned.
- Requires that corporate boards hold shareholder votes on CEO and other top executive pay at least every three years.
- Simplifies loan documents, banning some fees, and creating a consumer financial protection agency to enforce the new rules against fraud.
You could argue that the most important of these changes are the very ones that still haven’t taken effect—the Volcker Rule, the higher capital requirements, and the “living wills” for banks that are too big to fail.
Given what happened in 2008, the banks should be happy with Dodd-Frank. Officially called the Wall Street Reform and Consumer Protection Act, Dodd-Frank is the primary legislative action taken by Congress after the financial industry nearly destroyed all human life in 2008.
The result of hearings and investigations by Congress and a variety of independent government regulatory bodies, it began at a time when prescriptions were being floated that would have radically changed global finance. Early policy suggestions included an idea removing the political independence of the U.S. Federal Reserve (a GOP favorite), nationalizing the largest banks in the United States (the liberal parry), outlawing the trading of financial derivatives (the banking industry’s nightmare), and my favorite—forcing banks that took TARP funds to write down the mortgage balances of their clients rather than pay the money back to the Treasury Department.
(This last was my own idea, but it never got anywhere because politicians worried about a backlash from “honest” people who weren’t caught underwater. Or maybe from banks who fund their campaigns. Either way, it died a quiet death.)
In the end, none of these things above ever happened. Instead, Dodd-Frank became a battleground between the banking industry and those in abject horror lined up against it. The result is a mishmash of regulatory changes that arguably make the financial system a bit less prone to the kind of crisis that hit in 2008 but really does nothing to prevent the real cause of the problem: the concentration of financial power in too few underregulated hands.
No matter how many bank scandals hit the headlines, bank CEOs will insist they need no supervision on the playground. They’ll also cite their responsibility to shareholders as a reason for this.
Yet a short list just from this year of what banks do when mommy’s not looking would include HSBC and Standard Chartered laundering Iranian money, insider trading at Nomura, Barclays and others putting the “fix” on Libor (the London Interbank Offered Rate that sets all our interest payments), JP Morgan losing $5.8 billion on risky proprietary trade, and a new probe into Bank of America’s allegedly falsified statements to clients.*
Dodd-Frank would have done little, even if fully implemented, to prevent any of the things that happened above. Many happened in London. Some are just criminal and would happen anyway.
Having said that, because Democrats have proved highly susceptible to complaints (often warranted) from the business community about the party’s love of red tape, no one has raised the Dodd-Frank banner on the campaign trail this year in a positive way. Romney, of course, railed against it in an Ayn Randy kind of way, but even as Obama’s victory assured Dodd-Frank would never be repealed, he certainly didn’t make much of a case for it out on the campaign trail. The momentum for effective (as opposed to burdensome) regulation basically died before passage of Dodd-Frank.
Partly this is due to exhaustion. No one wants to hear about economic regulation at a time when economic activity is what they’re really after. Touting the need for regulation with nearly 8 percent unemployment invites an ugly and simplistic counterattack: "See, even with the patient on life support, they want to slow the flow of blood from the intravenous tube!" It’s ignorant and deliberately obscures which party put the patient into the critical ward in the first place, but it worried Democrats enough that they all, with a few exceptions, ran like hell from Dodd-Frank.
As a result, even on the eve of the election, Dodd-Frank was very much under threat. Had a Romney administration taken office, it is very unlikely the law would have been rescinded completely. (In fact, that is a very rare occurrence.) More likely it would be gutted, first by ensuring the so-called Volcker Rule banning banks from betting with their own money never went into effect and then by delaying or watering down the “living wills” being required from all too-big-to-fail financial institutions.
For those who played “skunk at the picnic” for decades—when deregulation was second only to sex as a way to sell an idea in Washington—Dodd-Frank was a symbol of all that is wrong with Washington, a town incapable of learning from the shot it has just administered to its own foot. This was a great and unfortunate case of America “wasting a crisis,” as Rahm Emanuel, then Obama’s chief of staff, memorably put it.*
But Obama’s election at least means that, even if it is that worst of defenses—one that provides false security—it won’t be consigned to the shred pile of legislative history just because of politics.
Correction, Nov. 8, 2012: This article originally misidentified the Commodity Futures Trading Commission as the Commodity Futures Exchange Commission and the London Interbank Offered Rate as the London Interbank Overnight Rate. It also misspelled Rahm Emanuel's first name.