“We did very difficult, politically hard things” in the Dodd-Frank Wall Street Reform and Consumer Protection Act, former Massachusetts congressman Barney Frank said July 21 as the law that bears his name celebrated its fifth anniversary. “My head hurt.”
In his no-nonsense style, Frank, along with former Sen. Chris Dodd of Connecticut, took the stage at the Newseum in Washington to discuss the financial reform law's progress, their regrets about what didn't make it into the historic piece of legislation, as well as where they think financial reform since the law's passing is headed.
As July 21 marked five years since President Barack Obama signed Dodd-Frank into law, the two Democrats ticked off what they believe are its strong points. Since Dodd-Frank was signed into law, “the economy is doing tremendously better: 64 months of continued employment growth, banks are capitalized to a larger extent, leverage is better, liquid assets exist, and transparency in the derivatives market has been a major, major achievement,” Dodd said at the event, which was sponsored by Better Markets. Also, “we’ve made sure, to a large extent, and obviously time will tell, that you can't have taxpayers bail out failed institutions.”
Frank was quick to point out that today, “we do not have the kind of toxic loans being made, which is good for the system and good for individuals.” Mortgages being “given to people who shouldn't have gotten them was at the core” of the financial crisis of 2008, Frank continued. “Mortgages were the bullets and these [market] systems shot them all over the place.”
But Frank said his “biggest disappointment” when it comes to Dodd-Frank is that the law doesn't include “any risk retention measure for residential mortgages.”
Dodd-Frank did, however, put other types of risk measures in place. The huge insurer AIG was “one of the precipitators of the crisis” because it was in the hole to the tune of $185 billion in risky credit default swaps—and had to be bailed out by the taxpayers, Frank said. Because of Dodd-Frank, “nobody can go out there with that kind of indebtedness in derivatives without having the ability to know about it, but also to pay for it.”
Financial institutions under Dodd-Frank “can take any risks that they want to take, but they have to be prepared to stand behind the risks and take some losses if the risks go bad. That's the essential fact.”
Republican critics of Dodd-Frank, like House Financial Services Chairman Jeb Hensarling of Texas, continually point out that the financial reform law failed to do anything to rein in Fannie Mae and Freddie Mac. As Hensarling said in a July 21 speech on Dodd-Frank, “let's remember that more than 70% of subprime and Alt-A mortgages that led to the crisis were backed by Fannie and Freddie, the FHA and other taxpayer-backed programs. Liberals asked them to ‘roll the dice’ a little bit more. They did, and we all lost.”
He added, “If you have to point to a root cause of the financial crisis, this is it: government housing policies.”
But Frank countered at the Newseum event that “Republicans have been in control of the House for five years and they’ve done nothing about” reforming Fannie and Freddie. Hensarling “is chairman of the committee that has jurisdiction over Fannie and Freddie.”
As to Dodd-Frank's survival, both Dodd and Frank see little chance for outright repeal of the law. “There have been no votes on repealing the financial reform bill because they [members of Congress] know it's popular,” Frank said. “They’re afraid of it,” he said, adding that he doesn't see repeal even if a Republican wins the White House in 2016.
However, a Republican White House would appoint regulators who would seek to water it down, Frank added.
Dodd pointed to a recent bill, the Financial Regulatory Improvement Act of 2015, which was introduced by Senate Banking Committee Chairman Richard Shelby, R-Ala., and was being dubbed a Dodd-Frank rollback bill (see sidebar, below).
The bill, which passed the committee and has been referred to the full Senate, includes provisions to correct more than “300 nonsubstantive inaccuracies, omissions or errors” in the Dodd-Frank law, seeks changes in the process of designating banks as systemically important, increases “transparency” of the Federal Reserve Board, includes bipartisan measures for the Jumpstart Our Business Startups (JOBS) Act and calls for international discussions on capital standards for insurers.
Dodd said at the Newseum event that if you look at Shelby's bill “carefully,” it “has little to do with Dodd-Frank” and includes, for instance, no rollbacks to the Consumer Financial Protection Bureau or the Financial Stability Oversight Council, both created under Dodd-Frank.
Dodd noted that he regretted Dodd-Frank didn't include “self-funding” for the Securities and Exchange Commission. “We did do the self-funding of CFPB, which I think was smart,” he said, “but that's a big bone of contention.”
Since the CFPB was set up four years ago, 17 million people have had more than $10 billion of their money returned to them, Dodd said, and 650,000 consumer complaints have been handled by the CFPB. “In the past, you had to pass separate pieces of legislation to deal with consumer issues. Today you have a one-stop shop for all of that.”
Post Dodd-Frank, “the culture is changing within institutions,” Dodd continued. “Many institutions are way ahead of the regulators in implementing the ideas that the legislation required.” That being said, “I’m a little worried that we don't have major financial interests that are going to defend” Dodd-Frank.
Frank's major fear: that Dodd-Frank “will get under-administered.”
“By 2020, these practices [ushered in under Dodd-Frank] are going to be embedded. After 10 years, this bill will have taken root,” he said.
Frank's biggest surprise following the financial crisis: “I’m surprised they didn't prosecute some people.”
No Room for Dodd-Frank Rollback Riders
At press time, Sen. Richard Shelby, R-Ala., chairman of the Senate Banking Committee, was said to be attempting to get his Financial Regulatory Improvement Act of 2015 attached to a Senate appropriations bill that also included flat funding for the Securities and Exchange Commission.
Dennis Kelleher, president and CEO of Better Markets, said Shelby's bill included “irresponsible and dangerous deregulation provisions.”
Provisions included in Shelby's bill “are a de facto repeal of many key Dodd-Frank financial reform provisions, and would prevent agencies like the CFTC, SEC, CFPB, Fed and FSOC from doing their jobs protecting the American people from another financial crash,” Kelleher said.
“While many on Wall Street may be popping the champagne corks thinking Christmas has come in July, they will be celebrating too soon because President Obama will not sign a funding bill that lets Wall Street return to high-risk gambling and threatens Main Street jobs, homes and savings,” Kelleher said.
Indeed, Treasury Secretary Jacob Lew said at the Better Markets event where Dodd and Frank spoke that the Obama administration has “seen attempts to roll back key safeguards by slipping complex provisions into unrelated bills.” This tactic “of using riders on must-pass legislation to chip away at crucial financial reforms is unacceptable,” Lew said. “And let me be clear—this administration will strongly oppose these efforts. Faced with bills that threaten to turn the clock back to 2008 and leave the American people vulnerable to another crippling crisis, I will recommend the president veto them.”