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From Securities Regulation Daily, July 20, 2015

Former legislators Dodd, Frank worry about rollback of reform

By Lene Powell, J.D.

At an event sponsored by the watchdog group Better Markets, former lawmakers and Dodd-Frank architects Christopher Dodd and Barney Frank gave an inside perspective about the causes of the 2008 financial crisis, their reaction to critics of the legislation, and their concerns about efforts to roll back the reform.

Following the former legislators’ discussion, Treasury Secretary Jack Lew reviewed progress since the Act’s passage as well as future work still to be done. Lew warned that the Administration “strongly opposes” the tactic of tacking riders onto must-pass legislation to chip away at crucial financial reform.

“Faced with bills that threaten to turn back the clock to 2008 and leave the American people vulnerable to another crippling crisis, I will recommend the President veto them,” said Lew.

Cost of crisis: $20 trillion. According to Better Markets CEO Dennis Kelleher, the total cost of the 2008 crisis topped $20 trillion in lost gross domestic product and “massive human suffering.” The crash and economic crisis, detailed in an accompanying report by the nonprofit, give critical context to understand what the Dodd-Frank Act was trying to prevent and why the legislation is so important. Preventing another crisis should not be a political or partisan issue, said Kelleher.

Progress since Dodd-Frank. Financial institutions and the economy are in much better shape since the crisis, said former Senator Dodd, who sponsored the legislation as chairman of the Senate Banking Committee. There has been 64 months of continued employment growth and deficits are down. Banks are capitalized better, and there is much more transparency in the derivatives markets. And the CFPB is an important bulwark for consumers. Before, consumer protection measures had to be passed separately. Now with the CFPB in place, it’s one-stop shopping for consumer protection, said Dodd.

Former Representative Frank, co-sponsor and former chairman of the House Financial Services Committee, agreed that there has been substantial progress since Dodd-Frank. There are far fewer bad loans being made today, he said, adding that the idea that Democrats forced bad subprime loans on the country was a myth and that the opposite was true. Also, nobody can now accrue as much derivatives risk as AIG did without the regulators knowing about it. In an aside, Frank said that AIG suing the federal government for unfavorable bailout terms was like an arsonist suing the fire department for water damage.

Other risks are reduced as well; banks can take the risks they like, but now must stand behind them and take the consequences, said Frank. His biggest disappointment, though, relates to risk retention in securitizations. The original provision was stronger but got revised, and now there is essentially no risk retention left for residential mortgages. As to the argument that the risk retention measure couldn’t be included because then banks wouldn’t lend and there wouldn’t be any mortgages, Frank said sarcastically, yes, because there were no mortgages in America before 1980, when there was significant risk retention.

Criticism and attempts to repeal. Moderator Ylan Mui of the Washington Post asked how Dodd and Frank would respond to criticisms that compliance costs were too high, being pegged by some at $25 billion or more, and that House Financial Services Chairman Jeb Hensarling has attacked the Act for having too many unintended consequences. Dodd replied that unintended consequences are not a reason not to legislate, because there will always be unintended consequences of any legislation, but you don’t sit around and do nothing. You would never legislate if that was the case, said the former senator.

Moreover, the Act has been a success, said Dodd. Lending institutions are not exculpated, and the government cannot now ask taxpayers to do what it did in the fall of 2008. Capital, liquidity, and leverage are all in better shape. Systemic risk is lower. Regulators can now spot crises earlier and deal with them better. The mechanism of liquidation and unwinding of failed financial institutions is likely to work.

Both are worried about attempts to roll back the reform. Frank said it bothered him that a rollback to the swaps pushout provision of Dodd-Frank Section 716 was included in the 2015 appropriations bill. However, it was unlikely that the Act will be totally repealed. Compared to Obamacare, for which there have been 50 or 60 votes to repeal, there have been no votes to repeal Dodd-Frank. Opponents are afraid of it because they know it’s popular. Even if a Republican is elected president, they’ll be afraid of trying to repeal it altogether, Frank believes.

Dodd pointed out that the Shelby banking bill currently under consideration has very little to do with Dodd-Frank provisions. The one thing he does worry about, though, is that unlike healthcare reform which enjoyed the support of insurance companies and other key stakeholders, there are no large financial interests in favor of the bill that will defend it.

Sticking points. Asked about the changes from the discussion draft to the final legislation, Dodd said that regarding a proposal to merge the regulatory agencies to create a single prudential regulator, such a proposal would likely have a much larger constituency now than it did then.

“People screamed bloody murder about it. We got about 3 votes in the committee on it. Today I think we might have different thoughts about it,” said Dodd.

Frank concurred, saying the single biggest opposition to the idea of a prudential regulator came from state chartered banks, and that the dual banking system that the U.S. has, which most countries do not have, causes a lot of complications. Despite the appeal of simplification, however, they had to let go of this proposal due to unpopularity. As it was, the bill was supported by only three Republican senators and got barely 60 votes in the Senate, and it came close to losing a couple of key provisions in the House. They had to choose what to focus on, said Frank.

Another point of contention arose when the Congressional Budget Office cost estimate came out and they were $20 billion off from where they needed to be, Frank said. They proposed to assess financial institutions to make up the shortfall, but as courageous though those three Republicans were, they couldn’t go for that. However, one of the nice things about conference committees was that there were no rules for them in the House. It had also been a long time since there was one, so it was possible to make some aspects up. So, they were able to reconvene and amend a bill they had already signed off on. But it was stressful, said Frank.

“You know, it’s hard to do a lot of tough things at once. We did a lot of difficult, complicated things. I mean, my head hurt,” Frank said, to general laughter.

MainStory: TopStory Derivatives DoddFrankAct ExchangesMarketRegulation RiskManagement

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