TOO BIG TO FAIL - Dodd-Frank Law

"Is Dodd-Frank missing some vital regulatory firewalls?" PBS NewsHour 4/12/2016

Excerpt

SUMMARY:  Investment bank Goldman Sachs became this week the last big institution to settle with the federal government for its role in the 2008 financial crisis.  But in an election cycle that has seen big banks under more scrutiny than ever before, there are worries that regulations against institutions like Goldman Sachs aren't going far enough.  Lynn Stout of Cornell Law School joins John Yang.

JUDY WOODRUFF (NewsHour):  Now to our occasional series of conversations about whether some banks and firms are too big to fail, and whether they pose a risk to the country's financial health.

John Yang has our latest installment.

JOHN YANG (NewsHour):  Eight years after the housing bubble exploded, investment bank Goldman Sachs this week became the last big institution to settle with the government for its role in selling bundles of bad loans to investors, which led to the financial crisis.

In this election year, there is a lot of talk about whether too many firms remain too big to fail and whether the Dodd-Frank (Act) law is working.

Lynn Stout is a Cornell University law professor who now serves on the Treasury Department's Financial Research Advisory Committee.  She has been very critical of Dodd-Frank, and she joins us now from Ithaca, New York.

Professor Stout, thanks for being with us.

Let's start off with that Goldman Sachs settlement this week.  They have agreed to pay as much as $5 billion in this settlement with the government.  What does this say about accountability now among the big financial institutions after the financial crisis?

LYNN STOUT, Cornell University:  I'm afraid the settlement confirms something that we have suspected for quite a long time, which is that it looks like fraudulent practices were hard-baked into the banking sector during 2008.

And, unfortunately, although $5 billion sounds like a lot of money, the settlement is actually relatively small.  It's certainly small compared to the damage that was done by these fraudulent practices, and it's relatively small compared to some of the settlements by some of the other banks, by Citibank and by Bank of America.

So, as large as the figure may seem, I'm afraid it creates the risk that this could be business as usual, that, at the end of the day, Goldman Sachs may have found these sorts of fraudulent practices to overall profitable, even in light of the fines.

JOHN YANG:  Business as usual, you say.

Now, Dodd-Frank was supposed to address all this.  It was the response to all of this, the financial crisis and what brought it on.  You say Dodd-Frank isn't working.  Why not?  What about it isn't working?

LYNN STOUT:  The basic problem with Dodd-Frank is that it created the appearance of Congress doing something, without that appearance being backed up by reality.

What the Dodd-Frank Act did mostly was direct various regulators at the Federal Reserve, the FTC, the CFTC to draft regulations that were supposed to rein in the banks.  But Dodd-Frank itself doesn't impose many hard and fast rules, and what's happened in all the years since is that the financial industry, through lobbying, campaign contributions, behind-the-scene actions, HAS been very effective at stymying regulators from doing anything that really crimps their style and reins them in.

TOO BIG TO FAIL - Barney Frank vs Bernie Sanders

"Barney Frank takes on Bernie Sanders and the ‘too big to fail’ argument" PBS NewsHour 3/24/2016

Excerpt

SUMMARY:  It’s been a common theme this campaign season: Are our banks still too big to fail?  Former treasury official Neel Kashkari and presidential candidate Sen. Bernie Sanders have both shared their concerns with the NewsHour.  For another perspective on the argument, Jeffrey Brown talks to Barney Frank, former Democratic congressman and co-author of the regulatory Dodd-Frank bill.

JEFFREY BROWN (NewsHour):  In our first conversation, we talked with Neel Kashkari, president of the Federal Reserve Bank in Minneapolis.  As a Treasury official during the financial crisis, he helped oversee the bailout of the banks.  He now argues that the system remains in danger and that giant financial firms should be broken up.

That’s a view being heard on the campaign trail from Senator Bernie Sanders.

In his interview with Judy yesterday, here’s how he described the problem and his plan for it.

SEN. BERNIE SANDERS (VT-I), Democratic Presidential Candidate:  It will be important to point out that three out of the four largest banks in this country today are bigger than they were when we bailed them out because they were too big to fail, that you have the six largest banks in this country that have assets of 58 percent of our GDP.

I happen the believe that when you have a few financial institutions with unbelievable economic power, with unbelievable financial power, that what we should do is reestablish a modern Glass-Steagall legislation, and what we should do, in fact, is break them up, not only from a risk perspective of not seeing their greed and illegal behavior destroy our economy, as happened eight years ago, but also from creating a competitive financial system, where we don’t have so few financial institutions with so much power.

JEFFREY BROWN:  And we get a response now from one of the leading players in the aftermath of the financial crisis.

Barney Frank served as a Democratic congressman from Massachusetts from 1981 until his retirement in 2013.  As chairman of the House Financial Services Committee, he played a lead role in crafting the Dodd-Frank law, which enacted the most sweeping changes to U.S. financial regulation since the Great Depression.