Happy Birthday to Dodd-Frank, a Law That Isn't Working

Failure was built into Dodd-Frank from the beginning. Instead of writing laws that addressed the abuses that led to the crisis, it nearly always kicked the can down to agencies, instructing them to write new regulations.
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Today marks the third anniversary of the Dodd-Frank Wall Street Reform Act. Sadly, except for a recent promising development that might increase capital requirements for megabanks, the act has not delivered on its promise to fix the problems that caused the financial meltdown of 2008-09.

Failure was built into Dodd-Frank from the beginning. Instead of writing laws that addressed the abuses that led to the crisis, it nearly always kicked the can down to agencies, instructing them to write new regulations. By and large, those regulatory agencies have been overwhelmed by a combination of congressional underfunding and a massive lobbying effort by the megabanks that increasingly seem to control Washington. The Davis Polk law firm's latest count says that only 155 of the 398 rule makings required by Dodd-Frank have been finalized.

Here are just a few examples of Dodd-Frank's failure:

• The banks still are gambling with FDIC-insured money. The JPMorgan Chase "London Whale" fiasco was just the latest proof that there has been no change in the casino speculation of Wall Street banks.

• There is still a giant loophole in derivatives trading. Although there are new regulations curbing the kind of derivatives trading that was a key element in the crisis, those regulations do not cover the foreign subsidiaries of megabanks. Banks can easily move trading activities into different offices. He wasn't called the "London Whale" because he worked in Philadelphia.

• No one has gone to jail. And no one will. There are many examples of criminal behavior during the meltdown, but not one megabank executive has been jailed. Without that deterrent, white-collar crime is not just profitable but inevitable.

• Reform of the credit-rating agencies is a long way off. "Essential cogs in the wheel of financial destruction," as the Financial Crisis Inquiry Commission described them, the credit-rating agencies still operate as they always have, bought and paid for by the entities they rate.

• Fannie Mae and Freddy Mac have not been fixed. In fact, they weren't even mentioned in Dodd-Frank, despite the fact that everyone agrees they played a role in the meltdown.

There were lots of heated debates before passage of Dodd-Frank, but no disagreement from anyone in the administration or Congress about one thing. The bill had to end the possibility that American taxpayers would ever again have to bail out a big bank because its failure would have a severe impact on the entire economy.

You would think that by now at least that problem would have been addressed. But it hasn't been. Our biggest banks are bigger now than they were in 2008.

A recent analysis by Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., revealed that. JPMorgan Chase, Citibank and Bank of America have become the three largest banks in the world. Together with Wells Fargo, which has become the world's sixth largest, assets of the four largest U.S. banks amount to an astonishing 97 percent of our 2012 gross domestic product.

What would happen if any or all of them were in extreme financial trouble? Some argue they could be resolved without taxpayer money through some iteration of what the FDIC has done successfully in the past with smaller failing banks through the Orderly Liquidation Authority included in Dodd-Frank legislation.

There are three reasons I believe that would not happen. Let me state the first as a simple question: Given the complex interconnections among the world's largest banks, is it likely that at a time of financial crisis only one of them would be in trouble?

Second, even if that were to happen, there is no precedent for resolving a megabank through the FDIC process. The largest financial institution ever resolved by the FDIC was Washington Mutual, which had assets of under $330 billion. It was essentially resolved by selling it to JPMorgan Chase. Who is going to take over JPMorgan Chase or Bank of America, each with assets of $2 trillion, if one of them goes bust?

Third, Citigroup alone has more than 2,000 foreign subsidies. Lehman Brothers was much smaller, with approximately 80 subsidiaries to deal with. Yet its 2008 bankruptcy took over three years because of the difficulties in resolving across national borders.

As of now, this is the inevitable scenario: A megabank gets in trouble. It is critically important to move fast, before other banks get infected. There are no possible buyers. Once again, political leaders are faced with a choice -watch the dominos fall and risk the entire financial system or step in with government funds.

Will that happen? Certainly there are a lot of people, inside and outside of Washington, who are working hard to solve the TBTF problem. I'm always an optimist, and I hope I can write a very different column on the fourth anniversary of Dodd-Frank.

Ted Kaufman is a former U.S. senator from Delaware. Read all of his columns at tedkaufman.com. This piece first appeared in the News Journal.

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