The most expansive financial reform law since the great depression turns six on Thursday. For many, like Donald Trump who says he wants to “dismantle” Dodd-Frank, it has become a vehicle for political posturing due to what they see as a dangerous dogma threatening free market capitalism. For others, like former Secretary of State Hillary Clinton who says such talk of dismantling Dodd-Frank is a “reckless” idea that would “leave middle-class families out to dry”, it has been a prudent policy path forward. As the law continues its Jekyll and Hyde existence, more will be heard in the coming days at the respective political party conventions.
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Back in 2009 and 2010, I worked with Congress for passage of the law, then helped write and vote for 65 rules. All these years later, now is a fitting time to consider the good, bad and ugly of Dodd-Frank.
In the wake of the 2008 recession, the most terrible economic time in 80 years, Congress established the Financial Crisis Inquiry Commission (FCIC) with a mandate to determine what transpired and why there was a need for Dodd-Frank. FCIC determined there were two causes which instigated the crash: slumbering policymakers who had no jurisdiction over dark markets (unregulated areas of finance where trillions traded), and the captains of finance who took advantage of the utterly unregulated environment. Numerous new financial products—like credit default swaps or CDSs—were created, then used and abused. Many of the troublesome products were bundles of mortgages, packaged and repackaged and traded in massive bundles. With billions and billions based upon housing market wagers, when the housing market collapsed, so did the financial firms which were over-leveraged with their big, bad bets. The result: a $620 billion government bailout of many large financial institutions (961 recipients in total), and an economy in a deep ditch.
The “good” here is that as a result of Dodd-Frank, there are greater capital, margin and clearing requirements on trading so that over-leveraging won’t occur. There’s added transparency which enables regulators to see what’s going on. Additionally, Dodd-Frank took away authority to provide for another bailout. Oh, and the bailout money from 2008 is being paid back, with interest. In fact, the government has, to date, made a profit of nearly $69 billion.
At the same time, the economy is—finally—on a righteous road to recovery. I’m not suggesting the rebounding recovery is due to Dodd-Frank, but it certainly assisted in providing confidence to investors and markets, generally. At the height of the hurt we were losing 800,000 jobs a month, and unemployment reached ten percent (October 2009). Today, unemployment is just below five percent. Last month alone, 287,000 jobs were created. The housing market has also seen a broad revival along with U.S. stocks. Recently, the Dow hit a fresh record trading well above 18,000 rebounding from a 54% drop from October 2007 through March 2009. Another great good from Dodd-Frank is that the previously unsupervised financial products, and the venues on which they trade, are now overseen by regulators like the Securities and Exchange Commission (SEC), and my former agency—the Commodity Futures Trading Commission (CFTC). Markets are being policed like never before. Moreover, other nations’ financial watchdogs, which similarly had lax rules, are building robust regulatory regimes. That’s particularly important today, given markets are international and integrally integrated.
The unfortunate part of Dodd-Frank is that the law and some of the regulations went too far. That is: there were areas of the financial sector which were not culprits to the economic calamity but received increased regulation. The trading exchanges, for example, were not problematic leading up to 2008. Not a single firm contributed to the financial collapse due to their trading on regulated market venues. Not one. Yet, Dodd-Frank created added reports and regulatory requirements which adversely impacted the exchanges—at least in the short-term. On the flip side, markets and our economy are better protected against some future potential problems (which is why I helped craft and voted for many of the rules), but it is incontrovertible that exchanges took it on the chin with some collateral regulatory requirements as part of Dodd-Frank.
We also got some things wrong. Despite the fact that there are public comment periods for proposed rules, and that regulators tried to listen carefully to market participants and others who had a stake in what we were doing, we fashioned a few rules (like the Swaps Execution Facilities rule—which set guidelines for swaps trading) that simply have not done as well as hoped. We had no experience nor expertise with these exotic and complex products. Suffice it to say: we proved it.
Finally, we didn’t do enough work early on with international regulators to better harmonize cross-border trading rules. That meant US firms had to address myriad new Dodd-Frank requirements before their competitive counterparts in other nations, thus placing US firms (for a time) at a competitive disadvantage.
Financial regulation has become particularly painful because its partisan. The supervision of markets wasn’t like that when I became a Commissioner in 2007. Aside from Republicans being a bit more focused on free markets than Democrats, by and large policy deliberations had not been very political. The non-partisan nature of issues promoted the fashioning of thoughtful policy. The economic collapse and Dodd-Frank contributed to what is now an unfortunate circumstance with ruptured relationships and reduced rapport amongst policymakers. Today, some thrive not on the “correct” approach, but which message mantra appeals more to the party base. Unfortunately, that division will be deepened in a demonstrable fashion at the two party conventions.
What’s ironic is that many of the market participants and others who opposed Dodd-Frank for so long, even Republican regulators who know what is actually taking place in markets, don’t see dismantlement of Dodd-Frank, as Mr. Trump has proposed, as an appropriate course of action. They may have difficulties with the deets of some provisions, sure. However, they know that those involved in the financial sector have become comfortable, even contented, with many of the Dodd-Frank requirements. Market participants want certainty and confidence that things won’t change every few years. Dismantling Dodd-Frank would create monumental headaches for exchanges, traders and others in financial markets. It would also add even more difficulty to what are already overly complex markets with many established regulatory rules of the road.
For the Democrats, it’s also “the season”—which isn’t Christmas or Summer vacation. Amongst the political class, the season is the election season. That means prudent policy can take a back seat to seemingly simplistic solutions proffered with ugly oratory. Wall Street equals bad. Main Street equals good. We should do even more than Dodd-Frank. Got it? Good.
Forget that millions of people involved with our financial sector work all over the country, not just on Wall Street. Forget that the financial sector fuel-injects the economic engine of our democracy more than other sectors of the economy.
In fact, from some politician’s perspective, forget about it all. It’s simply better to carry on with the “dismantling” discourse, and for others it’s best to perpetuate simplistic propaganda. That’s how you win. At least, that’s how it’s been.
What an unfortunate—and indeed ugly—state of affairs. Let’s hope following this silly season, after the election is won and done, that cooler and more thoughtful minds will prevail and people will begin to work together again.
Bart Chilton is former CFTC Commissioner and is currently a Senior Policy Advisor at the global business law firm DLA Piper and the author of Ponzimonium: How Scam Artists Are Ripping Off America. He can be reached at firstname.lastname@example.org