Why Dodd-Frank Is A Failure

July 21, 2015 at 9:30 am 1 comment

Today marks the fifth anniversary of one of the great failures of American History: The Dodd-Frank Act:

It’s 800 plus pages mandate 400 regulations spawning hundreds of thousands of pages of single spaced postings to the Federal register that have had to be interpreted and implemented. This is one reason why it is difficult for all but the largest credit unions and banks to grow. Meanwhile, some of the most important mandates intended to curb banking excess have yet to be implemented.

An unelected Bureau now is the final arbiter of the propriety virtually every consumer financial product and service.  It has used its enormous power to explain to us what a Qualified Mortgage is and how you really know when someone can afford a home.  Welcome to the Nanny State on steroids.

To be fair, Congress faced big problems when it finally got around to passing the Dodd Frank Act almost three years after Fannie and Freddie went bankrupt in September 2008 signaling the start of the greatest economic downturn since the Great Depression. Millions of Americans lost their homes and their jobs to the free market even as the Captains of Capitalism obtained a trillion-dollar taxpayer supported bailout almost as large as their collective egos.

Credit unions were caught in the tsunami and are still paying back the bill.  With so many problems to fix, Congress could be forgiven for dedicating so many pages to fixing so many problems.

If only this were true: Five years after Dodd Frank the reckless banks that brought the economy to the edge of disaster are bigger and more powerful than ever; The country is more not less dependent on Fannie and Freddie to meet its housing needs and the American worker is caught in a catch 22 economy: For economic growth to take off we need more people willing to take on more of the debt that got us into this mess in the first place.

Look at the facts:  Fortune reports that the six largest banks in the nation controlled 67% of all the assets in the U.S. financial system in 2013. That amounted to $9.6 trillion, up 37% since 2008.

The size of these corporations is rivaled only by their avarice.   JP Morgan still kept Jamie Dimon as its CEO and Board Chairman even though he described a trader’s $6 billion failed bet as a “Tempest in a teapot.” That’s one hell of a teapot.  If you are a twenty something investment banker the lesson of the last five years has been that regulators and prosecutors come and go but as long as you make money and pay the occasional penalty you can pretty much do anything that generates a profit.

As for the CFPB, If you feel the country needs a national consumer watchdog you are entitled to your opinion but you are deluding yourself if you feel the country is less likely to suffer another financial collapse because it exists.  The mortgage regulations are a classic example of defending  against the last war.  As long as banks are too big to fail consumers will always be victims of their failure.  Money always moves quicker than regulators. Not too many Americans knew what a mortgage Backed Security or a credit default swap was five years ago; the next crisis will be triggered by a new-fangled financial contraption that can’t possibly fail, until it does.

Ironically it remains to be seen just how much “safer” the housing market really is today.  Over the last five years  housing advocates have been basking in their delusion that you can both give a home to everyone who wants one  and decrease delinquencies and foreclosures;  all it takes, we are told,  is consumer tested disclosures and more compliance trip wires Your average servicer now must be a de facto compliance officer.

By the way the American housing market is more not less dependent on Government support than it was in 2008. According to the NY Fed private-label residential mortgage securitization, which funded more than one-third of mortgages over 2004-2006, has remained close to zero since 2008. Fannie Mae and Freddie Mac’s market share of the secondary market is almost twice what it was during the height of the housing boom.

The Free Market works because of its unique ability to permit failure and reward success. Like any other man-made mechanism it’s not perfect and when it breaks down its Government’s job to fix it.

When Teddy Roosevelt broke up the corporate trusts he made this a better country. In the aftermath of the Great Depression, Congress swiftly   passed legislation   separating commercial and investment banks, created national share insurance so that banks could fail without putting savers at risk, created a more transparent stock market and authorized a system of federal credit unions.   These changes helped lay the groundwork for an economy that would make   the Baby Boomers the richest generation in history.  All this was being done as some of the biggest names on Wall Street were being brought before Congress and even prosecuted.

In contrast, five years after Dodd-Frank Banks are too big to truly prosecute let alone fail.  We have a political class more interested in posturing for Super Pac donors than it is at making the hard compromises necessary for real reform.  They were sent to Washington by an electorate “educated” on   talk radio and the internet. The American public is more interested in debating legalizing pot and how big a buffoon Donald Trump is than it is in debating whether it is any safer today than it was five years ago.

Great countries don’t act this way: Declining ones do


Entry filed under: General. Tags: .

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1 Comment Add your own

  • 1. Lynn Gray  |  July 21, 2015 at 10:42 am

    If only everyone could see the truth as you do, I will always hope that sense will prevail and we will get back on track and the big banks will be broken up into respective entities and then will never again be too big to fail.

    Thank you for your sensible reporting of the facts.


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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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