Matt Stoller: Dodd-Frank Made No Structural Changes to Banking System

By Matt Stoller, a Roosevelt Institute fellow (on Twitter at @matthewstoller). Cross posted from New Deal 2.0

A former Congressional staffer sees Dodd-Frank as a lost opportunity to rebuild a financial system in line with public needs.

I was a staffer on the Dodd-Frank legislative package, and the whole process seemed odd from the very beginning. There was no attempt initially to ask the question, “what happened and what should we do about it?” There was no examination of the purpose of a banking system, and how to rebuild a system that aligns the public with the financial industry. There was no attempt to build legitimacy through a public education campaign about what Congress and the administration was doing, and why. Instead, legislators and very serious men in suits started throwing around terms like “systemic risk regulator” and “resolution authority”, and then used the idea of a Consumer Financial Protection Bureau as a palliative for liberals.

My specific focus on the bill was the provision to audit the Federal Reserve, which was one of the bright spots (another could be the Consumer Financial Protection Bureau). This provision opened up the Fed’s emergency lending facilities and its discount window to the spotlight, allowing for the beginning of a real debate over our monetary system. But overall, the Dodd-Frank bill was significant for its lack of significance.

In retrospect, this was by design. Congress created a panel — the Financial Crisis Inquiry Commission — to examine the cause of the financial crisis. But this panel had a mandate to deliver its recommendations after the passage of Dodd-Frank. In other words, Congress and the administration did not design Dodd-Frank to prevent another financial crisis. So what was the purpose of the bill? I suspect this can only be answered by looking at the overall policy thrust of the government since the beginning of the financial crisis.

The clearest explanation is by Roosevelt Institute Fellows Tom Ferguson and Rob Johnson in their series on the Paulson Put. While a shadow bailout took place through the Federal Home Loan banks and the Federal Reserve from 2007 onward, eventually a fiscal and regulatory solution would become necessary. The first significant legislation in this thrust was the famous Bazooka bill (or Housing and Economic Recovery Act) signed in June 2008 that allowed Treasury Secretary Hank Paulson to take over and pump unlimited sums into Fannie and Freddie. The second was the TARP. Both of these bills were pivotal to providing the government with enough firepower to overcome the solvency crisis.

After the immediate crisis was contained, losses were socialized, and profits returned to financial executives, Congress had to put together a “solution”. It would have a giant bite at the apple in restructuring our regulatory apparatus. But in order to perpetrate the oligarchic banking structure, it would be important that no structural changes to the industry be implemented. Not one regulator was fired for his or her part in the crisis. The Justice Department adopted a posture of legalizing financial control fraud by refusing to prosecute anyone involved in the meltdown, and continues to allow millions of cases of foreclosure fraud to continue. Ben Bernanke was renominated, and the administration fought a bitter below-the-radar battle to secure his confirmation. With a few modest exceptions, the risk-taking and leverage in our financial markets continues apace, and the deregulatory neoliberal mindset is still dominant. The Federal Reserve has been audited, but the system is now accountability-free for high level operatives in finance and politics. And now that Elizabeth Warren has been thrown overboard by the administration, the lockdown of the financial system is nearly complete.

And mostly, that’s what Dodd-Frank accomplished. It rearranged regulatory offices and delivered a new set of mandates, but effected no structural changes to our banking system. Congress never asked what happened, or why, or even, what kind of banking system do we want? And that’s because Obama’s Treasury Secretary already had the answers to these questions.
The one dangling thread, and this is what worries the administration, is the housing market. But we’ll save that problem for another day.

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  1. Jackrabbit

    Yes, it is interesting and instructive that the Obama Administration found the courage to fight for Bernanke (“Subprime is contained”) vs. the lack of interest to fight for Warren.

    We’re not suppose to make these connections. It’s “settled business” as some dimwit recently commented the other day when castigating Yves because she wouldn’t STFU about Warren.

  2. steelhead23

    Matt, Freaking Bravo man, Bravo! You may be aware that a discussion occurred earlier on this blog as to whether the Roosevelt Institute could maintain its perspective after receiving a large donation from a conservative funder. You have, over the last two posts, answered that question in the affirmative.

    What is missing from the above is – why. Why did Congress take this weak-kneed approach? Why did the administration take the approach it has and continues to take? Was this approach less risky than an aggressive recapitulation of the U.S. and global (they are inextricably interconnected) financial systems. I frankly favor a large scale change in the system and a separation of commercial banking from investment banking and a return of monetary policy and control from the privately-owned Federal Reserve banking system to a publicly-owned U.S. Central Bank. Even if the U.S. is not going to prosecute financial criminals, it should at least attempt to avoid further crimes.

    1. kabosh

      Not so fast; Stoller is and has been great, but the problem with Roosevelt and its role in the so-called “Fiscal Summit” was that it gave a veneer of legitimacy from the left to what was truly an illegitimate exercise. The fact that there are still valid progressive voices within Roosevelt was never the issue, and doesn’t negate the fact that their participation in the Peterson effort was a massive blunder that calls the judgment and motives of their organizational leadership into serious question.

