He’s gotten more done in three years than any president in decades. Too bad the American public still thinks he hasn’t accomplished anything.
In addition to resolving the immediate crisis, the administration tried to insure against a repeat of it by issuing a plan to expand federal regulation of the financial markets, a plan that ultimately became the Wall Street Reform and Consumer Protection Act, otherwise known as Dodd-Frank. The new law, which passed with almost no GOP votes, has been scathingly criticized since it first appeared in the House— by conservatives for being a big-government power grab and by liberals and various academic experts for being too weak.
But as Michael Konczal of the Roosevelt Institute explains, the new law parallels and expands upon the great achievements of New Deal financial regulation. Much as the Securities Act of 1933 and the Securities Exchange Act of 1934 mandated transparency in the securities markets and created the SEC to punish fraud, Dodd-Frank creates a new Consumer Financial Protection Bureau (CFPB) to do the same for everything from mortgages to credit cards. The Securities Exchange Act forced stock trading onto exchanges and mandated that traders have sufficient collateral. Similarly, Dodd-Frank pushes financial derivatives into clearinghouses and exchanges. The 1933 Glass-Steagall Act forced the separation of commercial banks from the more speculative activities of investment banks. The new so-called Volcker Rule in Dodd-Frank limits the ability of banks to trade securities for the firm’s own profit. Glass-Steagall also created the FDIC to monitor commercial banks and take them over if they get into financial trouble. Dodd-Frank gives the FDIC “resolution authority” over the “too big to fail” financial behemoths so that they too can be monitored and taken over if necessary.
At each stage as Dodd-Frank has moved through the legislative process, from House to Senate and now to the agency level for implementation, liberals have sounded the alarm that the insufficiently stringent law was liable to get progressively weaker as industry lobbyists jam it full of caveats and exemptions. Yet while the law does now include its fair share of loopholes (especially in the Volcker Rule), what’s surprising is that the measure has in general gotten tougher, not weaker, over time—often at the behest of lawmakers who wanted stronger measures than did Geithner. The Senate adopted the Collins amendment—a set of rules drafted by Sheila Bair’s FDIC that imposes tough capital requirements on banks, bank holding companies, and systemically risky nonbank financial institutions like hedge funds, limiting their ability to make the kind of highly leveraged and risky trades between each other that contributed mightily to the financial crisis. Thanks in part to the prodding of Gary Gensler, the Obama-appointed chair of the Commodities Futures Trading Commission, the language on regulating derivatives got much stronger in the Senate version of the bill, and since then the CFTC has written a reasonably strong and comprehensive set of rules and regulations to implement the law.
Washington narratives tend to get set early and resist new anomalous facts. So it is with the financial crisis. The initial take was that Dodd-Frank is weak tea and Obama caved to Wall Street. This view has persisted despite accumulating evidence to the contrary. Confidence Men”, Ron Suskind’s scathing critique of the administration’s handling of the financial crisis, opens with Obama in a Rose Garden address making clear that he would not be nominating Elizabeth Warren to head the CFPB. The anecdote is meant to encapsulate the administration’s general political spinelessness. Today, the CFPB is headed by the widely admired Richard Cordray, placed there in a nervy recess appointment by Obama, and Elizabeth Warren is leading the polls in her race to win back Ted Kennedy’s Massachusetts Senate seat from the Republicans—hardly a bad outcome for the cause of financial justice.
True, the largest banks are now bigger than they were before the crises thanks to emergency mergers engineered by the Bush administration. But as Obama’s former economic adviser Austan Goolsbee told journalist Michael Hirsh, “The most dangerous failures—Bear Stearns, Lehman—were not even close to the biggest. You could have broken the largest financial institutions into, literally, five pieces and each of them would still have been bigger than Bear Stearns. The main danger to the economy was interconnection, not raw size.” With the capital requirements of the Collins amendment, the Volcker Rule, and the forcing of derivatives into clearinghouses, Dodd-Frank goes a long way toward dealing with the “interconnection” problem. The law’s “resolution authority” also gives regulators the ability to spot overly risky behavior by big banks early and to shut them down if they get into trouble. And the behemoths now have higher capital requirements than do smaller banks, another hedge against risk and an incentive for business to move from the former to the latter.
True, the bank executives on whose watch the crisis happened got lavish bonuses on their way out the door, and the bonuses continued to flow even as the sector was getting bailed out by Uncle Sam—a dispiriting and infuriating phenomenon to many Americans, liberal and conservative. Yet it’s also true that bank shareholders were forced to take a “haircut,” since the new private investment that flowed into banks thanks to Geithner’s recapitalization plan greatly diluted the value of their stock. That has provided at least some market discipline to counteract the “moral hazard” dilemma of government bailouts sending the signal that there is no penalty for recklessness. More importantly, by reducing banks’ ability to leverage capital and make risky trades with other people’s money, Dodd-Frank threatens the honeypot of the huge profits that have been the source of all that outsized compensation. And as a fallback, the law gives government the power to rewrite bank executive compensation packages if those packages are seen as incentivizing overly risky behavior—a power regulators have already begun to exercise. Finally, after years of pussyfooting around, the administration, prodded by aggressive state attorneys general, has finally launched a major push to investigate and prosecute possible criminal misconduct in the financial collapse.
How, then, will historians judge Obama’s handling of the financial crisis? That’s hard to say definitively because so much depends on follow through—specifically, on whether Obama has a chance to follow through by winning a second term. (If he isn’t reelected, the Republicans have vowed to gut Dodd-Frank.) Will the rules that regulators are now writing to implement Dodd-Frank be tough and smart enough? Will they be enforced? Will federal prosecutors bring some bankers to justice? Can the toxic assets still on banks’ books be disposed of without causing another banking collapse?
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