The 2010 Wall Street Reform and Consumer Protection Act is “a failure” that did not remove protections for “too-big-to-fail” banks and whose authority is a “paper tiger,” according to panelists at a conference on large financial institutions Wednesday.
While the mix of conservative and liberal speakers at an American Enterprise Institute discussion differed sharply on how to restore the country’s rigid financial industry, all agreed on one point: The 2010 law — commonly known as “Dodd-Frank” after its co-sponsors, then-Sen. Chris Dodd and then-Rep. Barney Frank — has utterly failed in its purpose of reducing the systemic risk posed by enormous financial institutions.
Former Democratic Sen. Ted Kaufman of Delaware called the “orderly liquidation authority” established by Dodd-Frank a paper tiger, noting that it is inadequate to handle the liquidation of insolvent financial institutions. Kaufman blamed heavy lobbying by financial firms — which he said accounted for more than 90 percent of the political activity around the passage of the 848-page bill — for the ineffective regulation of too-big-to-fail (TBTF) financial firms.
Peter Wallison, an AEI fellow in financial policy studies, seconded the view that the 2010 law is a bust. Since TBTF banks still have funding advantages over smaller competitors and endanger the stability of the financial system, “then we have to think that the Dodd-Frank Act was a failure,” Wallison told a packed room at the conference, which was entitled “Too big to tolerate? How to right-size America’s giant banks.”
Nevertheless, Wallison differed sharply with the other speakers in blaming regulation, instead of a lack of it, for the instability. He pointed to the savings and loan crisis of the 1980s and the 2008 bank bailouts, both of which occurred in heavily regulated industries. “The orderly liquidation authority is the cause of the funding advantage” enjoyed by large banks, he said.
Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., agreed with Kaufman’s view that big banks need to be broken up — either through a renewed version of the Depression-era Glass-Steagall Act (which separated retail and investment banking, and which was repealed in 1999) or by adopting a new bill on capital reserve requirements co-sponsored by Democratic Sen. Sherrod Brown of Ohio and Republican Sen. David Vitter of Louisiana.
Wallison countered that, “It is not sensible policy to wring our hands about TBTF while creating the conditions for TBTF.”
Asked why big banks can’t simply be allowed to fail or be liquidated by the Federal Deposit Insurance Corp., Kaufman told The Daily Caller that the size and complexity of large institutions endangers the whole economy. He pointed to the Troubled Asset Relief Program (TARP), which he argued prevented a “collapse” in the economy. “The whole financial system would have gone down the drain in 2008,” Kaufman said.
TARP, which provided $700 billion in taxpayer money to large financial institutions, was adopted in 2008 despite massive popular opposition. In the nearly five years since, the United States has experienced the longest period of economic stagnation since the Great Depression, with unemployment never falling below 7 percent and the labor force participation rate dropping steadily to its current 64.3 percent. New-business creation has also declined sharply and job creation has steadily lagged behind population growth. Median net worth fell by nearly 40 percent during and after the recession, according to the Federal Reserve [pdf].
TARP does, however, appear to have succeeded in exacerbating the TBTF problem. Between 2008 and 2011, the largest banks increased their share of the market by more than 5 percent and now control 72 percent of U.S. bank deposits. Banks in nearly all other asset classes have lost market share.
Nevertheless, Kaufman pointed to two masssive 2008-era mergers — the takeover of Washington Mutual by JPMorgan Chase and Wells Fargo’s absorption of Wachovia — as successful liquidation examples, in which a big bank “could come in and buy the whole thing.”
Wells Fargo and JPMorgan Chase are now the largest and second largest U.S. banks by market capitalization, respectively.
Though he blamed special interests for the failure of Dodd-Frank, Kaufman insisted that proper regulation can solve the TBTF problem. When asked by an audience member how this was possible, he blamed the financial industry for “kicking the can down the road.”