Bill Black: Dodd-Frank Was Designed to Fail – and Trump Will Make it Worse

Yves here. I hate to voice a minor quibble with Black’s post. By all accounts, Tarullo got much further with bank reforms than anyone expected, doing an effective job of bureaucratic infighting and getting quite a few people at the Board of Governors unhappy with him. There were regular leaks to the media about his sharp elbows, hot temper, and being rough on staff, when that sort of thing never escapes the Fed. It was an internal effort to undermine him and the lame attacks on him as a manager reflected a lack of real goods. Jamie Dimon and plenty of other CEOs are famous for far worse treatment of subordinates, yet no one tries to make a big deal out of that.

I contrast Tarullo with Janet Yellen, a status quo defender willing to pursue only marginal changes

The fact that he didn’t get very far seems much more a function of recognizing what he was up against rather than intellectual capture. Tarullo focused on a few key issues such as capital levels. Black may be correct that the better approach would have been much tougher bank examiner gumshoe work, but Tarullo’s view may have been that that would be easier to roll back after he left than higher level policy changes.

Nevertheless, Black is correct to flag that Tarullo was not able to accomplish very much and that was no accident.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Originally published at New Economic Perspectives

William Cohan’s April 14, 2017 column in the New York Times discusses Daniel Tarullo’s swan song talk on bank regulation.  Here are the key passages from that column for the first half of my discussion.

Much to the relief of Wall Street executives, who feared and hated him in equal measure, Daniel K. Tarullo left his powerful perch on the Federal Reserve Board of Governors last week, but not before delivering one last lecture on how big banks should be regulated in his absence.

His swan song was pretty surprising, all things considered. It also went largely unnoticed, much like Mr. Tarullo himself during his eight years at the Federal Reserve. Many people have never heard of him, even though his decisions affected their lives in ways big and small.

Once described as the “Wizard of Oz,” for the power he wielded behind the scenes, Mr. Tarullo was appointed to the Federal Reserve by President Barack Obama in January 2009. At the Fed, Mr. Tarullo took over the important responsibility of regulating the big Wall Street banks, a job that, understandably, had been the purview of the president of the Federal Reserve Bank of New York. The oversight moved to Washington from New York in the wake of the financial crisis.

“It was obvious that a lot in the U.S. regulatory system had not worked particularly well before the crisis,” Mr. Tarullo said in a 2015 interview with The Wall Street Journal.

Cohan was writing about a different subject, one I discuss briefly in the second half of this article, so he did not discuss the insanity described in these four paragraphs.  Here is the short version of that insanity.

1.) The Clinton and Bush administrations, collectively, destroyed effective financial regulation. Tarullo’s sad euphemism is “the U.S. regulatory system had not worked particularly well before the crisis.”

2.) As you can tell from that sad euphemism, in a supposedly honest swan song, Tarullo is not the kind of enforcer who inspires real “fear” or “hatred” from an industry. The “Wizard of Oz” is an apt moniker “for the power he wielded behind the scenes” – for the Wizard of Oz was a pathetic huckster.  Here is a quick test of the fantasy that Tarullo was tough.  The Fed “removed and prohibited” what CEO of a prominent Wall Street bank under Tarullo?  The answer is no one.  The Fed never even attempted to remove a single one of the Wall Street CEOs that led the most destructive epidemics of financial fraud in history.

3.) As weak as Tarullo was, he was in fact far tougher than his predecessor who was responsible for regulating Wall Street’s commercial banks, which “understandably, had been the purview of the president of the Federal Reserve Bank of New York.” That president was the most abject financial regulatory failure in my Nation’s history – which is a powerful insult given how many U.S. presidents deliberately appointed scoundrels because the president knew that they would fail to even try to be effective regulators.

Who was that NY Fed “president” who was the worst-of-the-worst regulators that was so culpable in devastating our Nation?  That scoundrel must have had his reputation destroyed and been recognized as unfit to serve even as a dogcatcher in a one-dog town.  That would be the result if we did not live in the modern era of American crony capitalism.  In that real world, our presidents promote our worst scoundrels precisely because the scoundrels deliberately refused to honor their oath of office and regulate Wall Street.  In our real (depraved) world the new President Obama promoted the disgraced Timothy Geithner from his position as the president of the NY Fed to the top financial position in the world – Secretary of the Treasury.

Everyone in finance knew that Geithner had been a catastrophic failure as regulator.  Everyone in finance knew that Geithner failed as a regulator because he never tried to regulate effectively.  Indeed, he infamously testified before Congress: “I have never been a regulator.”  That was true, but you are not supposed to admit it openly and you are not supposed to be promoted to Treasury Secretary because you admit it.  President Obama appointed Tarullo contemporaneously with his appointment of Geithner.  Tarullo had no experience or expertise in regulation and Obama obviously did not choose him to serve as a “feared and hated” regulator.

