Tags: Dodd | Frank | too big to fail | bailout

Interview With Dodd and Frank — Too Big to Fail

By    |   Monday, 02 Jun 2014 07:51 AM

The Boston University Law School sponsored a day of panel discussions recently on bank regulation to celebrate the 150th anniversary of the founding of the Office of the Comptroller of the Currency (OCC), the agency within the Treasury Department that is charged with regulating national banks.

The United States has a very complicated system of regulating financial institutions, one element of which is the so-called "dual banking system," which accommodates banks that are chartered by both state and federal authorities. The states were there first, and for many years they issued their own currencies, whose values depended on the standing of each respective bank.

At the time the OCC was founded, the Treasury was faced with the problem of how to finance the Civil War, given that the existing banks were reluctant to accept "greenbacks." By creating a national banking system, the Treasury could be assured that there would be banks who were conditioned to accept the Treasury's non-interest-bearing debt, which would also circulate through the economy as "legal tender" required to be accepted to settle all debts — public and private.

The point of this background is to highlight the irony that this year marks the 100th anniversary of the Federal Reserve and the 150th anniversary of the Comptroller of the Currency, both of which failed miserably to take the supervisory and regulatory actions that might have contained the financial crisis. Not to slight the FDIC, it has fallen short of the statutory funding ratio and has become dependent on a Treasury line of credit. Like most federal insurance programs, it systematically underprices the risk and provides, in effect, a subsidy to the banking industry.

As panelists, the remarks of former Sen. Christopher Dodd, D-Conn., and former Rep. Barney Frank, D-Mass., ranged from candor and insight to standard political spin. Both told anecdotes about their interaction with legislators and lobbyists. A highlight was Dodd's quip that in leaving the Senate and assuming the leadership of the Motion Picture Association of America (MPAA), he went from one group of bad actors to another.

It was Frank who dived into the issue of "too big to fail" early in the interview with a combative challenge to those who continue to be skeptical that the Dodd-Frank Act ended too big to fail. He insisted that Dodd-Frank made clear that a large failing bank would be put out of business with no possibility of bailout, and he called the contention by doubters "the stupidest argument ever" and demanded to know, "In which country?" in response to suggestions that bailouts are still in the cards.

Dodd pointed out that the authority under which the 2008 bailouts were conducted, section 13(3) of the Federal Reserve Act, was repealed by Dodd-Frank. He cited a vote of 92-5 for an amendment sponsored by himself and Sen. Richard Shelby, R-Ala., that prohibits bailouts.

Nevertheless, the skepticism, and in the case of this writer, cynicism, remain. The chairman of the Financial Crisis Inquiry Commission, Phil Angelides, stated that he believed that bailouts would happen again, and hearings of the Senate Banking Committee have repeatedly addressed the question of when a Secretary of the Treasury would be able to say "with a straight face" that too big to fail had ended, with Secretary Jack Lew setting the end of 2013 as a target date.

This writer would offer two observations in support of the view that too big to fail is alive and well. First, financial regulators have made a record of inventing authority for actions they choose to take on behalf of clients, and they will also refuse to exercise authority when clients oppose such action. Second, in the recent Senate Banking Committee markup of housing finance legislation, the committee adopted the same language Dodd-Frank had repealed, as the committee set a standard in advance for a bailout of mortgage finance.

(Archived video can be found here.)

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Robert-Feinberg
The Boston University Law School sponsored a day of panel discussions recently on bank regulation to celebrate the 150th anniversary of the founding of the Office of the Comptroller of the Currency (OCC), the agency within the Treasury Department that is charged with regulating national banks.
Dodd, Frank, too big to fail, bailout
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2014-51-02
Monday, 02 Jun 2014 07:51 AM
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