On July 30, former FDIC Chairman Sheila Bair appeared with the able interviewer Greta Brawner on C-SPAN's Washington Journal to talk about the state of the implementation of the Dodd-Frank Act three years after its enactment, particularly as it affects efforts to mitigate the risk that activities of financial institutions could threaten the financial system.
This article will cover the preliminary discussion, and the next article will recount the Q&A portion of the program.
Bair spoke in her capacity as chair of a group called the Systemic Risk Council. Despite its official-sounding name, it is a private group of the great and the good who serve without extra pay under the sponsorship of the Pew Charitable Trusts and the CFA Institute. As she explained it, the group seeks to act as a counterweight to powerful industry lobbies in debating issues related to systemic risk.
The task for the viewer and reader is to parse her words and determine how well she is doing and to draw one's own conclusions as to the state of regulation of the financial system three years into Dodd-Frank. Three years ago, I predicted that Dodd-Frank would never be implemented, but instead would meet the fate of the whole series of so-called "landmark" legislations enacted over the last third of a century that was supposed to give the regulators new powers to curb abuses by managers of risky and poorly run financial institutions. In each case, industry lawyers, lobbyists and captive "irregulators," often with the help of Congress itself, succeeded in thwarting half-hearted "limplementation."
By 2003, the industry playbook had been fully tested, and industry leaders such as JPMorgan Chase CEO Jamie Dimon confidently dared regulators to put their careers on the line. A defining moment occurred when Dimon pointedly asked Federal Reserve Chairman Ben Bernanke whether he had "bothered" to consider the "cumulative effect" the regulations would have on the economy.
Industry representatives no longer feel the need to issue plaintive but phony apologies, as they did in the immediate aftermath of the 2008 episode. Now the industry presents itself as the victim, not the instigator, of the sequence of events that culminated in government bailouts of "too big to fail" banks, including Goldman Sachs and Morgan Stanley, which transformed themselves into banks for the occasion.
Brawner invited an assessment of the effectiveness of Dodd-Frank, and Bair conceded that it has been "disappointingly slow." However, she gave credit for good progress on the so-called Orderly Liquidation Authority (OLA) and a ban on future bailouts, and she added that it was good news that the regulators have acted to impose "substantially higher capital requirements."
She also praised the new Consumer Financial Protection Bureau (CFPB) for adopting new mortgage regulations and the Commodity Futures Trading Commission (CFTC) for acting to make derivatives trading more transparent and improving risk management.
Under the category of "not done," Bair listed the Volcker rule, new (Basel) capital rules that have been proposed but not finished and partial regulation of money market funds. Overall, she gave the implementation of Dodd-Frank a grade of C+.
Noting that none other than Treasury Secretary Jack Lew has stated that the job will not be done until too big to fail is truly eliminated and that critics have blasted the OLA as less orderly than bankruptcy and as codifying, rather than ending, bank bailouts and too big to fail, I would offer no more than a D-. Moreover, at a recent Senate Banking Committee hearing, Sherrod Brown, D-Ohio, quoted an article in the Financial Times as dismissing the new capital regulations, because the industry can reposition activities so as to avoid raising an additional capital at all.
Given that the chairs of the Securities and Exchange Commission (SEC) and the CFTC were scheduled to testify that day, Brawner asked for suggestions of questions to ask of Mary Jo White and Gary Gensler.
Bair said she would give them both friendly opportunities to explain why their agencies need more funding and she would urge White to concentrate on money fund regulations, market structure issues raised by high-frequency trading and dark pools, so as to enhance public confidence in the pricing of securities.
She said she would praise Gensler for the agency's work on derivatives regulation. Unlike the committees where Gensler testifies, Bair noted explicitly that Gensler would be leaving at the end of this year. (I would observe that the attempt by the CFTC to finish its derivatives regulation has been chaotic, due to industry opposition and the willingness of the SEC to offer a friendlier regime, encouraging the financial lobbies to play the two agencies against each other.)
Brawner posted statistics compiled by the Sunlight Foundation tracking meetings on Dodd-Frank between the biggest banks and federal officials as: Goldman Sachs, 222; JPMorgan, 207; Morgan Stanley, 175; and Bank of America, 156.
Bair mused that her total would be six or eight, and the purpose of her group is to provide some balance to the industry lobbying. She went on to argue that the "relentless lobbying" of the banks is contrary to their long-term interest, because they need credible regulation and more certainty.
She contended that the banking industry is "all about trust," and that if people don't trust the regulators, they won't trust the banks either, and she chided the banks for only wanting completion of rules they like. Displaying a naivety some find charming, Bair said she wished that the industry leadership would take a firmer hand in controlling its lobbying operations, "because it's a spectacle, and the people trying to speak to the public interest are outmanned."
My impression is that too big to fail CEOs see efforts of private groups to interdict the march toward business as usual, validated by higher stock prices, higher compensation, more stock buybacks and glowing recommendations of bank stocks as semi-tough huffing and puffing.
Until the too big to fails are forced to raise capital and spin off trading and other activities inappropriate for institutions backed by the federal safety net, the champagne will keep flowing on Wall Street.
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