Dodd-Frank: Two Years Later

Obama financial regulation under constitutional fire, hurting growth, critics say

July 23, 2012

Two years after President Obama signed the 848-page Dodd-Frank Wall Street Reform and Consumer Protection Act, only a third of the nearly 400 required regulations have been finalized, and critics say the ensuing uncertainty is retarding economic growth.

According to a July 18 report from law firm Davis Polk, 123 of the 398 rules required by Dodd-Frank have been finalized, but 141 rules have not been proposed at all.

Regulators have missed more than 60 percent of the stipulated rulemaking deadlines, the report states.

"Dodd-Frank was run through Congress with very little debate [in 2010]," said John Berlau, a Senior Fellow at the Competitive Enterprise Institute who focuses on the relationship between public policy and entrepreneurship and investing.

Dodd-Frank was a hastily crafted response to the 2008 financial crisis, Berlau said, full of requirements that legislators did not take the time to read and regulators were unprepared to meet.

Critics of the financial reform have characterized Dodd-Frank as, "Too big not to fail," and have cited the high cost of complying with new regulations as a potential drag on the economy.

Dodd-Frank has cost the finance industry $7 billion in compliance costs alone since its passage by mandating thousands of pages of regulatory paperwork, according to a July 17 Financial Services Roundtable report.

The Financial Services Roundtable report also estimated that one key provision of Dodd-Frank, the Volcker Rule, could cost American businesses $315 billion and increase annual borrowing costs by $43 billion.

The Volcker Rule bans proprietary trading and was supposed to be implemented on July 21, but an early draft of the rule was heavily criticized, and the final draft remains unwritten.

Regulators and officials have speculated that the final version of the Volcker Rule may be issued in September, two months after the implementation deadline.

"Dodd-Frank was a legislative massacre," said Peter Wallison, a financial policy expert at the American Enterprise Institute. "If the Republicans win in November, repealing Dodd-Frank should be the first thing they do."

Wallison said the worst part of Dodd-Frank is Title I, which allows the Financial Stability Oversight Council to designate "systemically important financial institutions" that are too big to fail, opening the financial system to regulatory favoritism and potentially obligating the federal government to more bank bailouts.

Multiple lawsuits have been launched against Dodd-Frank, each challenging specific provisions within the reform because of a severability clause stipulating that if one part of the bill is declared unconstitutional, the rest of the legislation remains in place.

"No single big lawsuit will take down Dodd-Frank," said Berlau, "but the death of a thousand cuts could work."

Oxfam America filed suit against the SEC in May over delayed energy industry regulations.

The State National Bank of Big Spring, a Texas community bank, filed suit last month, challenging the constitutionality of the Consumer Financial Protection Bureau, a Dodd-Frank creation that the lawsuit argues gives regulators unlimited power to punish lenders.

Congressional Republicans are using Dodd-Frank’s two-year anniversary as an opportunity to go on offense, holding a series of House Financial Services Committee (HFSC) hearings in which financial industry leaders have been largely critical of Dodd-Frank’s potential consequences.

At the July 10 hearing, HFSC Chairman Spencer Bachus (R., Ala.) said, "The law was not intended to hinder the ability of American businesses to utilize the capital markets or to unduly hamper the ability of consumers and businesses to obtain credit, create jobs, mitigate risk, and thrive. Yet two years after its passage, many argue that Dodd-Frank is having precisely these negative effects."

The principal authors of the financial reform, Chris Dodd and Barney Frank, refused to defend their legislation.

Dodd (D., Conn.), who served as the Chairman of the Senate Banking Committee until retiring in 2010, and now serves as head of the Motion Picture Association of America, did not return a request for comment.

Dodd was involved in the "Friends of Angelo" program, receiving preferential treatment from Countrywide Financial as he refinanced two of his homes.

Frank (D., Mass.), who currently serves as the Ranking Member of the HFSC, was also unavailable for comment.

While defending Dodd-Frank last year, Frank said that his financial reform created "death panels for big banks."

"When we do the Volcker Rule and some of those other things, and we say, ‘Well the bank can’t do these kinds of activities,’ and the financial institutions say, ‘Oh my God, maybe there will be less of them,’ the answer is, ‘Okay, good,’" said Frank.

Frank did not attend the HFSC hearings on July 10 and 11.