VILLAGE KAHUNA - Dodd-Frank

[Guest]

VK - as a banker could you explain in plain language what the Dodd-Frank bill is?

I love a line from an old Dirty Harry movie when Clint Eastwood says, "A man has to know his limitations." Concerning banking, mine stop at balancing the checkbook.

I would sincerely like to hear your perspective on the implications of Dodd-Frank, if any, on the economy and whether you believe it should be repealed. I believe we can all benefit from your professional perspectives.

[Guest]

VK - as a banker could you explain in plain language what the Dodd-Frank bill is?...What is it, in just a few words or thoughts?

It's an abomination

It's a Rube Goldberg piece of legislation that is designed to satisfy all the lobbyists and permit the politicians to break their arms patting themselves on the back.

It's one of the most disgusting, inefficient, costly, and almost sure not to provide any benefit piece of legislation in the history of the U.S Congress.
For almost 70 years the U.S. banking system was kept largely healthy by the Glass-Steagall Act (GSA) of 1932. In a few words, the primary objectives of GSA was to separate investment and commercial banking activities. At the time, what was considered overzealous commercial bank involvement in stock market investment was deemed the main culprit of the financial crash of 1929. GSA prevented commercial banks from taking on too much risk with depositors' money.

The result of GSA? The U.S. commercial banking system operated for more than seventy years safely, and providing the credit and liquidity needed for a healthy and growing economy.

But the commercial bakers hated GSA. By keeping them under the thumb of some stiff regulation, all the rich, profitable financial business flowed to the investment banks, whose partners made tons of money. The commercial bankers wanted a piece of that action. They thought they could do investment banking just as well and make all those sweet bonuses like the investment bankers.

So in 1999 with amendments in 2001, the Gramm–Leach–Bliley Act was passed which allowed commercial banks, investment banks, securities firms, and insurance companies to consolidate.

And that was the beginning of the financial disaster that we've experienced in recent years.

I hope this was a simple enough explanation.

[Guest]

Dodd admits that despite his influence over finance in the Senate, he made a terrible mistake by not blocking the deregulation bills starting in 1999. Then he pledged not to retire until he could undo the damage. Thus we have Dodd-Frank. Some of the new D-F banking regs look pretty good from here. Can you go a little farther to explain why it is an 'abnomination'?

[Guest]

Barney Frank was my representative. He is despicable, arrogant and prone to not telling the truth. Nuff Said!!!

"Nuff said?" Why would you want to stifle informative dialogue based on Barney Frank's personality? Maybe its just me, but posters have a wealth of knowledge in this area and I for one would like to learn more from their perspective and first hand experience.

VK - thanks for the informed response. You've made it interesting in straight forward terms. I hope you follow-up even more as Dodd-Frank will be an issue in the coming elections. How did Dodd-Frank impact the equation?

ijusluvit - what looks so good about D-F from your perspective?

[Guest]

Dodd admits that despite his influence over finance in the Senate, he made a terrible mistake by not blocking the deregulation bills starting in 1999. Then he pledged not to retire until he could undo the damage. Thus we have Dodd-Frank. Some of the new D-F banking regs look pretty good from here. Can you go a little farther to explain why it is an 'abnomination'?I wish I could explain succinctly how and why a several thousand page bill is not what the politicians purport it to be.

I will say this in agreement with Chris Dodd--he should have worked harder to block the deregulation of the banking system that was rammed thru under the guidance of Texas Senator Phil Gramm and the Republican majority 105th and 106th Congresses under Speaker Newt Gingrich and Senate Leader Trent Lott, and the lack of executive oversight by Bill Clinton and George Bush.

Take time to read the history of how this deregulation was rammed through Congress and who benefitted. Just one example--Phil Gramm retired from the Senate shortly after the de-regulation was passed. Since then he has served in a very highly-paid position as Vice Chairman of Investment Banking for the United Bank of Switzerland. He is married to Wendy Lee Gramm, who approved a significant loosening of regulation of futures trading when she was chairman of the Futures Trading Commission, being heavily lobbied by Enron Corporation. She then resigned from that FTC position and took a job as chairman of the audit committee of Enron, getting million dollar bonuses for her service. Ask the employees and shareholders of Enron what they think of her auditing oversight and whether the regulations she gutted at the FTC might have prevented the dramatic failure of Enron.

After a long career as a commercial banker, I'm convinced that no regulation or group of regulators will ever be able to provide the safety of the financial system against the activities of very, very smart and highly profit-motivated investment bankers. I've seen it time and time again--it's an intellectual mismatch.

What Dodd-Frank tries to do is create a crazy quilt of individual regulations and rules which initially were written by lobbyists to satisfy the needs and desires of the bankers and investment bankers who hired them. They all knew that the tide of public and political opinion was against them, so they simply tried to minimize the "damage" to their ability to continue to make money. The containment of risk and the surety of the financial system were issues farthest from their minds.

