Gearing Up for a Let Down?

There currently is a lot of activity surrounding implementation of the Dodd-Frank Act. The various agencies are proposing rules, numerous organizations are filing responsive comments and many rules have become final. (For useful resources to help track rulemaking and developments, see here and here.) Major portions of the Act are taking shape (see, e.g., here, here and here); the new Consumer Financial Protection Bureau even has its website up and running.

But there are problems. Although progress is being made, agencies are behind schedule in meeting certain benchmarks, with the first anniversary of the Act quickly approaching. Opposition lobbies continue to form and are gaining strength (see, e.g., here and here), and funding for the Act’s initiatives remains in question (see here, here and here). I can’t help but wonder about the endgame. Can our already understaffed and underfunded agencies enforce these new rules? Are rules on the books without any meaningful enforcement mechanisms effective? If the answer to both of these questions is no, where exactly are we headed?

I am not the first, and certainly will not be the last, to raise these types of questions. Nevertheless, I raise them to consider the alternatives. If the risk management, corporate governance and consumer protection issues highlighted by the recent recession can’t be fixed effectively through the regulatory process, what might work? The obvious alternatives—market discipline and industry self-regulation—have their own problems, which might be as challenging to overcome as the resource issues facing the government.  (For interesting perspectives on these alternatives, see, e.g., here and here.) But I think we should continue to try; we should consider innovative ways to enhance the efficiency of these and other monitoring/disciplining tools that could complement whatever comes out of the regulatory initiatives. The economic problems we face are too big for us to fail.

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4 Responses

  1. Frank Pasquale says:

    Thank you for this very valuable perspective on the issue.

    I think it’s critical for all to realize how hard the banks are trying to assure that the agencies remain “understaffed and underfunded.” Many say “don’t regulate because the agencies are hopelessly behind.” But it’s critical to convey how hard the finance lobby is working to keep them underfunded and in the dark.

    I want to quote just a tiny sample of the stories on this problem:
    “House Republicans are attempting to eviscerate the SEC and CFTC budgets.”
    Lobbyists Opposed To Derivatives Reform Outnumber Reform Lobbyists 11 To 1: Report
    “Obama said the ‘usual army of lobbyists’ had been dispatched to Capitol Hill to weaken provisions of the Wall Street reform legislation currently before the Senate. The bill is supposed to bring more transparency and accountability to all that money sloshing around by requiring derivatives to be traded publicly on exchanges.”
    Budget Cuts, Lobbying Challenge SEC’s Oversight
    “Meanwhile, the companies are lining up to lobby on those rules. For example, more than 260 companies have told the SEC that a new program to pay whistleblowers for tips undermines the companies’ own internal compliance systems, the Journal separately reported today.”
    Finance industry lobby takes up fight against reforms
    “Having failed to block financial reform, Wall Street is now focused on the next best thing: ensuring that the law is loosely interpreted and weakly enforced.”
    “The names listed most frequently in the logs are Goldman Sachs, with 21 meetings with regulators, and JPMorgan Chase, with 23. Jamie Dimon, chairman and CEO of JPMorgan, was among those in attendance when a bank contingent met Oct. 8 with Federal Deposit Insurance Corp. Chairwoman Sheila Bair, records show.”
    “More than 90 percent of the groups that appear in the meeting logs are banks, hedge funds and other big companies that rely on the financial industry, according to the Times’ analysis. Some worry that the imbalance could affect the rules that regulators are drafting to implement the law.”

  2. Michelle Harner says:

    Frank: Thank you so much for highlighting these quotes and additional resources; they really drive home the point. I think we need a balanced approach among regulation, market discipline and an industry-driven compliance culture. But as you point out, the first component of this balanced approach is in jeopardy and arguably has been for some time. Although many factors contributed to our most recent recession, regulatory failure is certainly among those factors. Thank you again for the comment. Best regards, Michelle.

  3. Maryland Conservatarian says:

    So a government agency is complaining that it is too under-funded to meet the mandate of the Dodd-Frank Act; before we get all worked up about that and just throw money at the problem, let’s make sure we truly understand the Act and what it entails. One Chris Dodd offered some insight on this very matter: “No one will know until this is actually in place how it works.”

    Of course Democrats could also have rammed through Sen. Schumer’s proposal (Sept. 2009) to have the SEC and CFTC be self-funded…and perhaps the “regulatory failure” wasn’t just a lack of resources but also that the available resources were mis-directed…for instance, perhaps they were instead surfing porn sites (Report: April 2010).

    …and Professor Pasquale – in ref. to the bit about lobbyists and derivatives in your comment; let’s also remember that when push came to shove in the final moments before the Act was agreed to, the main lobbyists successfully pressuring to thwart then-Sen. Lincoln’s proposal to get big banks out of the derivatives game were Democratic Congressmen (mostly from NY).

  4. Ken Rhodes says:

    “the main lobbyists successfully pressuring to thwart then-Sen. Lincoln’s proposal to get big banks out of the derivatives game were Democratic Congressmen (mostly from NY).”


    In what alternate universe are the legislators on one side or the other of a divisive issue considered “lobbyists?”