Dodd-Frank at Four

Dodd-Frank is four.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act became law. As with human 4-year-olds, the party parents throw may be a little duller than on the first birthday, but the toddler now appreciates the present in the box more than the box itself.

Let's look at what's in the box: Regulators have finalized half of the 398 rules mandated by the law, which means, with quick math, that half remain unfinished. Even with many finalized rules, compliance begins at future dates.

The Consumer Financial Protection Bureau (CFPB), the new agency created by the law, runs robustly. The agency has returned $3.8 billion to consumers who fell victim to violations of the law. Americans are growing acquainted with this new friend, as 375,000 have filed complaints on debt collection, credit cards, mortgages and other consumer issues.

Perhaps the best sign of its potency is that the congressional allies of the industry sector that thrives on unfair, deceptive or abusive practices continue to harangue the CFPB. Efforts to defund it or dilute its authority figure in the routine diet of the Republican-controlled U.S. House of Representatives.

On the other end of progress, the Securities and Exchange Commission lags behind its fellow regulators in finalizing rules. There is still no rule for credit rating agencies, the industry that blithely assigned high grades to junk mortgage securities. Money market reform remains mired, and the corporate governance provisions that would shine sunlight on pay practices of corporate CEOs while also reining in the most egregious is also long delayed.

The middle ground can be found with the prudential bank regulators that post mixed results. Some regulations now apply but remain poorly used; others are finalized, but don't apply yet. For example, major banks must submit living wills but they remain non-credible. This provision of Dodd-Frank dictates that banks simplify their operations so that in a failure, they can be resolved -- with pieces sold off rationally, avoiding financial contagion. Lehman's bankruptcy sparked the crisis in 2008 and took three years to resolve owing to its 800 subsidiaries. Could JP Morgan be resolved, which is four times Lehman's size, with more than 3,000 subsidiaries? That doesn't seem credible. Regulators could order JP Morgan to divest certain assets, but have not taken such a step.

Regulators have finalized key bank capital requirements and completed the Volcker Rule prohibition on bank gambling. Yes, compliance doesn't kick in for several years. With capital, which is roughly the difference between what the bank owns less what it owes, the regulators settled on levels far less than what banks themselves ask homeowners to use for down payments for mortgages.

From the beginning, it was recognized that Dodd-Frank would not be a perfect child. The financial crash introduced America to moral hazard--the idea that some banks were too big to fail and would inevitably engage in reckless risk-taking knowing they'd be bailout out. While some members of Congress attempted to cut down the size of the mega-banks in Dodd-Frank, they fell short. Now, paradoxically, the mega-banks are even more mega. JP Morgan is the largest bank on the planet (using international accounting standards) having acquired the failed Washington Mutual, which was the largest savings-and-loan, and Bear Stearns, a major investment bank.

Key lawmakers now press for additional important reform, a new child if you will. Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) promote substantially higher bank capital requirements. Sens. Elizabeth Warren (D-Mass), John McCain (R-Ariz.) and others want to break up the largest banks by divorcing commercial and investment banking, a return to Glass-Steagall In a Congress frozen by partisan rancor, these reforms are challenging.

Congress approved Dodd-Frank following the greatest financial crash since 1929, and we hope it doesn't take another calamity of this magnitude to continue to reform our system. The crash displaced millions of Americans from their homes and jobs, and eliminated a year's world of gross domestic product from the economy. To stop further crisis, our nation requires Dodd-Frank to work well, which will take good supervision not only by regulators, but by their Congressional overseers, and ultimately, by Americans who elect Congress. Restoring a productive financial sector, as with good parenting, requires constant attention.