Thursday, July 24, 2014

Dodd-Frank Grows Up- Or Does It?

As many have celebrated or decried, Dodd-Frank turned four-years old this week. This is the law that Professor Stephen Bainbridge labeled "quack federal corporate governance round II" (round I was Sarbanes-Oxley, as labeled by Professor Roberta Romano). Some, like Professor Bainbridge, think the law has gone too far and has not only failed to meet its objectives but has actually caused more harm than good (see here, for example).  Some think that the law has not gone far enough, or that the law as drafted will not prevent the next financial crisis (see here, for example). The Council on Foreign Relations discusses the law in an accessible manner with some good links here.

SEC Chair Mary Jo White has divided Dodd-Frank’s ninety-five mandates into eight categories. She released a statement last week touting the Volcker Rule, the new regulatory framework for municipal advisors, additional controls on broker-dealers that hold customer assets, reduced reliance on credit ratings, new rules for unregulated derivatives, additional executive compensation disclosures, and mechanisms to bar bad actors from securities offerings. 

Notwithstanding all of these accomplishments, only a little over half of the law is actually in place. In fact, according to the monthly David Polk Dodd-Frank Progress Report:

As of July 18, 2014, a total of 280 Dodd-Frank rulemaking requirement deadlines have passed. Of these 280 passed deadlines, 127 (45.4%) have been missed and 153 (54.6%) have been met with finalized rules. In addition, 208 (52.3%) of the 398 total required rulemakings have been finalized, while 96 (24.1%) rulemaking requirements have not yet been proposed.

Many who were involved with the law’s passage or addressing the financial crisis bemoan the slow progress. The House Financial Services Committee wrote a 97-page report to call it a failure. So I have a few questions.

1) When Dodd-Frank turns five next year, how far behind will we still be, and will we have suffered another financial blip/setback/recession/crisis that supporters say could have been prevented by Dodd-Frank?

2) How will the results of the mid-term elections affect the funding of the agencies charged with implementing the law?

3) What will the SEC do to address the Dodd-Frank rules that have already been invalidated or rendered otherwise less effective after litigation from business groups such as §1502, Conflict Minerals Rule (see here for SEC response) or §1504, the Resource Extraction Rule (see here for court decision)?

4) Given the SEC's failure to appeal after the proxy access litigation and the success of the lawsuits mentioned above, will other Dodd-Frank mandates be vulnerable to legal challenge?

5) Will the whistleblower provision that provides 10-30% of any recovery over $1 million to qualified persons prevent the next Bernie Madoff scandal? I met with the SEC, members of Congress and testified about some of my concerns about that provision before entering academia, and I hope to be proved wrong. 

Let's wait and see. I look forward to seeing how much Dodd-Frank has grown up this time next year.

Corporate Finance, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia Narine Weldon, Securities Regulation | Permalink


Dear Ms. Narine,
In my opinion the whole Dodd-Frank law needs to be buried and Glass-Steagall reinstated. It was the dumbest idea on the planet to knock down the walls that separated investment and commercial banking. One of the other dumb ideas was in permitting, what used to be private partnerships – the investment banks – to actually go public and issue stock thereby expanding the risks that Wall Street used to take with their own “private capital” to shareholders: pension funds, mutual funds, and the “small” investor. The risks that were once controlled by partners not wanting to “play” with their own capital were now being protected by D&O insurance and leaving the shareholder holding the bag!

People in the media and government like to blame Wall Street for creating derivatives that “nobody can understand” and “greed” for creating the crisis of 2008, but I can tell you that the reason why the mortgage derivative market exploded in the mid to late 1990’s was in response to a lowering in lending standards. The banks and investment firms just don’t create products like CMO’s, CDO’s, MBS, and CDS’s to create more risk and complexity for themselves – for their own entertainment. They created these products to manage the increased risk in their own mortgage portfolios. And why was there increased risk in their mortgage portfolios? Because they knew that they were being prodded by the federal government to lower lending standards. And what was the unspoken truth in all of this – that the federal government would be the back-stop in the market. The full faith and credit of the USA was put on the line with this stupidity and thus we have the Federal Reserve monetizing our national debt to the tune of $17 Trillion + - just $1 Trillion short of our GDP; think about that.

NY Times columnist Gretchen Morgenson wrote, perhaps, the best book on the subject, RECKLESS ENDANGERMENT. And although the word greed is used, it’s the kind of greed that can only come about with the encouragement of the federal government - “encouraging” bad lending behavior, that snowballs into bad lending practices, that is not adequately policed by the regulators and congress who enabled it all in the first place; and to borrow a line from “Casablanca”, “….hear very little, and understand even less.”

Has the Dodd-Frank law done away with “too big to fail”? No, it has INSTITUTIONALIZED it by making the banks even bigger and riskier! Stunning when you look at it all!

Bob McMahon

Posted by: Robert L. McMahon | Oct 6, 2014 1:05:38 PM

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