A year on, it's clear we did, in fact, waste the financial crisis. Sorry, Rahm.
The Dodd-Frank Act upended financial regulation, and even did some good, but it missed the mark on the two areas most critical to avoiding a future financial meltdown: systemic-risk oversight and regulatory reform.
On the first, Congress gets credit for taking a stab, but its prescription is so convoluted it will be pure luck if it succeeds.
On the second, lawmakers can claim credit for finally putting the Office of Thrift Supervision out of everyone's misery, but it was too little too late. The law did nothing to bring accountability and order to the jumble of financial regulators. In fact, it created new agencies and handed a whole lot more power to others, and in the process exacerbated already bitter turf wars.
Let's start with systemic risk. The law was supposed to prevent a repeat of the 2008 financial crisis by identifying which firms are too big to fail and then subjecting them to tighter oversight and higher capital standards.
These firms will have to write living wills explaining to regulators how they should be unwound if disaster strikes, and new resolution rules are supposed to make it easier to liquidate these giants. There's more — in a law topping 2,000 pages there is always more — but that's the gist.
Yet a year in, we don't even know which firms the government considers systemically important, or those that could bring down the financial system if they were to fail.
I understand the designation is really important, and any decision will be second-guessed, but leaving this hanging exposes a lack of leadership that is fueling uncertainty and anxiety.
Remember, Dodd-Frank already put every banking company with assets of more than $50 billion, so all that's left is identifying the financers, insurers, hedge funds or money managers that policymakers consider too big to fail. It's not expected to be a long list, particularly since the main advocate for an expansive approach, Federal Deposit Insurance Corp. Chairman Sheila Bair, resigned earlier this month.
The job of identifying these firms falls to the Financial Stability Oversight Council, which Dodd-Frank created. It's a messy collection of more than a dozen state and federal agencies spanning banking, insurance and securities, agencies that are supposed to work together to detect the next big problem and defuse it before a massive federal bailout is needed.
To support the council, Dodd-Frank also created the Office of Financial Research, a cool unit that is supposed to collect and analyze all sorts of data to spot the next crisis before it explodes.
To date, the council and the office have accomplished little.
Led by the Treasury Department, the council has held just a handful of meetings, including one this week where members made quite a show of complimenting one another about how hard they are working and how well they are all getting along. If they really were, you wouldn't think they would spend so much time reassuring us about it. The most authentic comment at the meeting came from acting FDIC Chairman Martin Gruenberg, who conceded the council "is never going to be perfect," and said its mission "is never going to be an easy thing to do but it is going to be an important thing to do."
Congress did complicate the FSOC's mission by putting everyone and anyone on it. Does the National Credit Union Administration need to be at the table when policymakers decide whether GE Capital is systemically important? And the nod to the insurance industry is overdone — the council has three members who are supposed to represent the industry's interests. There are also seats for state banking, insurance and securities regulators, housing finance overseers and consumer protection cops. It was said before the law was passed and it's still true today: there are just too many people on the council for it to be effective.
"It seems inconceivable to me that the complicated FSOC, comprising multiple agencies with diverse missions, can prevent future financial crises," Lawrence Baxter, a former Wachovia executive now teaching at Duke University's law school, emailed from an African safari. "Its procedures are cumbersome, whereas crises arise suddenly, and whether the council will have the political will to take meaningful preemptive action against SIFIs [systemically important financial institutions] remains to be seen. I am skeptical."
Baxter thinks a better policy prescription is to put "restrictions on the size, complexity and activities" of companies.
Congress considered and rejected that idea when it debated Dodd-Frank. However, proponents of living wills, including Bair, have argued they should lead companies to streamline and simplify their corporate structures and perhaps even downsize. But for that to happen, regulators will have to hold the wills to a high standard, and it's unclear whether that will happen now that Bair is gone.
The FDIC is working with the Federal Reserve Board on living wills, and the two agencies are expected to present a joint final rule in August. While they insist they are on the same page, it will surprise no one if, after a lot of hoopla, living wills end up collecting dust on shelves.
Turning to regulatory reform, Congress passed on a golden opportunity to rationalize what can only be described as a mishmash of oversight agencies.
Dodd-Frank did fold OTS into the Office of the Comptroller of the Currency, but it should have consolidated federal oversight of all depository institutions — banks, thrifts and credit unions — into a single agency. The Fed should have been focused on monetary policy, clearly a full-time job, and the FDIC should have been stripped down to deposit insurer.
All the supervisors working for the Fed, FDIC, OCC and NCUA should have been consolidated into this one agency, which could have special units for different types of firms. For example, it could have a squad dedicated to nothing by supervising community institutions that do not need anything like the sort of scrutiny applied to larger companies. It would need another unit devoted to supervising every systemically important institution. (Under Dodd-Frank, this job falls to the Fed.) Because Congress ducked this admittedly tough choice, all the banking agencies are holding small banks to unreasonably tough standards and each of them has set up special offices to supervise the giants.
Ironically, all the agencies are also beefing up their consumer compliance efforts just as another Dodd-Frank creation, the Consumer Financial Protection Bureau, opens its doors. The overkill here should be obvious. It will lead to costly redundancies as well as drain resources from where they are needed most: supervision of systemically important firms. (Congress ought to raise that asset threshold for banks. Banks the size of Zions and Huntington are not systemically important and shouldn't have to abide by a bunch of rules designed to bring a much more complex company like AIG to heel.) A single regulatory agency, led by a prominent, forceful person, would make it clear where the buck stopped the next time companies made boatloads of lousy loans or shoved tons of risky assets into SIVs.
This stuff matters, because when the next crisis hits — and the mortgage foreclosure mess remains an unaddressed threat — pressure will mount for more aggressive, more direct action.
Indeed, Dodd-Frank's fixes were an alternative to breaking up or even nationalizing the big banks.
If its fixes fail, if another bailout is required, the industry will be back on the defensive.
Barb Rehm is American Banker's editor at large. She welcomes feedback to her weekly column at
