Thursday, June 20, 2019

Part of the In Crowd: Thoughts on the Dodd-Frank Act

Posted by OnCourse Staff January 25, 2011 1:40pm

Photo Credit: Robert Linder

In my attempt to master the business of social media, I recently posted a poll to several hundred (may actually be thousands) of banking professionals that are probably much better at this than I am. The question that was the focus of the poll was: 

Is the Dodd Frank Bill adequate to control the systemic risk of financial institutions both large and small?

I didn't realize the level of sensitivity to this issue, which would generate a passionate and almost overwhelming antipathy.  My intent was to gain a perspective from much more intelligent individuals than myself whether systemic risk can be regulated in a practical and concise manner, and if Dodd-Frank is the right solution.

Their collective overwhelming response was a loud NO! 

Some very brilliant commentary from many individuals across the spectrum suggested that the current crisis stemmed from a variety of sources: from the Carter era through the S&L crisis, AIG, the European crisis, fiscal monetary policies (in which I pretended I understood the context), Wall Street greed, lack of regulatory oversight, Congressional zeal to push banks to make loans which they shouldn't have, etc. etc.

The essence of what I found is that all parties involved in the poll indicated that more regulation is not going to help keep the banks safe.  Regulations might be a good political posture, but it seems that we go through such crises every so often, irrespective of the new rules that we develop. 

There appears to be an inherent strength in our business culture to figure out loop holes and exploit them for profitability.  And doing has helped enough people across the economic spectrum that we keep exploiting it and milking it until the system finally cracks. 

I suppose that no one really cared about Wall Street greed or lack of regulatory oversight when they sold their homes at huge gain, or those who figured out the impending decline and bought at the right time. But then there are those like me who just couldn't time it right and bought at the high end and wound up selling at the low end. Should people (like me) blame the "smartest men in the room" who had personal gains by reading the direction of the market right? 

As the blame game erupted, how did our congressional leaders show that they understand and have empathy for people like me? They gave us Dodd-Frank.  I suppose this was because they wanted to show that they really cared about "me" and not the bankers.

Finally ... somebody in Washington understands my anguish and my lack of general financial skills in being able to be part of the in-group that can profit no matter what rules and regulations we come up with.  This time with 2,300 pages of new rules and additional studies which can result in more rules, even Houdini would have a tough unraveling this stuff. I should now sleep better at night, knowing that no one will be able to profit - at least for a while. 

Seriously though ... can more regulations and new disclosure forms contain a crisis, and the systemic risk that is inherent in our capitalistic culture? I suppose only time will tell. 

While we are all scratching our head and trying to figure out its full impact, we learn that according to the Wall Street Journal: "Regulators have missed or postponed several deadlines to write rules needed to implement the financial overhaul triggered by the Dodd- Frank law. The Securities and Exchange Commission and Commodity Futures Trading Commission are straining to keep up with the workload of turning the language in last summer's law into regulations in time to begin enforcing some of the new rules this summer. SEC officials postponed at least seven of the agency's self-imposed deadlines related to the law, including revising the definition of an "accredited investor" to whom higher-risk investments can be sold."

Incredible as this sounds, it demonstrates that the vagueness of the Dodd-Frank bill is continuing to strain even governing bodies in their efforts to develop effective meaningful regulations consistent with the intent of the bill. Having served the risk management needs of hundreds of community banks for over 25 years (yes I am that young!) I have seen that ultimately it's not the regulation or adherence to the regulations that distinguishes the winners and the losers, rather it is the individual dedication, focus and desire to adopt a prudent risk culture that protects a bank. 

Interestingly enough, while the commentary in response to my poll suggested many reasons for the current crisis, there was no mention of community banks. I am guessing that either no one really was, or is, concerned about them, or they aren't important in the scheme of things enough to write about.

But then the community banks, at least the ones that I have had the pleasure of serving, haven't been involved with any of the practices that resulted in the innovation of the Dodd-Frank bill. And neither have I.  So why can't we just have the bad guys pay for it and exclude the good banks, and me from this?

I know, like my father always told me, "we all have to pay for the mistakes of the few." I can only hope that we can make it through the enormity and the complexities of the Dodd-Frank bill and survive.  I wouldn't mind, however, if someone could give me heads up this time, so that I could also buy and sell at the right time and feel - for a change - that I was part of the in crowd. 

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