So now with Dodd-Frank we have what we have. A crazy quilt of expensive regulations that essentially will drive smaller banks and financial institutions either out of business or out of the country. They won't impair the ability of smart bankers to put the capital of the system at significant risk in their pursuit of profits and bonuses. The result will be bigger and bigger and more complex banks, ones that really will be too big to fail and will have to be bailed out by the government once again. All this in a time of increasingly complex financial products and systems.

Glass-Steagall was a very simple piece of Congressional legislation. I think it was less than a dozen pages long. It simply said that commercial banks could not be involved in the risky business of trading. They could take deposits and make loans...period. They would have to maintain a healthy proportion of capital and the loans that they did make would be rigorously scrutinized by regulators. Investment banking, trading and the creation of financial derivatives and the like, were permissible businesses for investment banks to do--with a minimum of regulation but with their own money, not placing depositor's money or the ability of the banking system to function to enhance economic growth at risk.

Unfortunately, those days are gone forever. I'll make a prediction--we will experience another financial crisis that will put the U.S. and even the world banking systems at significant risk. The unknown problem(s) that will have that result will be uncontrolled and unconstrained by a complicated set of bureaucratic regulations like Dodd-Frank.

I hope I'm wrong. I don't think I will be.

[Guest]

"Nuff said?" Why would you want to stifle informative dialogue based on Barney Frank's personality? Maybe its just me, but posters have a wealth of knowledge in this area and I for one would like to learn more from their perspective and first hand experience.

VK - thanks for the informed response. You've made it interesting in straight forward terms. I hope you follow-up even more as Dodd-Frank will be an issue in the coming elections. How did Dodd-Frank impact the equation?

ijusluvit - what looks so good about D-F from your perspective?

Of course you are right. My response was from too many years of listening to his blather.

[Guest]

"Nuff said?" Why would you want to stifle informative dialogue based on Barney Frank's personality? Maybe its just me, but posters have a wealth of knowledge in this area and I for one would like to learn more from their perspective and first hand experience.

VK - thanks for the informed response. You've made it interesting in straight forward terms. I hope you follow-up even more as Dodd-Frank will be an issue in the coming elections. How did Dodd-Frank impact the equation?

ijusluvit - what looks so good about D-F from your perspective?

Here's what appears to be an objective summary of the whole bill:

http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive _summary_Final.pdf

I see the following as positive elements: the Consumer Financial Protection Bureau, some of the banking regs, first time hedge fund and executive compensation regs, and parts of the mortgage regs. I don't have enough background knowledge to judge some of the other provisions. Nor do I know enough to judge any of the other provisions as counterproductive, or 'abominable'.

Of course, 'the devil's in the details'. The benefits derived from regs like these may not fully materialize without persistent, long term effort by Congress and the President to make them work. One problem now, for example, is the Republican Senate opposition bloc of any nominee to head the Consumer BPB. Their opposition stems from the fear that the bureau head would have too much power. (to champion consumer causes).

I still can't understand vk's reasons for an entirely negative view.

[Guest]

Here's what appears to be an objective summary of the whole bill:

http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive _summary_Final.pdf

I see the following as positive elements: the Consumer Financial Protection Bureau, some of the banking regs, first time hedge fund and executive compensation regs, and parts of the mortgage regs. I don't have enough background knowledge to judge some of the other provisions. Nor do I know enough to judge any of the other provisions as counterproductive, or 'abominable'.

Of course, 'the devil's in the details'. The benefits derived from regs like these may not fully materialize without persistent, long term effort by Congress and the President to make them work. One problem now, for example, is the Republican Senate opposition bloc of any nominee to head the Consumer BPB. Their opposition stems from the fear that the bureau head would have too much power. (to champion consumer causes).

I still can't understand vk's reasons for an entirely negative view.

Let's try it this way. The Sarbanes Oxley Act was enacted following the Enron , et al scandals. It has created a nightmare for business especially middle and smaller firms because these employers hire two people to meet compliance regulation for every three people they hire.

Frank-Dodd is Sarbanes on steriods. All this act will do is to push companies to move their operations overseas.

The populist notion that you are curtailing big bankers ,et al greedy profits schemes (i.e portecting consumers is well B as in B and S as in S) However I do agree that governement should monitor what bankers insurers etc do but they went way overboard on that objective. Personally I believe as with the Obama Admin this was all about governement control and not protecting consumers

VK gives a good accounting of Gramm /Bliley Act. I lived through it but from the insurance company's perspective.

[Guest]

...I still can't understand vk's reasons for an entirely negative view (of the Dodd-Frank bill).Without going into a lot of detail, the bill was one of the most heavily debated between the parties in both houses of Congress. All the politicians knew they needed to produce some sort of regulatory reform to satisfy the public in the wake of the financial meltdown of 2007-2008. But whatever legislation that was proposed by the House and Senate finance committees was heavily lobbied by the banking and insurance companies, who wanted to limit any additional regulation.

