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The federal Dodd-Frank Act is considered by many to be the most significant financial legislation in modern history. Its purpose was to create a sound Economic Foundation to grow jobs, protect consumers, rein in Wall Street and big bonuses, end bailouts,and “too big to fail,” as well as prevent another financial crisis. Years without accountability for Wall Street and big banks had ushered in the worst financial crisis since the Great Depression that resulted in the loss of 8 million jobs, failed businesses, a drop in housing prices, and wiped out personal savings.
It was in response to this 2008 crisis, that the Obama administration urged prompt and full implementation of the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” meant also to serve as an inoculation against future crisis. Dodd-Frank was signed into federal law by President Barack Obama on July 21, 2010 at the Ronald Reagan Building in Washington, D.C.
Because of policy decisions made early on in the implementation process, it became nearly impossible for regulators to enact smart and well-coordinated regulations. Furthermore, the process of rolling out the regulations became extremely political.
As part of its Liberty Speaker’s Series, the Illinois Policy Institute, CEO and President John Tillman, hosted a discussion of Dodd Frank and its fallout on Tuesday, October 28, at its headquarters in Chicago, 190 S. LaSalle Street, 40th Floor Library.
On the panel to discuss Dodd-Frank were three individuals who had been appointed to various government commissions to assist in the drafting, implementation, and oversight of the Dodd-Frank Act.
Paul Atkins, chief executive of Patomak Global Partners, LLC, was appointed by Congress and served from 2009 to 2010 as a member of the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP). Atkins was then asked to serve on FSOCK, a creation of the Dodd-Frank Act and a uniquely powerful body within the executive branch of the US government.
It consists of 15 members, of which 9 are the chairs of other federal financial regulatory agencies charged with identifying and responding to emerging risks throughout the financial system (to prick the financial bubbles before they happen). The Secretary of the Treasury serves as the Chairperson of the Council.
In discussing Dodd-Frank, Mr. Atkins warned that whenever a bill has “consumer” and “protection” in it, watch your wallets. Atkins called the 2,319 page bill basically rubbish. Not unlike Obamacare, Dodd-Frank was pushed through Congress with no one knowing what was in the bill until after it had passed. While Dodd-Frank created thirteen new offices and agencies, the government only got rid of one agency. Dodd-Frank conveys the message that government knows best under the assumption that if enough smart people are assembled in the same room with enough information, they can do better than the free market.
Speaking about SIFI (Systemically Important Financial Institution) Institution), the $50 billion in consolidated assets threshold at which bank holding companies are subject to enhanced prudential supervision was called science fiction by Atkns. The $50 billion SIFI threshold sweeps in too many small banks that don’t pose a systemic threat, thus diluting attention from the big banks that do.
Jill E. Sommers served as a CFTC commissioner (U.S. Commodity Futures Trading Commission) for five years, from 2008 to 2013, one of only two Republicans. The mission of the CFTC is to protect market participants and the public from fraud, manipulation, abusive practices and systemic risk related to derivatives — both future and swaps — and to foster transparent, open competitive and financially sound markets.
Ms. Sommers, as one five CFTC members, spent more than two years writing the Dodd-Frank Act rules to bolster oversight of the $639 trillion swaps market and the futures industry following a shortfall in customer funds at the failed brokerage MF Global Holdings Ltd. Criminal or civil charges have yet to be filed against MF Global after the company left a $l.6 billion shortfall in customer funds when it filed for bankruptcy in October of 2010.
Sommers expressed concern over the agency’s approach to completing Dodd-Frank rules, citing a lack of coordination with the SEC and oversea regulators, that the agency hadn’t adequately considered public comments on proposed rules, and that an analysis of regulatory costs and benefits was lacking. Industry needed relief from rules that were impossible to employ when first instigated.
Jill Sommers vented her frustration as to the role of the oversight and regulation of swap markets in a speech delivered before the Cadwalader Energy Conference in October of 2012, the day before the definition of “swap” became effective and compliance rules for swap deals kicked in. According to Sommers, if dozens of requests weren’t granted for relief, the market could be damaged and irreparable harm could follow for market participants. Sommers bemoans the fact that many of the rules finalized were vague and subject to legal challenges, which has resulted in real, unintended and very costly consequences. Sommers has little confidence that the rules already in place have a chance of withstanding the test of times. She instead believes that the commission will be consumed over the next few years using valuable resources to rewrite the rules we knew or should have known would not work in the first place.
Christopher Giancarlo was confirmed by unanimous consent of the U.S. Senate on June 3, 2014. On June 16 he was sworn in as a CFTC Commissioner whose purpose is to protect market participants and the public from fraud, manipulation, abusive practices and systemic risk related to derivatives (both futures and swaps) and to foster transparent, open, competitive and financially sound markets. Giancarlo’s term expires in April 2019. Giancarlo took the place vacated by Jill Sommers on the CFTC. His work on the Commodity Futures Trading Commission might be defined as the clean-up phase. Giancarlo considers the Futures and Swap markets important to a thriving economy. Of importance is that the government doesn’t interfere. Food and energy prices are low because we don’t have government setting the price.
Mr. Giancarlo defined the Swap Market as looking more like the bond market, and the Futures Market more like the stock market. The Swap Market, in comparison to the Futures Market, operates as controlled over-the-counter growth. The Swap Market is now a global market.
On Sept. 9 Giancarlo gave the Keynote Address to the Global Forum for Derivatives Markets (35th Annual Burgenstock Conference) in Geneva, Switzerland. He began his remarks by indicating that they would be his own and did not necessarily constitute the views of his fellow CFTC Commissioners or its staff.
Giancarlo posed three questions, although he realized that many in attendance already knew the answers and that they didn’t inspire confidence in the future.
- Are we fully honoring the commitment to coordinate our efforts to reform the derivatives market?
- Are we avoiding protectionism?
- Or are we building new 21th century protectionism around regional financial markets, especially in swaps and futures?
Giancarlo further indicated that “this lack of coordination in swaps clearing does not exist in a vacuum. It is preceded by an uncoordinated approach in formulating the regulations of swap trading.”
The fourth anniversary of the signing of the Dodd-Frank was noted this summer on July 21. Most Americans think more regulation is the answer and that Dodd-Frank solved the problems causing the crisis, even believing that the law didn’t go far enough to punish private firms responsible for the crisis. If anything, Dodd-Frank has made the financial system even more fragile than it was prior to the 2008 crisis.
As concluded in a committee staff report titled, “Failing to End Too Big to Fail: An Assessment of the Dodd-Frank Act Four Years Later’, released just days before the fourth anniversary signing of the Dodd-Frank Act by President Obama in 2010, the Dodd-Frank Act did not end “too big to fail” as the law’s supporters claim, but actually had the opposite effect of further entrenching “too big to fail” as official government policy. According to Oversight and Investigation Subcommittee Committee Chairman Rep. McHenry, “Rather than institute market discipline and a clear rules-based regime, four years later Dodd-Frank’s failed policies have only worsened the risks within the financial system and recklessly handed financial regulators a blank check for taxpayer-funded bailouts.” The report is available here.
Another article worth reading by Calomiris and Meltzer was published on Feb. 12, 2014 in the WSJ: How Dodd-Frank Doubles Down on ‘Big to Fail’. It relates how Dodd-Frank doesn’t address problems that led to the financial crisis of 2008.
It remains to be seen if Mitch McConnell does controls the U.S. Senate in 2015, whether the Republican Party will push for full or partial repeal of Dodd-Frank. In the meantime, Commission J. Christopher Giancarlo has his work cut out for him as a CFTC Commissioner.