Dodd and Frank on Dodd-Frank

“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).