How Wall Street Defanged Dodd-Frank
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A ‘Hydra-Headed Monster’
Sadly, part of this story involves the reluctance of the left, and Democrats generally, to rally around a bill that failed to deliver everything reformers wanted. Lisa Donner can readily tell you everything that Dodd-Frank doesn’t do. She’s heard her share of grumbling as executive director of Americans for Financial Reform, a coalition of 250 consumer, labor and civil rights organizations that joined forces during the debate over the bill. Among the criticisms: it doesn’t reinstate Glass-Steagall, the Depression-era law—tossed in the 1990s—that walled off the banks in which ordinary people keep their savings from high-risk investment banking; no banker will stand trial because of the bill; nor has it provided compensation to a single family who lost their home in the subprime disaster.
But if it’s possible to love a piece of legislation, Donner is smitten with Dodd-Frank. She sums up the CFPB as “astonishing” and deems the bill’s regulation of derivatives “very important”; likewise its requirement that a bank hold on to at least 5 percent of any portfolio it securitizes unless it’s made of the safest plain-vanilla mortgages—a policy that could have gone a long way toward preventing the worst of the subprime calamity. She lists several more meltdown-related provisions that would give regulators “potentially very powerful tools”—if they ever take effect.
Plus there are many hidden gems for progressives buried in Dodd-Frank. There’s an anti-bribery clause requiring companies to disclose payments to a foreign government when they acquire drilling and mining rights, and another requiring US corporations using “conflict minerals” to ensure that they were not mined in the Democratic Republic of Congo, which is being ravaged by those warring over tin and tungsten. Another provision caps the fees a bank can charge for debit-card transactions. “There’s so much in there we could never have gotten on a single up-or-down vote,” Donner says.
And yet, this landmark legislative achievement went virtually unmentioned on the 2012 campaign trail. If President Obama chose not to trumpet Dodd-Frank so as not to alienate deep-pocketed backers on Wall Street, the strategy didn’t really pay off: Mitt Romney’s top six donors were all financial institutions—including Goldman Sachs and JPMorgan Chase, which had been among Obama’s top ten donors in 2008 but fell off that list in 2012. Organized labor, meanwhile, perhaps distracted by its own frustrated legislative priorities, never mounted a full-court press in support of the legislation either. The law’s passionate defenders consist of maybe a few dozen advocates, totally overwhelmed by the lobbying and legal muscle on the other side.
The mismatch was vividly on display one day last fall, when Richard Cordray, the CFPB’s director (at least until his recess appointment expires at the end of this year), testified before the Senate Banking Committee. The hearing room was thick with power-suited lobbyists, well-groomed and coiffed, each wearing shoes that probably cost more than the typical American worker takes home in a week. And then there was US PIRG’s Ed Mierzwinski, bearded and bespectacled, wearing tan khakis with a conspicuous stain on one leg. His off-the-rack blue sport coat was paired with a too-wide tie slightly askew at his neck. Earlier, over breakfast at the low-budget Capitol Hill cafeteria, Mierzwinski told me that as US PIRG’s point man on financial reform, he tries to attend every congressional hearing related to the issue, but he simply can’t make them all. Records maintained by OpenSecrets.org show that US PIRG and the Consumer Federation of America, two of the more prominent consumer advocacy groups on Capitol Hill, have spent a combined $1.1 million on lobbyists over the past three years—in contrast with the more than $350 million spent by the Chamber of Commerce during that same time period, or the $25 million laid out by the American Bankers Association.
“How do you compete when one side is this hydra-headed monster that can devote unlimited resources to killing, gutting or otherwise weakening financial reform?” asks Dennis Kelleher, himself a former corporate lawyer who now runs Better Markets, a small nonprofit pushing for stronger financial regulations.
And how can you compete, asks Bart Chilton, a former Agriculture Department official under Bill Clinton who is now a CFTC commissioner, with the “full-meal quadrakill deal”? Chilton laid out the industry’s four-pronged offensive strategy last year at a conference of consumer advocates. Phase one is the legislative effort to kill the bill before it has a chance to pass. Phase two consists of pushing Congress to defund regulatory agencies like his. The third and fourth phases, said Chilton (who has a speaking style that calls to mind no one so much as Ross Perot), is reserved for players like the financial industry—“the class of folks who have some buckaroos.” Phase three began immediately after passage of Dodd-Frank, when those squadrons of regulatory lawyers descended on people like Chilton.
And if a regulator ever succeeds in publishing a rule, Chilton says, then brace yourself for phase four, or what he calls ”Defcon 4”: the bankers take the regulator to court, hiring the likes of Eugene Scalia, who has carved out a lucrative niche blocking such rules on technicalities. Kelleher calls them “sore-loser suits,” but there is no denying their effectiveness: one of Scalia’s lawsuits can bollix up a rule indefinitely, if not get it thrown out entirely. Scalia had already filed six Dodd-Frank-related suits against the government by the end of 2012—and he only smiled when I asked him if he had plans to file more. In April, he filed a seventh.
Three years after Dodd-Frank was passed, only 148 of the 398 rules requiring action by regulators have been finalized, and draft versions have yet to be submitted for half of the remainder. Sheila Bair, head of the Federal Deposit Insurance Corporation between 2006 and 2011, is among those outraged at that record. Bair, a lifelong Republican who was picked by President George W. Bush to head the FDIC, is unhappy that Congress wrote such an overly complex law. She also wishes that the regulators would act more boldly. But the main culprit, she says, is the resistance to reform posed by an industry with enormous firepower. “At the end of the day,” Bair says, “the regulators are outgunned.”