Dodd-Frank Financial Regulation Bill Turns One. Not Nearly Potty-Trained.

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A year later, regulators are trying to sort out the gigantic mess of new rules Congress sought. Is it doing more harm than good?

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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:

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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.

The bill also seeks to remove the agencies' influence from every rule on the books, but now regulators are having trouble redefining capital requirements without relying on the agencies' asset risk ratings. The SEC also has yet to establish the Office of Credit Ratings, as required by the bill. It would serve as a watchdog to oversee these firms.

The Volcker Rule

One of the other very controversial provisions of Dodd-Frank sought significantly limit banks' proprietary trading, which essentially occurs when a bank trades for its own book using its customers' deposits. It also limits how much money a bank can invest in a specific private equity fund.

A recent Government Accountability Office report expressed concern about difficulties with regulators ability to regulate proprietary trading. The final rule is expected to miss its October implementation deadline. But banks have already begun anticipating the new rule, as Goldman Sachs has stated that it would shutter its proprietary trading desks.

Safer Securitization

Regulators are still working through a key provision for the securitzation market: how much risk lenders should retain when pooling and selling their loans. Too much retention will curb lending, but too little may result in more bad loans. We will learn more about what regulators decide in coming months.

More Harm Than Good?

At this stage, citing positive changes to the economy due to the financial regulation bill isn't easy. As you can see, few of the rules and other changes have been finalized and implemented. But even if all the new regulation was in place, we still wouldn't know if the effort really managed to achieve better financial stability. It could be years, probably decades before we'll know if bailouts and financial crises really have been curbed for good.

But there are some ways in which the new rules appear to be harming the market. The most obvious is the uncertainty they pose. Until hundreds of rules are finalized, financial firms are left in an opaque cloud of uncertainty. For example, will the derivatives rules be as aggressive as initially anticipated or relaxed a bit? Without understanding the rules of the game, firms cannot form long-term strategy, which prevents potential job growth in the industry.

In other ways, some have said that the new rules have done more tangible harm to the banking. Recent reports indicate that Goldman will outsource thousands of jobs to other countries including Singapore, where regulation is more lax. Other firms will likely follow. Reports also indicate that banks are shrinking their staffs to comply with regulations. New rules that the mortgage industry faces could even be preventing the housing market from recovering by stifling credit, according to Anthony Sanders, senior scholar with the Mercatus Center at George Mason University.

When Politicians Take on Finance

The implementation difficulties explained above mostly occurred for one of three reasons: either the timeline Congress provided was unrealistic, a rule was not well-formed and leaves regulators confused, or a rule has deeply problematic side effects that concern regulators. Why did Dodd-Frank run into such issues? Generally, Congress isn't the best group of individuals to engage in detailed and aggressive financial rule making. Most politicians lack the expertise to be able to fully grasp all of the consequences, especially unintended, of putting a new rule in place. Lobbyists and special interest groups pull them in different directions, which may or may not result in the best outcome.

Still, according to a recent poll conducted by the Center for Responsible Lending, 71% of likely voters support the Dodd-Frank bill. You have to wonder though: do they really know what's in it? Do Americans working outside the financial industry understand the difficulty that regulators are having making so many of its provisions workable? Do they understand the reported or even potential harms that overly aggressive regulation can cause?

If the answer to all three of these questions is "yes," then that 71% is a meaningful and important statistic. Unfortunately, the answer to all three of those questions are more likely "no." Let's hope that regulators manage to work through the difficulties they face and fix any mistakes made by Congress. If they don't, history may remember this massive effort as how the U.S. killed its thriving financial industry, instead of how it managed to improve its financial stability by as much as can be reasonable without harming its global competitiveness.

Image Credit: Tobyotter/flickr

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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