A lot of the members of the finance commitees in both the House and Senate were very well "taken care of" by the financial industry lobbyists. As an example, each member of the Senate finance committee received at least $1 million in campaign contributions from bank lobbyists. Chris Dodd, the chairman, received over $4 million!

The result was legislation which the politicians could claim improved the regulation on banks and financial institutions, but was a crazy quilt of overlapping and inconsistent new regulations and inadequate regulatory staff to apply them. The smaller banks have already begun to cite their inability to afford the staff needed to satisfy the new regulatory regime and the big banks have already testified before Congress that the significant additional cost of the regulations will have to be paid by bank customers. Do you recall reading of the new $5 per transaction fee that several banks are applying to transactions funded using cash cards? That's just one additional source of income the banks are using to pay for the heavy, new regulatory environment.

But more importantly, the Congress or the federal regulators are simply not smart enough to make the new regulations work as intended. Remember all the blah-blah-blah about limiting the bonuses of bank employees, particularly the ones involved in creating and selling many of the new and hugely profitable financial derivative products? The banks argued that if they couldn't pay "market" compensation, those people would resign and set up the business within unregulated host companies. In some cases that happened. But in a lot of cases, the banks found that by setting up independent "unaffiliated" companies that would employ the high-flying investment bankers, then simply contracting those same people who used to work for them as "consultants", they were able to escape the bonus restrictions of the new regualtions. In many cases the employees never even left their offices in the bank buildings. It took the banks about a week to figure out a way around the new bonus regulations contained in the regulatory reform bill passed in the last Congress. Like I've said, trying to have bureaucrats and politicians regulate potentially insanely profitable businesses in the financial industry is an intellectual mismatch.

So why don't I like the regulatory reform legislation?
Because it won't work
Because it adds unnecessary costs which will be passed on to the public
And because it will encourage a sense of confidence in new regualtions which is badly overestimated and misplaced.

[Guest]

Without going into a lot of detail, the bill was one of the most heavily debated between the parties in both houses of Congress. All the politicians knew they needed to produce some sort of regulatory reform to satisfy the public in the wake of the financial meltdown of 2007-2008. But whatever legislation that was proposed by the House and Senate finance committees was heavily lobbied by the banking and insurance companies, who wanted to limit any additional regulation.

A lot of the members of the finance commitees in both the House and Senate were very well "taken care of" by the financial industry lobbyists. As an example, each member of the Senate finance committee received at least $1 million in campaign contributions from bank lobbyists. Chris Dodd, the chairman, received over $4 million!

The result was legislation which the politicians could claim improved the regulation on banks and financial institutions, but was a crazy quilt of overlapping and inconsistent new regulations and inadequate regulatory staff to apply them. The smaller banks have already begun to cite their inability to afford the staff needed to satisfy the new regulatory regime and the big banks have already testified before Congress that the significant additional cost of the regulations will have to be paid by bank customers. Do you recall reading of the new $5 per transaction fee that several banks are applying to transactions funded using cash cards? That's just one additional source of income the banks are using to pay for the heavy, new regulatory environment.

But more importantly, the Congress or the federal regulators are simply not smart enough to make the new regulations work as intended. Remember all the blah-blah-blah about limiting the bonuses of bank employees, particularly the ones involved in creating and selling many of the new and hugely profitable financial derivative products? The banks argued that if they couldn't pay "market" compensation, those people would resign and set up the business within unregulated host companies. In some cases that happened. But in a lot of cases, the banks found that by setting up independent "unaffiliated" companies that would employ the high-flying investment bankers, then simply contracting those same people who used to work for them as "consultants", they were able to escape the bonus restrictions of the new regualtions. In many cases the employees never even left their offices in the bank buildings. It took the banks about a week to figure out a way around the new bonus regulations contained in the regulatory reform bill passed in the last Congress. Like I've said, trying to have bureaucrats and politicians regulate potentially insanely profitable businesses in the financial industry is an intellectual mismatch.

So why don't I like the regulatory reform legislation?
Because it won't work
Because it adds unnecessary costs which will be passed on to the public
And because it will encourage a sense of confidence in new regualtions which is badly overestimated and misplaced.


Some good info here. But I'm still not quite as pessimistic. That new $5 debit card use fee for example. It's just as much a replacement for the usurious interest rates and obscene penalties routinely charged to credit card users which are now regulated. It's no surprise that bankers would have found ways to defeat the employee compensation regs. After all, big bonuses are by far their highest priority. New mortgage info disclosure regs made it harder for my bank to screw me with extra and hidden fees recently when I refinanced a mortgage. I like the revised GFE's and Settlement worksheets. The new regs also make it far more difficult for banks to originate the ridiculous mortgages they wrote before. Say what you will about the state of the rest of the economy, but I still believe the mortgage mess was the single greatest cause of the economic crisis, and the prime reason the downturn has continued. Millions of foreclosures will have a huge ripple effect for years.

So lobbyists notwithstanding, I still think Dodd-Frank was at least a start. Stacking it up against the performance of Congress in 2011, it's a monumental feat.