It is no secret that it has become a nightmare for regulators to implement many aspects of the 2,000-page document that has become Dodd-Frank, the most ambitious piece of legislation aimed at the financial system since the Great Depression. A recent investigation by ProPublica, authored by a Pulitzer-winning duo, shows just how behind implementation on the Volcker Rule, the regulation of derivatives, and the regulation of credit rating agencies, really is.
Ten months since President Barack Obama signed Dodd-Frank into law, regulators have missed all 26 deadlines supposed to be met by April. According to ProPublica’s Jesse Eisinger and Jake Bernstein, “Dodd-Frank requires 387 different rules from 20 different regulatory agencies. The Byzantine, tedious rulemaking process has occasionally pitted regulator against regulator and proved a bonanza for lobbyists.”
While regulators, responsible for designing rules to implement laws “laid out in principle” only, struggle with insufficient budgets and political pressure from both sides of the aisle, lobbying has exploded. According to the Center for Responsive Politics, the CFTC, the Fed, the FDIC, and the Office of the Comptroller of the Currency (OCC) have seen more lobbying activity in the first quarter of 2011 than at any other moment since Obama became president. The SEC saw it’s second most active month. (Read Shiller On Dodd-Frank: ‘A Financial Crisis Is A Thing Not To Be Missed’).
Pertaining to the implementation of the law, Eisinger and Bernstein signal out three major areas for concern: the Volcker Rule, Derivatives regulation, and Credit Rating Agency regulation.
The Volcker-Rule, which bars federally insured banks from trading on their own account, or proprietary trading, has been delayed by “haggling about complicated, but vitally important definitions.” Specifically, the OCC has been pushing for banks to have “wider latitude in making trades to balance and manage their assets and liabilities.” Julie Williams, OCC agency counsel, has been pin-pointed Paul Volcker himself as trying to weaken the rule, a concern echoed by Barney Frank and others.
While the law stipulated that banks should invest in Treasury securities in order to manage their books, the OCC has pushed for banks to be allowed to be able to trade other securities as well. “Critics fear that adding the provisions sought by the OCC would mean banks could make almost any trade and claim an exemption, rendering the rule meaningless,” read the report.
In terms of derivatives, Dodd-Frank stipulates exchanges should be used to render markets more transparent and regulated. Yet, opposition from even previously supported legislators has surfaced.
The Department of the Treasury, headed by Tim Geithner, has proposed that some foreign exchange derivatives “be exempted from the requirement that derivatives trade on exchanges.” From the report: Critics fear that adding the provisions sought by the OCC would mean banks could make almost any trade and claim an exemption, rendering the rule meaningless
Other opposition came from New York lawmakers, including Senators Chuck Schumer and Kristen Gillibrand, who warned the law could impose “significant competitive disadvantages “ on U.S. financial institutions. Even the SEC, suggesting that derivatives be traded on “swap execution facilities,” is pushing for less regulation.
On credit rating agencies, it’s the SEC, again, which is backtracking. Because of “budget uncertainty,” the SEC has delayed staffing a new office to oversee credit rating agencies, and instead added “personnel to existing offices to perform examinations on the rating agencies.”
More importantly, the SEC has gone back on previous attempts to make credit agencies legally liable for their ratings. While credit ratings have become an integral part of the financial system, making their way to valuation formulas and even legislation regulating pension fund investments, agencies have been off the hook for massive blunders, including their substantial responsibility in the 2007-2008 global financial crisis. The SEC has “indefinitely tabled provisions” to hold them accountable.
No one expected Dodd-Frank to be an easy law to implement. At the same time, attempting to regulate the whole financial industry through one piece of legislation appears as an impossible task. In the words of Eisinger and Bernstein, “emerging roadblocks reinforce a fear that Dodd-Frank, which was intended to touch on almost every aspect of the American financial system, may never provide the sweeping reform it promised.”
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