A year later, regulators are trying to sort out the gigantic mess of new rules Congress sought. Is it doing more harm than good?
On this day a year ago, President Barack Obama signed into law the most momentous financial regulation legislation since rules were put in place following the Great Depression. And yet, little appears to have changed.
A handful of rules or mechanisms have been put in place that policymakers hope will help. A huge number, however, either haven't taken effect or have been put on hold because regulators are having trouble implementing them. Other new rules may have done net harm up to this point, resulting in a slower economic recovery.
At this point, the Dodd-Frank bill appears pretty much exactly like you'd expect it to at its young age of one-year-old. It's a baby -- an infant. It's still making a mess of things; it certainly hasn't got potty-training down yet. Is it hungry? Tired? Gassy? Few can understand what it's even asking for some of the time.
Of the 87 studies that the bill required, just 26 had been completed as of July 1st, according to an analysis published by law firm Morrison & Foerster. Here's the breakdown of progress on the 400 final rules that the bill must establish:
Although the majority of deadlines haven't hit by one-year-out, of those that have 40% have missed their deadlines.
The Status of the Bill's Key Objectives
Too Big to Fail
The Dodd-Frank bill sought to create a Financial Stability Oversight Council made up of the grand masters of financial regulation who would possess the expertise and (more importantly) foresight to spot and prevent a financial crisis before it occurred. Think of the precogs from the film Minority Report, without the pool. The Council has met a few times and made a handful of rules, but it has yet to finalize criteria for which firms are "too big to fail." Regulators reportedly lack clarity and certainty on what should determine this designation. Additionally, three of the council's 10 voting members are currently in Senate confirmation limbo.
The bill's crown jewel to end "too big to fail" was its newly established power to wind down giant failing non-bank financial firms. The Federal Deposit Insurance Corporation has made some progress in formalizing its resolution authority, but it's having trouble finalizing its direction on how firms should write "living wills," the plans that the FDIC will follow to wind firms down quickly and cleanly. The holdup here is international coordination. Even when this is all finalized, however, many experts doubt that it will help much in another financial crisis. Last week rating agency Standard and Poor's released a report questioning whether the new authority can really end bailouts.
Consumer Financial Protection Bureau
Perhaps no part of Dodd-Frank was as controversial as the newly established regulator meant to consolidate consumer financial protection. Does it have too much power? Would it be wiser to establish a board for its governance instead of providing that power to a director? Republicans and other critics have such concerns.
Although the Bureau officially opens its doors today, it will do so without that director in place. President Obama nominated former Ohio Attorney General Richard Cordray this week, but he isn't expected to be confirmed. Senate Republicans have vowed to block any nominee unless some key reforms are made to the Bureau's structure.
A More Stable Derivatives Market
The bill requires sweeping changes to the derivatives market, including reshaping its infrastructure. Even as the law passed a year ago, however, the architects of the new derivatives regulation, former Sens. Lincoln and Dodd, expressed concern over a rule that would impose margin requirements on firms that use derivatives to hedge risk encountered in their normal course of business ("end users"). That and other aspects of the regulation have yet to be finalized. Regulators have delayed the new framework from taking effect until they work through all of the kinks in the new rules as envisioned in Dodd-Frank.
Better Rating Agencies
One key problem during the financial crisis was that so many mortgage-related bonds had received pristine ratings but ended up going bad. The rating agencies were criticized for making this mistake and reforms were sought to prevent it from happening again. But what sounds good in theory doesn't always work out so well in practice. Congress sought to hold the agencies liable for their mistakes, but the Securities and Exchange Commission indefinitely nullified the rule when it caused the market to seize. The House recently passed a resolution to make this change permanent.