10 Year Review of the Dodd-Frank Wall Street Reform and Consumer Protection Act

Yesterday marked the tenth anniversary of President Obama signing the Wall Street Reform and Consumer Protection Act, more commonly known as the Dodd-Frank Act in honor of its two authors, Senator Christopher Dodd and Representative Barney Frank. To mark the day, the Better Markets nonprofit advocacy group sponsored a virtual conference in partnership with George Washington University. The speakers at the virtual conference included former President Obama, former Senator Dodd, former Representative Frank, Senator Elizabeth Warren, and others. As a founding member and former Chief Operating Officer (COO) of the Consumer Financial Protection Bureau (CFPB) that was created from Dodd-Frank, I was invited to participate in the virtual conference. Here were the highlights I recorded from the first few speakers.

President Obama shared these thoughts in his opening address:

• The country was on the brink of another Great Depression when he was inaugurated. Banks were collapsing and credit was freezing up, resulting in businesses closing and jobs disappearing.
• His administration was focused on addressing the crisis in the short term and preventing financial crises in the future by reforming Wall Street by removing excessively risky and predatory behavior from "too big to fail" banks.
• Entrenched and well-funded opposition tried to block reform then and they are still working to undo the reform since. They have had some successes, but the Dodd-Frank Act remains largely intact.

John S. Reed - former Citicorp/Citigroup CEO from 1984-2000 who started at Citibank in 1965 - gave a personal history of the evolution of the financial services industry in the USA. It was a fascinating, sweeping, personal recount from someone who was an important player through several decades.

• In the 1960s, banks were mostly regional not national. It was a slow and steady business. The focus was on satisfying customers and getting a reasonable return for doing so. The industry was not exciting nor exceptionally well-paid, but it was an honest business.
• In the 1970s and 80s, innovation in banking included credit cards and ATMS.
• The 1990s saw a big change when "greenmail" emerged and activist investors got aggressive in taking controlling stock stakes to exert influence on bank management to more aggressively increase returns to shareholders. This began a shift in bank management focus from customer satisfaction to shareholder return. Executive compensation started to grow too, as investors didn't care about it as long as shareholder returns grew.
• Product complexity also increased in the 1990s, including with derivatives. In 1995, there was an important case that should have been a warning bell about the dangerous impact of predatory practices and product complexity by banks. Bankers Trust was recorded talking about the "rip off factor" of one of their derivative products that was profitable for the bank but a bad product for customers. A product like this would never have made it to market in the 1960s-70s.
• Since the 1990s, the market and products got more complex. Mortgage backed securities emerged. Compensation started to increase rapidly too, turning banking into a very high paid industry.
• The 1998 bailout of Long Term Capital Management should have been another warning for regulation, especially before the 2007-08 crash. It was a hedge fund that got too complex and got into trouble. The Fed had to come in to refinance and liquidate it. This should have been a warning shot that financial product complexity was getting too hard to regulate.
• By the 1990s, major banks were getting very involved in trading. It was because large customers put a lot of pressure on banks to take them to market. Banking got pushed into the idea of breaking down regulations from the Glass-Steagall law. Banks started looking like investment banks. At Citibank, Reed even merged with Travelers to keep up. All major banks started big trading activities. Commercial banks "got way out over their skis" according to Reed. They didn't have the management in place to understand trading and how to manage traders. The splicing and dicing of loans into new complex financial products was very dangerous. You started to see 40 to 1 liquidity ratios.
• Dodd Frank emerged after the 2008 meltdown to correct for these mistakes. Making banks have a "living will" is a worthwhile exercise because it forces managers at banks to think through how they would go through a bankruptcy. It forced them to take this type of planning seriously. Stress tests are important. The Volker Rule was very important because it addressed the fundamental conflict of interest banks had by trading for their own accounts while also trading for customers.

Dennis Kelleher of Better Markets summed up John Reed's history of the industry by saying that the Dodd-Frank Act was key to make sure the COVID-19 pandemic didn't trigger another financial meltdown.

Former Senator Chris Dodd and former Representative Barney Frank spoke next as part of a panel moderated by Stephanie Ruhle of NBC and MSNBC. Here were the key points they shared.

Former Senator Dodd shared these observations:

• TARP came shortly before the 2008 election. He was in meeting where Federal Reserve Chair Ben Bernacke said the world financial system would melt down if they did not approve a bailout. He realized he had to push the bailout through but it made him want to do reform too to make sure that never happened again.
• By 2010, lots of public memories of the financial bust had faded. The Obama Administration had prioritized the Recovery Act and the Affordable Care Act as legislative priorities before reform of Wall Street. This allowed political opposition, fueled by lobbying dollars from the banks, to grow against the Dodd-Frank Act. 
• The Dodd-Frank Act was passed on a largely partisan vote, but all the regulators appointed by President George W. Bush supported the outlines of the bill.
• Some ideas that made it into the bill came from Republicans. Half of the 60 amendments to the bill were Republican and ten passed. The bill also followed principles proposed by the G-20 that President George W. Bush had signed.
• Senator Dodd remembered being disappointed at his first meeting with the Financial Services Roundtable after he took over the chair of the Senate Finance Committee. He thought they would maybe want to take the chance to educate him on the increasingly complex financial services products being released into the market. Instead they used the meeting to lobby him on two topics - the need to block a consumer financial protection agency and to block regulation of financial services executive compensation.

Former Representative Frank shared these insights:

• The ban on abusive predatory mortgages was perhaps the biggest part of Dodd-Frank.
• Community banks have enormous political power because they have connected people everywhere. Local bankers are important in their local communities, and that translates to big political power. That power got them exempted from being examined by the CFPB because they claimed it costs too much to comply with inspections.
• The reputation of US banks being well regulated is a big reason why US financial securities and the US dollar are attractive to foreign investors. They feel it is safe here since it is well regulated.
• Dodd-Frank basically prevented people and banks from incurring more debt than they can handle. There is a competitive race to get more leverage.
• Regulating derivatives by putting them in exchanges where counterparts can deal in them pretty much took out a huge risk from the financial markets.
• There is discussion now of how non-bank financial actors like private equity firms and hedge funds need to be regulated next. He said the financial risk is a lot less, but there may be reason to start looking at anti-trust regulation on things like their impact on depressing wages.

Those were the highlights I got out from the first part of the virtual conference. I found it to be quite insightful and wanted to share with other people who are interested in how to make financial markets in the United States work most effectively.

About the Author: Victor Prince is a corporate trainer, executive coach, and best-selling author who helps financial services and other organizations build leadership, strategy, communications, and critical thinking skills. Before coaching and training clients, Victor was a founder and Chief Operating Officer (COO) of the Consumer Financial Protection Bureau, a Bain & Company consultant, and a Wharton MBA. Follow Victor on LinkedIN to access his 100+ articles on leadership, strategy, learning & development, and more.