As Chair of the Financial Crisis Inquiry Commission, I devoted almost two years to studying the causes of the financial crisis of 2007-2009 which devastated our economy, wiped away nearly $11 trillion in household wealth, and cost over 8 million jobs. Our commission heard from more than 700 witnesses and reviewed millions of pages of documents in reaching this central conclusion: the crisis was an avoidable tragedy. Regulators and policymakers ignored widespread warnings about mounting risks as bank executives recklessly pursued illusory short-term profits to reap huge bonuses while driving their firms, and the financial system, over the cliff.
With the passage of the Dodd-Frank Act in 2010, we took a major step toward preventing these kinds of financial catastrophes in the future. That's why it's so disturbing to see that the new Congress is already seeking to roll back and weaken crucial parts of the legislation, including many that are directly responsive to our commission's findings concerning the causes of the financial crisis.
The crisis was in no small part fueled by toxic mortgage lending. Dodd-Frank set critical, new "ability to repay" standards for lenders to ensure that mortgage loans were made fairly and responsibly. Yet, new proposed legislation by Senate Banking Committee chair Richard Shelby (R-Alabama), which will be considered by the Senate Banking Committee on Thursday May 21, would gravely weaken these standards and make it far easier for lenders to avoid them.
The crisis also exposed massive failures by regulators in banking oversight and consumer protection. Dodd-Frank created a new regulatory agency that put consumer protection first, and also mandated that banking regulators impose new risk controls at the 34 largest banks in the country, with the strictness of these controls increasing depending on the size of the bank.
We have already seen multiple efforts in Congress to weaken the new consumer agency. And now, Senator Shelby's bill actually instructs regulators to roll back improved risk controls at 28 of the nation's largest 34 banks. Under his proposal, if the Federal Reserve wanted to re-impose Dodd-Frank risk controls at any bank except the six largest banks in the nation, they would have to go through a lengthy and cumbersome "designation" process requiring extensive documentation and a two-thirds vote from a committee of ten different regulators.
The crisis further revealed a lack of effective oversight of major non-bank financial institutions, like investment banks and insurance companies, and of the $700 trillion plus over-the-counter derivatives market. Dodd-Frank put in place improved oversight of major non-bank financial firms and needed regulatory and transparency requirements on previously unregulated derivatives.
Senator Shelby's new proposal would strike at the ability of regulators to address issues at giant non-bank financial institutions like AIG that played such a central role in the crisis. The legislation would add numerous additional hurdles before the federal government could designate such institutions for additional oversight. Even under Dodd-Frank, the designation process is a lengthy one involving extensive study and numerous opportunities for a company to question and challenge a designation. With the new hurdles added by the Shelby bill, it is questionable whether such a designation could ever take place.
Meanwhile, legislation moving forward in the House of Representatives would further weaken the regulation of derivatives conducted through foreign subsidiaries of Wall Street banks - which could constitute the majority of Wall Street derivatives transactions. It would also impose new "cost-benefit" requirements on key derivatives regulators that are designed to make it far more difficult for them to do their work. Taken together, the Shelby bill and the House legislation would once again dangerously expose our financial system to unseen risks in "dark" markets.
Even before these latest Congressional attacks, those of us following the process of financial reforms were deeply troubled by the slow pace of implementation of Dodd-Frank Act reforms in face of fierce, no-holds-barred, lavishly funded opposition by Wall Street. But we could at least take heart in the fact that Dodd-Frank was forcing action to remedy many of the key weaknesses in our financial system revealed by the crisis. Now, these legislative proposals threaten to roll back much of the progress that has been made.
As my colleagues and I did our work at the Financial Crisis Inquiry Commission, we were deeply dismayed by the long train of avoidable and foreseeable errors that led to the financial collapse. Yet, we had a belief that, learning from history, we could improve our financial system to avoid these errors in the future. If Senator Shelby's proposals become law, they would not only reverse crucially important progress that we have made, but also put our economy and our families at undue risk once again.
Phil Angelides, former State Treasurer of California, was the Chairman of the U.S. Financial Crisis Inquiry Commission, which conducted the nation's official inquiry into the financial crisis.