By late spring, Barney Frank’s committee in the House and Chris Dodd’s committee in the Senate had each completed a financial-reform bill, and they were similar enough that legislators were confident they would be able to reconcile them in a legislative compromise acceptable to both parties. And they didn’t waste any time making it happen.
On Friday, June 25, just as day was breaking, weary lawmakers emerged from a large conference room in the Dirksen Senate Office Building after twenty straight hours of negotiation. At the front of the crowd were Dodd and Frank, rumpled but smiling, with the announcement that financial reform was a reality. The newly named Dodd-Frank bill had passed committee and would move on for a vote in both chambers.
Frank, who had got some but not all of what he wanted, was ebullient in the media. “Uncertainty is the great enemy of markets, and we’ve now provided a framework of certainty,” he boasted.
The primary elements of the bill were the following:
The creation of a ten-member Financial Services Oversight Panel, composed of the Treasury secretary, the Federal Reserve chairman, a presidential appointee with insurance expertise, and heads of regulatory agencies and the new consumer protection bureau.
The Consumer Financial Protection Agency would offer a number of protections on traditional financial products, such as checking accounts and credit cards.
Greater oversight and transparency on the $615 trillion derivative market, stipulating that high-risk derivatives be traded on public exchanges and be insured by third-party clearinghouses.
A modified version of the Volcker Rule, which would allow banks to invest up to 3 percent of their equity in proprietary trading.
New oversight capability for the Federal Reserve, designed to prevent future collapses, particularly regarding financial entities dubbed “too big to fail,” including an orderly liquidation process for ailing firms.
New rules on executive pay that would require compensation to be set by independent directors and approved by shareholders.
Hefty taxes, totaling around $20 billion, for financial firms to pay for some of the bill’s provisions. It was unclear how these taxes would be calculated, but this was one of the most controversial aspects of the bill.
The optimism of the dawn agreement began dissipating almost immediately. In the early hours of Monday, June 28, Senator Robert Byrd, ninety-two, died, robbing the Senate of a critical sixtieth vote on the bill. The timing of Byrd’s passing was reminiscent of that of another Senate lion, Ted Kennedy, whose death earlier in the year made the passage of President Obama’s health care bill uncertain. As a plan was under way for Byrd’s body to lie in repose on the floor of the Senate, ironically, it was Kennedy’s successor, Senator Scott Brown, one of a few Republicans who had been prepared to vote for the bill, who balked. Brown announced that he would no longer support the bill because of the $20 billion tax against large banks that was added in the final days of negotiation. Democrat Russ Feingold also said he would vote against the measure. Dodd’s committee hurriedly regrouped to revisit the item, dropping the provision and salvaging Brown’s support.
On July 15, the Senate passed the financial reform bill with a 60–39 vote tally. As President Obama prepared to sign it into law, the question was, what would the impact of the bill be? I spoke with many experts and began to piece together an idea of what impact it would have. Investors were initially encouraged that it was not as strict as many people had feared, particularly when it came to proprietary trading.
Some observers were skeptical about instituting yet another layer of bureaucracy with the Consumer Financial Protection Agency. Richard Bove, an analyst with Rochdale Securities, offered a reality check. “So now we’re going to do a bunch of things,” he said. “We’re going to slap restrictions on the pricing in the credit card industry. We’re going to slap restrictions on fees for insufficient funds or check bouncing. It’s going to put the consumer in a much more difficult position, since the banks can’t live with the rules the way they’ve been established.” Bove predicted that as many as 14 million checking accounts, representing 10 million customers, might be closed—in effect, harming the very people the bill was supposed to help.
Another financial expert voiced concern with the limitations on derivatives trading, telling me, “This provision would require bank-holding companies to move their derivatives businesses out of their best capitalized, most regulated, and most creditworthy subsidiaries. This is the precise opposite of what the other derivatives provisions are intended to achieve—to reduce systemic risk by imposing capital requirements for derivatives dealers and major participants, increasing regulation, and reducing credit risk. The provision would put U.S. banks at a tremendous competitive disadvantage to foreign banks, which would be able to continue to operate their derivatives businesses out of their subsidiary banks outside of the United States” Indeed, a source of mine at Deutsche Bank had been practically giddy with the possibilities. “If the American government prevents derivative activity at banks, we’re going to clean up,” he said.
Banks were also trying to anticipate what effect the new capital requirements would have on them. The issue wasn’t just the congressional package, but also new international rules, imposed as part of the Basel Accords, scheduled to take effect in 2012. The new rules would require much greater capital levels, which could have the effect of restricting lending. The thinking was, if a bank was worried about keeping capital high, it might be reluctant to lend.
I spoke with Vikram Pandit at the International Economic Forum in Russia in June 2010, and he told me, “I’m concerned about the Basel rules, not so much because of the impact they will have on us or most American banks. I think American banks are generally in very good shape, and we [Citigroup] certainly are as well. But the bigger impact is the amount of liquidity and