4.) The idea that Wall Street “feared and hated” Tarullo is hilarious. I can tell you from personal experience what happens when a financial regulator is “hated and feared” by sleazy CEOs because you are putting them in prison and “removing and prohibiting” them from working in finance.  First, there are recurrent efforts to fire you.  Second, they hire private detectives to investigate you.  Third, they sue you for hundreds of millions of dollars.  Fourth, they spend hundreds of thousands of dollars in political contributions to the most powerful members of Congress to induce them to investigate and attack you relentlessly.  Sleazy CEOs did each of these things to me and to several of my colleagues.  Sleazy Wall Street CEOs did none of these things to Tarullo because he never even tried to imprison or “remove and prohibit” them.

Cohan tellingly writes that the NY Fed president “understandably” was the top regulator of the Wall Street banks prior to 2009.  It is understandable in one, sick sense.  It is “understandable” that politicians who benefit so greatly from Wall Street contributions and the revolving door placed the primary regulator of Wall Street banks in the institution (the NY Fed) with the most perverse incentives that would ensure pervasively pathetic regulation of Wall Street banks decade after decade.  It is not, however, “understandable” that anyone seeking to create a system of effective regulation of Wall Street banks would choose the president of the NY Fed to lead the regulation of Wall Street banks.

Cohan’s primary purpose in his column is to present Tarullo’s admissions about what went wrong with Dodd-Frank.

First, he acknowledged that the Dodd-Frank Act, which re-regulated Wall Street at length (and to a fault) in 2010, was a compromise among those lawmakers who wanted to break up the big banks in the wake of the financial crisis and those who wanted to leave the status quo in place.

He said Dodd-Frank “forgoes structural solutions” — such as breaking up the banks or reimposing the separation of investment and commercial banking — “which might have been cleaner conceptually, but much more complicated as a practical matter.”

Instead, he said, Dodd-Frank “imposes a host of restrictions and requirements” on banks, including on counterparty credit limits, risk retention rules, incentive compensation restraints and wind-up resolution planning, while also requiring big banks to increase their capital and reduce their leverage.


His most unexpected statement, though, was to acknowledge that the Volcker Rule, named after Paul A. Volcker, the former Fed chairman, was a mistake. The Volcker Rule essentially seeks to prevent big banks from engaging in proprietary trading.

Mr. Tarullo said that when Mr. Volcker proposed it, he thought it could add to the “safety and soundness of large financial firms.” But now, “several years of experience have convinced me” that as drafted, it “is too complicated” and consumes “too many supervisory, as well as bank, resources.”

Here is what Tarullo actually admitted about Dodd-Frank’s fatal flaw.  President Obama and Congress did not frame it as a coherent response to the perverse incentives that cause our recurrent, intensifying financial crises.  Wall Street CEOs rigged our structures to institutionalize perverse incentives.  Refusing to change those structures after a catastrophe was, of course, significantly insane.  President Obama and Congress failed to engage in a rigorous, honest investigation of those structural causes and then refused to fix the structural defects.

The structures that institutionalize perverse incentives have in common the creation of conflicts of interest.  CEOs do this primarily by creating perverse compensation systems, but they also do it through combining investment and commercial banking.  Systemically dangerous institutions (SDIs) (“too big to fail”) create another conflict of interest.  Politicians dependent on their contributions and pathetic regulators treat them as untouchable.  Astonishingly, Obama and Congress refused to fix any of these three primary conflicts of interest that drive our recurrent crises.

The closest Dodd-Frank came to a structural change to address one of these fundamental, destructive conflicts of interest was the Volcker rule.  This makes Tarullo’s repudiation of that rule, and his stated basis for that repudiation so revealing.  Tarullo fears that “as drafted, it ‘is too complicated.’”  Who “drafted” the overly complicated rule – and at who sought to make it so complex?  The answer to the first part of the question is largely Tarullo and the answer to the second part is the five largest Wall Street banks’ lawyers.  Tarullo’s reason for opposing the Volcker rule is pathetic.  Still, the first-best solution is the return of Glass-Steagall rather than the roughly fifth-best solution that is the Volcker rule.  It is altogether fitting that Tarullo leaves with a whimper about a problem of “complexity” that he largely allowed Wall Street to create.

Here is the terrible news.  Tarullo is not remotely evil.  Compared to other senior financial regulators he is in the peak of the distribution along with Janet Yellen.  President Trump’s regulatory appointees will be far worse and by repealing the best parts of Dodd-Frank they will make the next financial crisis far worse.

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  1. Darius

    Given the corruption of the Democrats, it’s somewhat surprising that even the Dodd-Frank window dressing got done. My recollection is that they felt they had to something to avoid recognition of being totally bought but that, in typical Obama era fashion, it was designed to head off meaningful action.

    1. Vatch

      Given the corruption of the Democrats, …

      That should be:

      Given the corruption of the Democrats and the Republicans, …

      Sometimes it’s easy to forget to mention Republicans in discussions of United States political corruption. Perhaps that’s because we assume that it is completely obvious to everyone that the Republicans are corrupt. But if we stop saying it, some people will forget that it is true.