    2. nonclassical

      ..philosophically, if we know “how” it was perpetrated (meltdown) we know “why”. It’s much more important to know
      how-this is not semantics.

      Yves has done a great job of linking “securitized” mortgages, dealing with issues regarding what banksters wanted more “securities”=mortgages to do (to an extent). She has answered the reason banks split up mortgages into tranches, combined with student debt, car loans, credit card
      debt, etc…then falsely “rated”.

      But the really big issue here is to follow the $$$$…Kevin
      Phillips, Nixon’s quasi-economist-editorialist stated in at least 2 recent books that “derivatives” valued $880 Billion circa 2001, but by 2006-2007 valued $600 Trillion-this from designated Senate Banking Chairman Robert Johnson-30 pages,
      when brought before combined Senate-House he was cut off:

      Question of what banks actually did links between “securitized mortgages” used as “leverage”=collateral to BORROW AGAINST…then disregarding anti-trust, colluding to monopolize commodities and derivative markets internationally. It began with Bush-Cheney run-up in OIL FUTURES…and was being
      perpetrated in commodities such as rice, which quadrupled in 4 years, driving starvation.

      Wheat, corn, also involved. Hedge Funds, “Private Equity”,
      but mostly “investment banks”-Johnson notes that the largest
      6 remaining U.S. “investment banks” control 95% of worlwide derivatives. Let’s remember the U.S. economy values $6.5 Trillion per year, the world economy, $16.5 trillion…Gore
      Vidal forecast accurately IMO; “It will take 20 years (for banks to “clear” their books of bogus “tranches” associated..

      Let’s also remember that computerized trading at millisecond
      levels largely in “emerging markets”, given enough $$$$, can move entire national markets..which is the reason Hedge Funds are known as “the locusts” internationally…

      When looking for the “reasons” government is not interested
      in real fixes, we can only view capture of government by $$$, such as this article suggests:

    3. steelhead23

      I must admit, my previous post was a tad silly. Of course the reason why has to do with maintaining the elite’s wealth and power. But there is a risk the elite seem to ignore – not just that debts that cannot be won’t be, but when people become desperate they are prone to desperate acts. By stealing trillions and the futures of millions of people they have effectively blown a hole in their own future. I believe the term is over-reach, to be quickly followed by blowback. If they truly wished to preserve the system (that is, their private kleptocracy), they would prosecute a few targets of public animosity (Mozilo would make a fine whipping boy), pass somewhat effective regulation, and go back to stealing at a modest rate – which they might be able to get away with forever.

      I don’t think I am alone in wondering whether the current crisis is an inevitability in finance capitalism as cunning humans, exploit the markets and each other with technology (see the TED video) and market power. If this is the case, refining the system would only delay the next implosion, not prevent it. To prevent a repeat, we must fundamentally change the system.

  3. Shankara

    The answer lies in the simple fact that the oligarchy has threatened to kill the families of everyone in public office. How else could they get away with this?

    1. chris


      The oligarchy does not need to do that when they have purchased the media and enough politicians of all ideological persuasions. Although the occasional hot tub drowning does sometimes occur.

      1. Redneck Liquor

        Absolutely, Dodd-Frank was just a crack in the sidewalk that was quickly avoided, for superstitious purposes.
        The U.S. Chamber of Commerce ‘done kilt’ the som’bitch.’


  4. Hugh

    Stoller is just realizing that Dodd-Frank was all smoke and mirrors??? I never know how to take these pieces that report as new something we were discussing since the House version of financial reform shaped up in the latter part of 2009.

    Indeed I remember putting up my first list of what financial reform should look like back in late 2008. There wasn’t a single item on it that became part of Dodd-Frank. A useful shorthand to measure financial reform is Glass-Steagall. It was not the be all and end all of reform, but if reform was ever to be serious, it would have had a prominent place in it. It of course had no real place in the financial reform debate at all, and that told most of us, although not apparently Stoller, all we needed to know about Dodd-Frank.

    1. Yves Smith Post author

      In case you missed it, there has been a big media push to present Dodd Frank as a great success one year after it passed (which was the 21st). Why people try declaring victory when the game is still being engaged and the banks are successfully cutting back what there was in Dodd Frank is beyond me.

      That’s why Stoller wrote the post. He’s implicitly rebutting another New Deal post referred to by liberal below.

      And the point is that Dodd Frank was never intended to work. Many people might assume its limited impact was due to successful bank lobbying, as opposed to Congresscritters being significantly captured before the exercise was even begun.

