President Obama signed the Dodd-Frank financial regulation bill five years ago this week. Most conservative commentary on the legislation will be entirely negative, but there are two apparent benefits the law has provided.
First, Dodd-Frank may have chipped away at the Too Big to Fail problem, reducing the subsidy banks enjoy in the form of lower borrowing costs (from lenders who expect a bailout).
More concretely, Dodd-Frank has stimulated the economy of Washington, D.C., creating a lucrative industry for bank lawyers, consultants, and the revolving-door lobbyists who helped write the complex legislation and ever-changing rules.
Dodd-Frank’s stimulus to the political class is clear as day.
Barney Frank, the “Frank” of Dodd-Frank, now sits on the board of a bank, thanks to Dodd-Frank. Signature Bank’s CEO complained in 2010 that the law would make him “have to hire compliance experts and lawyers and other cost-generating personnel.” This year, Frank joined Signature’s board, extolling his “32-year career devoted to government and his distinguished expertise in financial services
When Amy Friend, Dodd’s chief counsel, joined financial consulting firm Promontory, the firm explained that she would help clients with “the regulatory implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which, at 2,300 pages, is one of the most complex and wide-ranging overhauls of the financial regulatory framework in decades.”
Frank’s chief counsel, Daniel Meade, went to K Street giant Hogan Lovells. The firm bragged that he was “a principal draftsperson of substantial portions of the Dodd-Frank Wall Street Reform.”
These are some of the most prominent Dodd-Frank cash-outs, but there are dozens of others. Lawmakers, congressional staffers and federal regulators who wrote, passed and implemented the law are now getting rich helping the regulated live with — and profit from — the law.
One new Georgetown consulting firm, Fenway Sumner, is built aroundhiring alumni from the Consumer Financial Protection Bureau, created by Dodd-Frank as the supposed answer to the capture of other regulators by the big banks.
Had Congress crafted a financial law specifically maximize the work it was creating for lawyers and consultants, and to maximize the value of its revolving-door authors, it could hardly have done better than Dodd-Frank.
The law created hundreds of complex, subjective tests and rules to be crafted by regulators without much guidance. It was a perfect make-work program.
The complexity and weight of the law is one reason the big banks welcomed it. “We will be among the biggest beneficiaries of reform,”Goldman Sachs CEO Lloyd Blankfein said in 2010.
Blankfein explained why this year: “More intense regulatory and technology requirements have raised the barriers to entry higher than at any other time in modern history.”
JP Morgan’s Jamie Dimon sounded the same note in 2012. Dodd-Frank’s rules “make it more expensive and tend to make it tougher for smaller players to enter the market, effectively widening JPM’s ‘moat’,” as Business Insider paraphrased Dimon’s comments.
“What if Dodd-Frank created a too-small-to-succeed problem in addition to the too-big-to-fail problem,” two scholars at the Kennedy School of Government asked after finding data that pointed exactly towards that conclusion.
Community banks had already been losing market share, but after Dodd-Frank, that shrinkage accelerated to twice the speed. “There are are economies of scale when dealing with regulation,” one of the authors explained.
Wasn’t Dodd-Frank supposed to bring the big banks down a peg? In one way, it may have — and this is actually the most praiseworthy part of the law.
For years after the 2008 bailout, the biggest banks explicitly enjoyed a Too Big To Fail subsidy. They could borrow at lower rates because lenders assumed they would be bailed out if the bank failed.
Credit ratings agencies, however, have cut the big banks’ ratings in recent years, as they have seen “presumed government support” trickle away. Scholars on the Left and the Right have produced studies suggesting that the TBTF borrowing discount has shrunk (though this conclusion isn’t unanimous).
Dodd-Frank supporters point to the bill’s “resolution authority,” — basically a system for unwinding failed banks and avoiding both bailouts and disorderly liquidation.
Credit for any TBTF-reduction more likely goes to one of Dodd-Frank’s less complicated rules: higher capital requirements on larger banks. In short, banks need to have more skin in the game when lending money. Through a few different mechanisms, this rule makes banks play it safer and reduces the TBTF subsidy.
Here’s the thing, though: These higher capital requirements were in the pipeline even without Dodd-Frank. International financial regulations, known as Basel III, prescribed exactly that. If making banks safer and protecting taxpayers were the goals, Congress could have simply codified Basel III’s capital rules.
That law would be far simpler, far easier to implement, would pose less chance for regulatory capture, and would impose less regulatory burden. But as we’ve learned in the wake of Dodd-Frank, one man’s regulatory burden is another man’s job security.
For K Street, Dodd-Frank’s fifth birthday is indeed an occasion to celebrate.
© 2015 by the Washington Examiner. Reprinted with permission.