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Obamacare for the Financial Industry

The disastrous Dodd-Frank Act.

Apr 9, 2012, Vol. 17, No. 29 • By PETER J. WALLISON
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All the Republican presidential candidates have called for repeal of the Dodd-Frank Act. Foreign governments are sending delegations to Washington to complain about the act’s Volcker Rule. Eighteen months after the legislation was signed into law, the president had to make a clearly unconstitutional recess appointment in order to get a director for the act’s Consumer Financial Protection Bureau past near-unanimous GOP opposition in the Senate. In the midst of a housing depression, the entire private housing finance system has ground to a halt while waiting for the regulators to define something Dodd and Frank called the Qualified Residential Mortgage. Yet none of these consequential events has moved discussion of the Dodd-Frank Act from the business pages to the front pages, or warranted more than a mention on the evening news. As a result, most Americans have no idea how radical this legislation really is. 

Photo of the president with Dodd and Frank

Make no mistake: These are the guys to regulate our financial industry.


The best way to understand the Dodd-Frank Act is to think of it as Obamacare for the financial industry. Like its health care counterpart, it leaves the members of the massive financial services industry as privately owned firms, but blankets them with so much regulation that they are no longer really independent operators. If the act is fully implemented, a U.S. industry once so aggressive and innovative that it came to dominate the world’s financial markets will be reduced to a ward of the U.S. government. The current controversies over the Volcker Rule and the Consumer Financial Protection Bureau, for all the attention they have drawn, are really minor matters compared with the overall structure and effect of the act. Indeed, its most significant elements are hardly discussed at all, even on the business pages.

Let’s start with the Financial Stability Oversight Council (FSOC). Ever heard of that? It’s a new agency made up of all the federal financial regulators—the SEC, the CFTC, the Comptroller of the Currency (regulator of national banks), the FDIC (regulator of most state-chartered banks and insurer of all banks), and of course the Federal Reserve (regulator of bank holding companies and soon-to-be regulator of the entire financial system)—to name just a few. 

The chairman of this body is the secretary of the Treasury. Right away, this should raise red flags. The secretary, a top officer of every administration, has now been given authority, through the FSOC, over all the financial regulators. To put this in perspective, before Dodd-Frank, Treasury and White House staffs were forbidden to contact the independent regulatory agencies about policy matters, except under special circumstances, for fear of political interference—or the appearance of political interference—in matters of regulatory policy. Under Dodd-Frank, the council is also exempt from the Federal Advisory Committee Act, so its meetings are not open to the press or public. 

In other words, longstanding policies that were intended to promote confidence in the independence of regulatory decision-making have now been wiped away by the act, which has in effect placed all the financial regulators under the direction of the Treasury secretary. This might be good or bad, depending on your view of how much power you think a president should wield, but the point is that this profound change in government policy was never seriously debated in Congress, and is largely unknown to the public. 

And power there is. The council may designate any financial firm as a “systemically important financial institution” (SIFI) if in the council’s judgment its failure could cause “instability” in the U.S economy. This applies to all financial firms—insurers, securities firms, finance companies, hedge funds, pension funds, perhaps even mutual funds and private equity firms, and of course banks. All banks and bank holding companies with assets of more than $50 billion are designated as SIFIs in the act, but the designation of nonbank financial firms as SIFIs is left to the FSOC. Other than the $50 billion threshold for banks, there are no numerical or empirically discernible standards for this decision. The FSOC has put out draft regulations for comment that cite such things as “interconnectedness” as a factor in the designation, but how they are to be measured is left completely in the council’s discretion.

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