      1. Darius

        Democrats had solid majorities in both houses. It’s true that Dodd-Frank was subject to a Republican filibuster threat. But a real party of the people would have used it as fodder for punishing attacks on the party of Wall Street. But not our consensus-obsessed, bought Democrats. They just left that fruit lying on the ground, as usual.

          1. different clue

            But the Democrats are the ones who falsely pretend otherwise. They are the “Nixons who can go to China” over and over and over again on supposedly “Republican” pro-OverClass items and agendas.

            1. Vatch

              Of course. That’s why I supported people like Bernie Sanders and Tim Canova in 2016, and Jim Thompson in 2017. Are there any Republicans who are worthy of support? Karen Handel, Ossoff’s opponent in Georgia, is a disturbingly extreme ideologue. The same is true of the Republican candidate Gianforte in the Montana special election.

              I have no objection to devoting attention to the corruption of establishment Democrats. Let’s remember that the Republicans are just as bad, and sometimes are worse (Scott Pruitt, for example).

  2. IDontKnow

    Dodd-Frank, as in Barney Frank? I dont know but having a bank regulation bill in the name of please give my boy friend a job, Freddy Mae, Rep. Barney Frank, should be a give away as to who put the fatal flaws in, ie: Wall Street.

    1. Pat

      Oh, please, both Frank and Chris Dodd were bought and paid for tools.

      That both left for more fertile ground once their terms ended after this smoke and mirrors bill was passed in some ways says it all. Let’s see despite being in his seventies Frank joined the board of Signature Bank and Dodd was named to head the MPAA, the lobbying arm of the film industry (one of the clear winners in the Obama trade negotiations).

      1. RBHoughton

        Yes, that was my recollection. Didn’t the lovely Mrs Clinton say Dodd Frank was cobbled together to give Congress the appearance of involvement in combating the meltdown, otherwise the representatives feared the electorate would recognize they were totally uninvolved in remedial efforts.

  3. JimTan

    “several years of experience have convinced me” that as drafted, it “is too complicated” and consumes “too many supervisory, as well as bank, resources.”

    Hmmm…………….”too complicated”. Big banks likely hate the Volker Rule for the same reason they hated the now dead Swaps Pushout Rule: it restricts them from making highly profitable ( this means risky ) proprietary derivatives trades collateralized by FDIC insured bank deposits. While the Volcker Rule bans proprietary trading by deposit taking banks, it exempts ‘hedging’ activities. Derivatives can be used to ‘hedge’ risk, but profiting from these contracts requires risk-taking instead of risk-mitigating which is where Volker runs counter to big banks interests – it provides a comprehensive definition of “permitted risk-mitigating hedging activities”. Under Volker Rules, banks must qualify for a ‘hedging’ exemption with extensive reporting to prove they are true ‘hedges’ and not ‘speculation’. With detailed information on positions, objectives, and strategies it would become clear when these derivatives are consistently profitable speculation, and not ‘hedges’.

    I think this is what Mr. Tarullo means by “too complicated”.


    He said Dodd-Frank “forgoes structural solutions” — such as breaking up the banks or reimposing the separation of investment and commercial banking — “which might have been cleaner conceptually, but much more complicated as a practical matter.”

    Instead, he said, Dodd-Frank “imposes a host of restrictions and requirements” on banks, including on counterparty credit limits, risk retention rules, incentive compensation restraints and wind-up resolution planning, while also requiring big banks to increase their capital and reduce their leverage

    Nonsense, the practical matter of splitting up the banks is straightforward; they are but legal entities, which means those who craft the laws can split them. It was done with the Bells a generation ago, can be done again. The only complication is the politics.

    Complicated is setting into place another set of vague, bureaucratic regulations, and giving the regulators overseeing them more busy work and draining red tape, but still with all the power of a wet noodle to enforce the regulations. Just serves to make the process harder for the (relatively) smaller players while creating less than a nuisance for the vampire squids the regulations are supposed to be (on paper at least) reigning in. Regulatory minutiae doesn’t stop bad behavior, it’s the big stick they’ll get hit with that does.

  5. Chauncey Gardiner

    Completely agree with Bill Black’s insightful article. However, it should not pass uncommented that although his underlying motivations are questionable, Trump’s senior economic advisor, Gary Cohn, who previously was president and COO at Goldman Sachs, earlier this month called for restoration of the Glass-Steagall Act to members of the Senate Banking Committee. Senators Warren, Cantwell, King and McCain immediately announced they would reintroduce a new Glass-Steagall Act.

    1. perpetualWAR

      “New” Glass Steagall Act, not like the old Glass Steagall Act. Don’t be fooled. McCain was Keating 5 alum.

  6. Expat

    Wall Street is fundamentally corrupt. While it is the goal of most businesses to make money by offering a good or a service, the goal of Wall Street is simply to make money without offering anything if possible.

    That we failed to break up the banks, jail the bankers, and destroy the entire system says much about America and its principles.

  7. dcsos

    Dodd – Frank was supposed to establish an exchange that regulated derivatives….did it ever happen?…Timmy the Treasurer exempted those derivatives that he personally felt capable of unregulating personally…So the bill was lacking…

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