COMPENSATION IN CONTEXT
DODD-FRANK IN RETREAT?
April 25, 2016
It’s been a rough few weeks for President Obama’s signature reform of American finance. Across Washington deep cracks are appearing in the foundations of the Dodd-Frank law Mr. Obama enacted in 2010.
A federal judge has knocked down a major decision from Mr. Obama’s Financial Stability Oversight Council. Also, a federal appeals court panel is questioning the constitutionality of Mr. Obama’s Consumer Financial Protection Bureau. On Wednesday, April 13th, regulators officially declared that most of the nation’s banking giants are still too big and too complicated to fail.
Dodd-Frank’s failure on its own terms virtually guarantees that someone will reform it. The question is whether it will be the judicial or legislative branch. Republicans have been criticizing Dodd-Frank since it was on the drafting table. More significant is that both Democratic presidential candidates are now also talking reform. Obviously a Bernie Sanders rewrite of financial rules would look very different from a Ted Cruz version. But outside of the White House, the status quo has almost no constituency. And with Barack Obama due to vacate the premises in just nine months, Dodd-Frank’s flaws are becoming impossible to ignore.
Three weeks ago U.S. District Judge Rosemary Collyer rescinded the government’s designation of insurer MetLife as a “systemically important financial institution.” It was the first time such a designation had been challenged in court. Indeed in its first title defense, the stability council created by Dodd-Frank lost by a knockout. Judge Collyer called the council’s decision “unreasonable” and the result of a “fatally flawed” process.
Recently in the same D.C. Circuit, an appeals court panel questioned whether another Dodd-Frank creation should even exist. Government attorneys may have figured they would have to explain only why the new Consumer Financial Protection Bureau is ignoring the parts of federal housing law it doesn’t like and overturning long-standing interpretations of others.
But earlier this month the appeals court warned them to be ready to respond to larger questions about the new agency. The consumer bureau is an odd creation. Unlike most independent agencies, it isn’t run by a bipartisan board but by a single director. It also doesn’t have to pay attention to Congress because it doesn’t require annual appropriations from legislators. The bureau simply draws its budget from the Federal Reserve, which can’t turn off the funding spigot even if it wants to.
This recent case neatly captured the unaccountable nature of this bizarre Beltway creature. The consumer bureau has been demanding that, for its alleged sins, New Jersey mortgage lender PHH should pay 18 times the amount ordered by the bureau’s own in-house administrative law judge. And why not, since the bureau reports to no one?
At the April 12th hearing, Judge Brett Kavanaugh made it clear that the bureau’s “very unusual structure” has him concerned about more than just a novel way of interpreting lending laws. “You are concentrating huge power in a single person and the President has no power over it,” Judge Kavanaugh said.
That same day word began to leak out of Washington of still another failure in the architecture of Dodd-Frank. On Wednesday morning, April 13th, the Fed and the Federal Deposit Insurance Corporation confirmed the results of their study of “orderly resolution” plans at America’s biggest banks. Known as “living wills,” they are supposed to show in detail how these banking titans, in the event of failure, could be placed into bankruptcy without wrecking the financial system.
The Fed and the FDIC agreed that the plans submitted by five of the eight banking giants reviewed were “not credible.” Bank of America, Bank of New York Mellon, J.P. Morgan Chase, State Street and Wells Fargo received these failing grades. The plans from Goldman Sachs and Morgan Stanley were deemed “not credible” by one of the two agencies. And even though Citigroup was the one kid in the class who managed to pass both the Fed and FDIC tests, regulators found “shortcomings” there too.
Much of the press may play these results as another outrage committed by giant banks, but this is fundamentally a failure of Dodd-Frank to keep its central promise. Six years after the law was passed, and eight years since the financial crisis, regulators given broad authority to remake American finance, with thousands of regulatory officials on their payroll, cannot figure out a system to allow financial giants to fail, even in theory. What are we paying these people for?
As the search continues for people outside 1600 Pennsylvania Avenue who believe that Dodd-Frank is reforming the U.S. financial system, judges are beginning to question the law’s most basic premises. Just possibly, taxpayers can contemplate a better future.