  5. liberal

    Posted this on the Greece thread; this is clearly a more appropriate place:

    Related: via Yglesias, via Rortybomb: “Economics of Contempt” on Dodd-Frank, particularly on resolution authority:

    The real movement in this space has been in the so-called “resolution plans” that the major banks have to submit (and regularly update). The proposed rule on resolution plans was very strong — it ensures that the FDIC will have all the information it needs when it comes time to actually resolve a major bank. That’s crucial, because a successful resolution of a major bank will have to be planned out in advance and be reasonably comprehensive. The proposed resolution plan rule also allows the FDIC and the Fed to identify any legal or funding structures that would cause problems in a future resolution, and gives the FDIC the authority to force the banks to restructure in a way that would make a future resolution easier.

    [emphasis added]

    I find this very hard to believe; can anyone else fill in here?

    1. Yves Smith Post author

      I had a very long argument with EoC on this blog, and he finally went silent, but he continues to try this line whenever and whereever he can despite begin wrestled to the ground. I thought about going after him again, but the proof is gonna be in the pudding, and this special resolution nonsense does not work internationally and it clearly won’t even work well for a clearly domestic institution if it has a decent sized trading book.

      The BIS and the International Institute of Finance (a blue chip private sector finance think tank/quasi lobbying group) BOTH agree with my reading on the international front (which alone is sufficient to render Dodd Frank resolution irrelevant to pretty much every TBTF institution). But EoC insists he knows better about how bankruptcy works around the world, and how that will intersect with Dodd Frank, when that is completely outside his expertise.

      The posts:

      1. nonclassical

        I’m beginning to seriously wonder (having lived in Europe for some years) if U.S. financial sector isn’t attempting to destabilize European banking, as a form of self-preservation-weakening “competition”…

      2. liberal

        Thanks, Yves. You’re a real soldier in the fight for freedom.

        My visceral reaction to the EoC post I mentioned was “this sounds like total BS,” but I don’t have the expertise.

  6. Francois T

    WTF was Obama thinking by fighting so hard to reappoint Bernanke? What was in it for him? A future job?

    I mean, he looked (and still look) completely stupid doing so.

    1. Yves Smith Post author

      His manhood was at stake. And there was all this BS at the time how “the markets” would react badly if Bernanke were not reconfirmed. As if the meltdown of 2007-8 weren’t evidence of what a swell job he had done (Bernanke gave Greenspanian policies significant air cover, so Bernanke can’t escape culpability).

      1. Ignim Brites

        The thing to remember is that Obama was educated at Columbia and Harvard. In these institutions the FED is an object of veneration, the pinnacle of the technocratic elite. So it was not his manhood that was at stake. If anything was at stake, it was is reputation for intelligence, for being a reliable member of the meritocracy. But the truth of the matter is that with his circles reappointing Bernanke was the obvious choice, just as Giethner was the obvious choice for Treasury. There was nothing at stake of Obama in these appointments. Which brings us back to the possibility that maybe he has just been educated to stupidity.

        1. Anonymous

          I think this is an essential, too-rarely made point. Outside the hard sciences and the arts, and maybe a few others (the crafts, so to speak), pedagogy at our schools, especially the big name schools, is very poor. Listening to politicians and policy-makers like the president, Bernanke, and the rest, talk about policy is painful, and often shocking. In a litany of cases, they genuinely do not understand basic things about how markets and the US government work. The same is true for the careerists who manage US big business. I think this incompetence explains the poor decision-making from the federal government and many bulge bracket companies more than ideology, corruption, or any other single cause.

          Michael Hudson, the University of Missouri academic, said on Friday’s Democracy Now episode that the president really does ‘believe in’ this trickle-down ‘economics’ bullshit. I think he’s absolutely right. The president, and most of the rest of these clowns, really are just that fucking dumb.

          1. darms

            Their “belief in this trickle-down ‘economics’ bullshit” would be ‘dumb’ only if they were down here with the other 99.9% of us. But since they’re not and instead are in that rarefied 0.1% group that belief is crooked & criminal. Don’t piss on me and tell me it’s rainin’.

      2. Jackrabbit

        I guess you’re both right in a way.

        After being talked into nominating him by Summers and Geithner, Obama felt compelled to follow thru.

        His education gave him a deep respect for elites (NOT reverence for the Fed). That made it easy(-ier) for him to hand over economic policy making to the “experts” Summers and Geithner.

        Also, Obama was focused on healthcare. He needed the “experts” to take care of the economic problems so that he could be free to deliver on his healhcare agenda. He felt much more confident about his ability to get healthcare done (and sooo wanted to trump Hilary) than about fixing the economy. Healthcare was to be the centerpiece of his promised “change you can believe in.”

        Lastly, he doesn’t seem to perceive himself to be a leader but a “change agent” (interestingly, George W. Bush was also loath to lead, calling himself “the decider”). He brings people to the table, calls for input, listens to experts, etc. but has no strongly held views himself. This mindset may be perfect for a politician but it makes him slow to react to changing circumstances (and subject to manipulation by trusted “experts”).

  7. pat b

    Actually, not only did Barney Frank, not ask any questions, he specifically forbade any hearings on the nature of risk or the causes. Rep Miller had to hold hearings through the
    science committee on risk analysis, and Frank was
    reportedly pissed.

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