Regulators' Reputation Sinks Along with Industry's

Bank executives aren't the only ones in need of a reputation rescue.

Their federal regulators could use some help as well.

The Dodd-Frank Act of 2010, the law that was supposed to resolve the problems revealed by the financial crisis, put enormous power into the federal banking agencies' hands.

And yet in the 32 months since enactment regulators have done little to restore the public's confidence in the government's ability to police the financial system.

The agencies will tell you that Dodd-Frank is complicated, and in places contradictory. But that's a cop-out.

There are plenty of steps the regulators could and should have taken by now.

Let's consider just a few.

Not a single financial company outside banking has been identified as a potential threat to the system. Look no further than AIG, an insurer that needed a $180 billion government bailout, to see how ineffective this inaction makes regulators appear.

Dodd-Frank specified every banking company with more than $50 billion in assets as "systemically important" and therefore subject to much closer scrutiny. The law asked the regulators to identify which firms beyond banking — insurers, finance companies, hedge funds, private equity investors — should also be subject to this extra oversight.

The agencies have cranked out lots of paper on how they will designate these firms, but they've yet to actually name one.

And that extra scrutiny? Well that's stuck in bureaucracy, too.

The Federal Reserve Board proposed a massive new rule on Dec. 22, 2011, but has yet to adopt it, so even the big banks aren't subject to it yet.

These rules, required by Section 165 in the law's first title, attack everything from how connected large companies are to one another to how well they manage their risks. In other words, these "enhanced prudential standards" are key to preventing the next crisis.

By the way, the deadline Congress set for a final rule on Section 165 came and went eight months ago.

Speaking of blown deadlines, the current tally is 176 and counting, according to Davis Polk, a law firm that is meticulously tracking Dodd-Frank's implementation.

To date, of the 398 rules required under Dodd-Frank roughly a third have not even been proposed yet.

And even when the regulators get it right, as the Federal Deposit Insurance Corp. did with Orderly Liquidation Authority, they manage to futz things up.

Dodd-Frank's Title II widens the agency's authority to seize large financial institutions, and the FDIC's "single point of entry" approach is widely viewed as a smart, reasonable way to proceed.

But experts have hounded the agency for more detail, and FDIC officials have agreed that it's needed.

Jim Wigand, who heads the agency's Office of Complex Financial Institutions, first said he expected more information would be released by yearend 2012.

Obviously that deadline is long gone, and early this month FDIC Chairman Martin Gruenberg said, "We are planning to make available later this year a policy statement to lay out some detail in how the [OLA] policy will work and we will seek public comment it."

Later this year?

The FDIC is well aware that critics in Congress are itching to repeal this section of Dodd-Frank, arguing that it enshrines rather than ends bailouts. The agency should not wait so long to put more meat on the OLA bones.

That brings us to living wills, the provision in Dodd-Frank that required the largest firms to put down on paper exactly how they could be resolved by regulators should disaster strike.

Critics claimed from the beginning that this would do little more than kill a lot of trees, and I hate to admit they are on the verge of being proven right.

The first living wills were filed last summer and regulators have said next to nothing about them since. Does the Fed and the FDIC view these first attempts as credible?

No one knows. Officials merely say something vague like it is too soon to tell how good the living wills are. What have they been doing since last July?

The single best way to prove Dodd-Frank has some teeth is to force changes based on the living wills. Regulators could require a bank to make structural changes or divest a subsidiary or shake up management.

It's possible that process is under way at individual institutions, but no one knows because the Fed and the FDIC haven't said. This is a big missed opportunity for regulators to look like they have a handle on what's going on inside the largest institutions.

The list goes on and on and it could venture into arguably thornier territory like Dodd-Frank's derivatives crackdown, which to date has generated a lot of paper but few real changes.

But let's end with one last example — one regulators themselves have insisted is an urgent need.

It's been four and a half years since the Prime Reserve Fund broke the buck and the government took the astounding step of guaranteeing the entire money market mutual fund industry.

The Treasury secretary, the Fed chairman, the head of the Securities and Exchange Commission and many, many others have argued for reforms. The SEC took some baby steps, but the big changes — require a floating net asset value and/or higher capital requirements — remain gridlocked.

The Financial Stability Oversight Council, created by Dodd-Frank to get in front of the next systemic risk, has done nothing but study and propose and postpone.

There is nothing that umbrella group of regulators, led by the Treasury, has done to inspire the public's confidence. Nothing. And the money market mutual fund issue is Exhibit A.

I'm sympathetic to regulators, most of whom are hardworking people who want to do the right thing. But they are making themselves an easy target by not getting more of Dodd-Frank into place.

It's as if they are searching for perfection. It doesn't exist.

Better to move ahead. No decision is irreversible and it's OK to start small: name a few nonbank SIFIs; finalize some of the 165 rules; answer an outstanding OLA question; make an example of a living will; tackle one more money market reform.

But the public needs to see more progress if it's to believe the government is taking reform seriously.