Tag: Dodd-Frank

The Troubled Legacy of Dodd-Frank

 

It has been almost ten years since the financial crisis of 2008, which threw the financial system into turmoil with the collapse of Lehman Brothers. After two years of tumultuous debate, the legislative response to the meltdown was the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which imposed many restrictions on the operation of American financial institutions of all sizes and types. Dodd-Frank specifically targets “systemically important financial institutions,” or SIFIs, for an intensive barrage of regulations in order to avoid another “too big to fail” meltdown. A bank qualifies as a SIFI if it holds $50 billion in total assets, but, at the discretion of the Financial Stability Oversight Council, that designation could be extended to non-banks as well, such as MetLife, a well-established insurance company with a stable asset base. In 2016, District Court Judge Rosemary Collyer slapped down that practice in a bruising opinion.

The operation of Dodd-Frank has not stopped large banks from getting larger, in part because the bailout of one large bank was often achieved through its acquisition by an even larger one, as with the 2008 acquisition of the failed Washington Mutual by JP Morgan Chase. Indeed, now that banking reform is in the air, a recent study by the Federal Reserve Bank of New York reports that investors fear Dodd-Frank’s cumbersome and untested apparatus will fail in the next crisis.

The ongoing dissatisfaction with Dodd-Frank’s heavy regulatory burden spurred a reform movement to adopt Senate 2155, the Economic Growth, Regulatory Relief and Consumer Protection Act. Its key features are as follows. First, small banks, defined as having under $10 billion in assets, will be exempt from the so-called Volcker Rule, which bars commercial banks from engaging in speculative trades with their proprietary accounts, the sort that are said to have contributed to the 2008 liquidity crisis in financial markets. It also raises from $50 billion to $250 billion the threshold for the dreaded SIFI status and specifies tailored regimes for the oversight of the largest banks. Just recently, the movement gained steam with the passage in the Senate of a motion to end debate over the bill.

In this AEI Events Podcast, AEI’s Peter J. Wallison hosts Chairman Jeb Hensarling (R-TX) of the House Financial Services Committee at AEI to discuss the Financial CHOICE Act. They evaluate the causes of the 2007–08 financial crisis and how the Dodd-Frank Act fails to address those causes.

Mr. Wallison and Chairman Hensarling consider the Dodd-Frank Act’s role in reducing lending activities — especially among small and community banks — and the ensuing slow recovery. They then discuss the challenges for the CHOICE Act in the House and Senate.

Conflicted Minerals – Predictable Disaster

 

It is something of a truism that the Road to Hell is paved with good intentions.  I think if it is paved with such, the mortar between the paving stones must be made of NGOs.  It would be hard to argue, for instance, that NGOs in Haiti in recent years have been especially helpful, considering there is a good argument that they are responsible for the death of local industry there and the spread of cholera, and their track record in many other endeavors is decidedly a mixed bag of horrible waste and fraud concocted of economic ignorance and meddling do-gooderism.  So it is with no small bemusement on my part that yet another of their mad quests is now bearing fruit far different than they claimed to have desired.  In this case, their crusade against mining in central Africa, ostensibly to shut down funding for a prolonged civil war, now appears to have made it far worse.  That this would happen was, of course, predictable at the time.

This holy crusade combined, for these NGOs, what should have been all of their favorite checkboxes: a patronizing view of Africans as being unable to look out for their own interests (and therefore needing Western help), plenty of photo opportunities with impoverished peasants and thuggish militias, and moral proof that our modern lifestyle (in particular, our electronics) are murdering people and raping the planet.  All that was needed was a catchy phrase.  The practically poetic “blood diamonds” was already taken, and it being a bit of a mouthful to say “Bloody Tin, Bloody Tantalum, etc.”, they instead used the phrase “Conflict Minerals”, though as @midge rightly pointed out this does rather sound like a PC way of saying “a cage match between pet rocks”.  So “Conflict Minerals” it is.  

No Guarantees for the “If” in SIFI

 

In the aftermath of the 2008-09 financial crisis, the Democratic Congress pushed through a law commonly known as Dodd-Frank. It was effectively Obamacare for the financial services industry: An unwieldy 2,300-page grab-bag of a bill, much of which irrelevant to the problems it purported to address, full of self-contradictory provisions, ineffective in dealing with the problems it purported to address, written vaguely and giving great power to regulators to flesh out the details. The stated motivation of the law was to make sure no financial institution would again be “too big to fail”. However, it instead codified the notion in “systemically important financial institutions”, or SIFIs. Once designated a SIFI, an institution is subject to extraordinary federal oversight. But there is an upside: Everyone in the market understands SIFI designation as an admission that the government will take extraordinary measures, if necessary, to ensure that company stays a going concern.

Most SIFIs are banks. Three, however, are insurance companies. AIG and Prudential have welcomed their designation. MetLife, in contrast, has fought it at every opportunity. The company sued the government to be taken off the list. And on Tuesday, the company announced plans to break itself up.

Still Worth Arguing About the Financial Crisis

 

shutterstock_73682491Who controls the past controls the future. — George Orwell, 1984

The candidates who are announcing for president will be cheered to know that the Democratic Party has been hemorrhaging popularity the way the housing market lost value in 2008. In 2009, 62 percent of Americans had a favorable view of the party. In January, only 46 percent said the same.

But the Democrats’ loss has not been the Republicans’ gain. A 2015 Pew survey found that 40 percent of Americans had a favorable opinion of Republicans in 2009, and just 41 percent do today.

Stage-One Thinking: Debit Card Edition

 

shutterstock_51417598Yet another example of the unintended consequences of poorly-thought-out regulation has surfaced. Back in 2010, Senator Dick Durbin of Illinois added an amendment to the Dodd-Frank bill that capped the amount a bank could charge a retailer for a debit card transaction.

In The Economist this week, an article describes what has happened as a result of this amendment. Durbin assumed that the rate reduction would be passed on to the consumer. Instead, retailers kept the rate difference, and banks raised their fees on a host of services in order to make up for the lost revenue:

Mr Durbin’s amendment has cost the banks $6.6 billion-8 billion annually, according to a paper by the International Centre for Law and Economics (ICLE), a think-tank. But retailers, whose profits have been sapped by the weak recovery from the financial crisis, seem to have pocketed most of the windfall, just as they did when interchange fees were cut in Australia. (Their shares jumped when the new rules were announced.) Meanwhile the banks, which are in even worse shape, have tried to make up for the lost revenue with higher charges for other things, including monthly fees for having a debit card, or even a current account. In 2009 banks provided 76% of America’s current accounts free of charge; last year the figure was only 38%. The higher charges in turn, have pushed 1m Americans out of the formal financial system—not the result Mr Durbin was aiming for.