It's been nearly five years since the financial crisis began. The U.S. economy is slowly recovering, the stock market is reaching new highs, home prices are rising and banks are reporting record profits again. Everything is good, right?
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Well, if you're a rulemaker, you still have a lot of work left to do. President Barack Obama signed the 848-page Dodd-Frank Act into law on July 21, 2010, after a long partisan fight in Congress. The law was designed to prevent another meltdown of the financial sector, but only a fraction of those rules have been put in place.
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Meanwhile, it's not like the banking industry has been scandal-free. Just look at last year:
- In March 2012, the nation's five largest mortgage servicers—Bank of America, J.P. Morgan Chase, Wells Fargo, Citigroup and Ally Bank—agreed to a $25 billion settlement with the Justice Department, the Department of Housing and Urban Development and 49 state attorneys general to address loan servicing and foreclosure abuses between 2008 and 2011.
- In April and May 2012, J.P. Morgan Chase, once considered the most prudent of the big banks, reported a loss of more than $6 billion after a trader, nicknamed the London Whale, made bad bets on credit default swaps. (Yes, those are the same financial instruments that led to insurance giant American Insurance Group needing billions in bailouts from the Federal Reserve and Treasury Department.) J.P. Morgan Chariman and CEO Jamie Dimon said the incident was "the stupidest and most embarrassing situation I have ever been a part of." As a result of the trade, Dimon's annual pay was reduced from $23 million to $11.5 million, people connected with the trade and the bank's risk management department were fired, and Congress held hearings.
- In June 2012, British bank Barclays settled claims that it manipulated a key interest rate—the London interbank offer rate—used to determine how much you pay for mortgages, car loans, student loans and other loans. Barclays paid more than $450 billion to U.S. and U.K. regulators to end the disputes and the bank's chairman and chief executive resigned.
What Work Is Left to Do?
Almost three years after Dodd-Frank became law, a majority of the rules required by the law have not been implemented or proposed.
Only 153 rules of the 398 total required rules—less than 40%—have been finalized as of June 3, according to law firm Davis Polk & Wardell, which tracks the progress of the Dodd-Frank Act. More than 60% of a total of 279 Dodd-Frank deadlines were missed and 128 rulemaking requirements have not yet been proposed.
Sheila Bair, former chairwoman of the Federal Deposit Insurance Corporation during the financial crisis, says the Dodd-Frank Act has ended taxpayer-funded bailouts, but more work is needed by regulators to prevent bad bank behavior. She opposes legislation in the House of Representatives that aims to repeal part of the Dodd-Frank Act related to derivatives trading before regulators have even proposed rules for that trading.
"[R]egulators leave the door open to this kind of industry-driven legislative mischief when they fail to finalize the rules and leave these issues dangling," Bair told The Washington Post. "In an area as complex as this, I wish Congress would at least wait for the regulators. But the regulators need to use their authorities."
Rules regarding how much capital banks need to have in reserve and the type of trading financial institutions can do are the main sticking points banks have with Dodd-Frank. These rules can diminish the profitability of banks and thus are the types of rules that regulators are having a hard time putting into place.
The Volcker rule—named after Paul Volcker, former chairman of the Federal Reserve, who supports the proposal—is a prime example. The rule would ban proprietary trading by big banks. Trading is a highly profitable part of the banking business, but trading losses by big banks contributed to the financial crisis and resulted in bailouts.
The Federal Reserve and other regulators have been negotiating over the Volcker rule with the banking industry since Dodd-Frank became law. For his part, Volcker says there are too many cooks in the kitchen—in other words, too many U.S. regulators.
"The simple fact is the United States doesn’t need six financial regulatory agencies," Volcker told the Economic Club of New York in a May 29 speech. "It is a recipe for indecision, neglect and stalemate, adding up to ineffectiveness. The time has come for change."
The banking industry has used its clout and money to block or waterdown Dodd-Frank rules it doesn't like.
Federal Reserve Governor Daniel Tarullo said in an interview with CNBC that he is "hopeful" that the Volcker rule will be finished this year.
While Dodd-Frank reforms have slowed when it comes to the banking sector, the law has had some successes. The Consumer Financial Protection Bureau is up and running. And the Financial Stability Oversight Council, established by Dodd-Frank, recently proposed rules for more oversight of "systemically important" companies, such as AIG, General Electric and Prudential Financial, that could pose a threat to the banking system.
Banks Standing in the Way
Banks have done well while regulators deal with delays. U.S. bank earnings rose in the first three months of 2013 to the highest level in nearly five years, according to the FDIC. Meanwhile, lending to consumers fell in most categories.
And the banking industry has used its clout and money to block or waterdown Dodd-Frank rules it doesn't like.
Consider the fact that the financial sector is the largest source of campaign contributions to federal candidates and parties, according to the Center for Responsive Politics. The sector, which includes commercial banks, insurers and real estate and securities firms, gave more than $658 million in the 2011-2012 federal election cycle. Commercial banks alone spent more than $40 million during the last election cycle.
It's not just the money, but the access to lawmakers and regulators it can buy. A study from the Sunlight Foundation found that the top 20 banks met 1,298 times with regulators, such as the Treasury Department, the Federal Reserve and the Commodity Futures Trading Commission, about Dodd-Frank from July 2010 to July 2012, while groups favoring stronger rules met just 242 times with the same regulators.
Banking industry lobbyists have also swarmed Washington. According to an analysis by The Nation, lobbyists opposed to Dodd-Frank outnumber lobbyists supporting stricter rules by a ratio of 20 to 1.
"They’ve definitely had success in delaying and watering down rules," Marcus Stanley, policy director for Americans for Financial Reform, which favors tougher Dodd-Frank rules, told The Hill.
Which means when—or if—the remaining rules will be implemented is anyone's guess.
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