December 12, 2013

The Battles That Shaped Dodd-Frank

Dodd and Frank share anecdotes of how some controversial aspects of their law emerged and discussed what really keeps Wall Street up at night

Chris Dodd, center, and Barney Frank, center right, at the Dodd-Frank signing (photo: AP) Chris Dodd, center, and Barney Frank, center right, at the Dodd-Frank signing (photo: AP)

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Former lawmakers Chris Dodd and Barney Frank offered some retrospective perspective on the Volcker Rule, a controversial aspect of the financial reform legislation that bears their names, in their first joint public speech since retiring from Congress.

On Tuesday five federal agencies finalized rules aimed at restricting the trading activities of federally insured banks.

Some on Wall Street fear the limits on so-called proprietary trading will reduce liquidity in capital markets and squeeze profits, while even some supporters of such restrictions lament the size and complexity of the 953 pages of rules.

Speaking Wednesday at the annual conference of MarketCounsel, a law firm serving independent investment advisors, former Senator Dodd revealed some of the back story to the law’s quirks — for example, the rule that bank ownership in hedge funds and private equity firms cannot exceed 3%.

“We debated the issue: Some wanted zero [percent ownership], some 10%. The reality though is 3% is how I got the 60th vote,” he said, indicating that the path to esoteric rules may be as mundane as legislative compromising.

Other legislative maneuvers were similarly necessary to gain votes, he said, noting that the original proposal required CEOs to put their names and signatures on the line certifying compliance. Removing that provision muted criticism from CEOs; other deletions placated foreign institutions that would otherwise have been affected.

Dodd’s former House counterpart, Barney Frank, defended the Volcker rule against criticism that it is overly intrusive.

“The Volcker rule doesn’t stop any transaction from happening that is useful,” he told the 400 attendees of the Las Vegas conference.

In response to worries over the uncertainties of how regulations are to be enforced, Frank offered that financial institutions will soon enough accustom themselves to the new regulatory regime. “As it is implemented it will become the new reality,” he said.

While the list of controversial aspects of financial reform addressed by Dodd-Frank is long — from ending "too big to fail" to making the monitoring of systemic risk a new federal responsibility — Dodd offered an insight into what really keeps Wall Street awake at night.

“When I became chairman [of the Senate Finance Committee] in 2007,” he met for an hour and a half with the heads of the 13 largest financial institutions in the country — “good people, smart people,” Dodd recalled. “And all they wanted to talk about was [executive compensation] and their fear over the consumer protection bureau.”

The ex-senator said those fears over the now instituted Consumer Financial Protection Bureau have proven to be wide of the mark.

He cited a report that researchers from the University of Chicago and New York University business schools released two weeks ago that said consumers have saved $21 billion in fees. That change has benefited financial institutions, he said, because “no one’s complaining against the credit card companies; they sense they’re getting a fairer and better deal.”

In the end, the power and political clout of large financial institutions was insufficient to stop financial reform, both of the law’s authors said.

“Community banks have a lot more clout than the JPMorgans,” Frank said. “[Politicians] pay attention to their communities.

“Money is a major factor in congressional deliberations, but votes will kick money’s butts,” he said.

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Check out Dodd and Frank, Together Again, Defend Their Namesake Law on ThinkAdvisor.

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