Chris Dodd: Five myths about Dodd-Frank

[ProSense]

Five myths about Dodd-Frank

By Christopher J. Dodd

After a worldwide financial meltdown — and a $700 billion taxpayer-funded bailout — the need for common-sense financial reforms was clear. But now, even though the Wall Street Reform and Consumer Protection Act of 2010 (known as Dodd-Frank, after Rep. Barney Frank and me, its sponsors) is only beginning to take effect, critics are launching false attacks against the law in an effort to undermine it. Whether they are intentionally misleading or just misguided, they are wrong about the law’s purpose and impact

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3. Dodd-Frank failed to truly reform Wall Street.

The protests about the law emanating from Wall Street tell you all you need to know about this claim.

Dodd-Frank fundamentally transformed our financial system. It requires banks to keep more capital on hand as a buffer against bad loans. It establishes a process for unwinding firms if they fail — and prohibits the Federal Reserve from bailing them out. It brings more transparency and accountability to the $600 trillionderivatives market. It shuts down ineffective regulators and insists that the remaining ones share information to expose the next financial trouble spots. And it finally establishes a single agency whose mission is to protect consumers.

This all adds up to a systematic overhaul of a regulatory structure that hadn’t been sufficiently updated since the 1930s. Much still needs to be done to ensure that the law succeeds: Regulators must implement reforms aggressively, and Congress must continue to provide vigorous oversight. But Dodd-Frank is a comprehensive solution to a comprehensive problem.

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[RaleighNCDUer]

1. Dodd-Frank was a good start, but it did not address the fundamental issue

of the intertwining of commercial banks with investment banks, which allows the risk-prone investment banks to gamble with the savings accounts of their customers, with the government backing their gambling with the FDIC. If they win, fine; if they lose, the government has to cover their losses.

Dodd-Frank SHOULD have reinstated Glass-Steagal.

Any bank that is too big to fail is guaranteed to fail.

[ProSense]

2. Dodd-Frank

"Dodd-Frank SHOULD have reinstated Glass-Steagal."

...addressed many issues that Glass-Steagall never did, one is too big to fail.

In fact, Glass-Steagall could be addressed by strenghtening one aspect of the law, the Volcker rule.

[RaleighNCDUer]

5. Strengthening the Volcker rule would be unnecessary if Glass-Steagal was

reinstated.

Glass-Steagle PLUS Dodd-Frank might actually accomplish something.

[jwirr]

3. What it lacks is the separation that Glass-Steagall provided to keep

our money separate from the money they use to gamble with on Wall Street.

[ProSense]

4. That

"What it lacks is the separation that Glass-Steagall provided to keep our money separate from the money they use to gamble with on Wall Street."

...is what the Volcker rule does.

Speech by SEC Chairman: Opening Statement at SEC Open Meeting: Item 1 — Prohibitions and Restrictions on Proprietary Trading

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We begin with the proposal to implement the Volcker Rule, which generally prohibits certain banking entities from engaging in proprietary trading or sponsoring or investing in a hedge fund or private equity fund.

The statute is intended to curb the proprietary interests of commercial banks and their affiliates in order to protect taxpayers and consumers by prohibiting insured depository institutions from engaging in risky proprietary trading. Section 619 is a key component of the Dodd-Frank legislation. Its implementation would be a step forward in reducing conflicts of interests between the self-interests of banking entities and the interests of their customers. The statute is aimed at constraining banking entities’ proprietary trading, protecting the provision of essential financial services and promoting the stability of the U.S. financial system.

In drafting this proposal, the Commission worked with our fellow regulators to ensure the rule will be applied consistently across institutions. Indeed, today’s rule is being proposed jointly with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and eventually the CFTC. This has been an extensive undertaking. Throughout the process of formulating this proposal, the SEC staff worked actively and continuously with the staffs of our fellow regulators in this collaborative effort, marked by more than a year of weekly, if not more frequent, interagency staff conference calls, interagency meetings, and shared drafting. The dedication and collective efforts of this interagency team deserve our thanks. Under the proposed rule, certain banking entities generally would be prohibited from engaging in proprietary trading. This includes banks, bank holding companies and their affiliates — as well as the U.S. operations of foreign banks and bank holding companies and their affiliates, including affiliated broker-dealers and investment advisers.

In addition, the proposed rule prevents these entities from circumventing this proprietary trading prohibition in that it restricts these entities from sponsoring or investing in hedge funds or private equity funds.

At the same time, the proposed rule — as required by the Dodd-Frank Act — permits certain activities necessary for capital raising and the healthy functioning of our securities markets. These include such things as market-making related activities, risk-mitigating hedging, and underwriting.

These otherwise permitted activities are not permitted, however, if they involve material conflicts of interest, high-risk assets or trading strategies, or if they threaten the safety and soundness of banking institutions or U.S. financial stability.

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It could be strengthened. Still, as I said in my previous comment, Dodd-Frank addressed many issues that Glass-Steagall never did.

[ellenfl]

6. kick for later. eom