Dodd Frank Bill: New Book Shows Just How Hard It Is to Stand Up to the Banks

Act of Congress, a new book written by Washington Post reporter Robert G. Kaiser, recounts the drafting and 2010 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). This legislation aimed to respond to the worst excesses of the last banking crisis and prevent the next one. Kaiser benefited from extensive access to the bill’s creators and their staffs, allowing him to provide an inside look at how this critical piece of legislation was born. 

He does not present a pretty picture, but for those interested in the legislative process or for those trying to understand the impact of the bill, this book is essential reading. Kaiser views Senator Chris Dodd and Congressman Barney Frank positively, as two politicians both at the end of their careers, who see the need for change and work all-out to accomplish it, compromising along the way. However, many other Republicans and Democrats suffer from dismissive descriptions in this book: House Speaker Nancy Pelosi’s (D-Calif.) enthusiasms “often came from the last person she talked to,” Congresswoman Carolyn Maloney (D-N.Y.) “was vain, sometimes aggressive, and not particularly bright”, Michele Bachmann (R-Minn.) makes up her own facts, and in general, speeches made during congressional hearings are “evidence of the perpetual triumph of ego over substantive accomplishment.” More disturbingly, an assistant to Paul Volcker comments, “The percentage of congressmen and senators who really understand how a bank works, or even what a hedge fund it, is small.” The book provides many examples that “In Congress, politics almost always dominates substance.” 

Despite the compromises made, the aggressiveness of lobbyists, and the insufficient knowledge of most legislators, Kaiser believes that the passage of this bill “does demonstrate that Congress still can work and it shows how, but only in extreme circumstances — so extreme that they are unlikely to recur for a long time. In other words, we needed a crisis for Congress to do its job and without a crisis intransigence and self-absorption takes precedence.

Kaiser writes that “Dodd-Frank will change the world” and to some degree he is right. The banks I work with as a consultant have lost earnings and have to find new ways to make money and grow or disappear. Look to increases in your bank fees as one industry solution to this problem. Dodd-Frank does result in banks requiring more capital, making it difficult for them to generate the level of returns on equity that make them attractive to investors. Some banks have responded to capital concerns by limiting lending to less attractive consumers and businesses, for Congress probably an unintended consequence. And the Consumer Financial Protection Board (CFPB), while still finding its way, does make banks more cautious in their pricing and the consumer policies they pursue.

But the banking industry has not simply raised a white flag in surrender to Dodd-Frank. Last week, former Senator Judd Gregg (R-N.H.), mentioned in the book as one of the leaders in crafting bank regulations tied to derivatives transactions, became the CEO of a Wall Street focused association, the Securities Industry and Financial Markets Association, characterized by a D.C. publication as “one of the hottest openings on K Street,” K Street being the center of Washington lobbying firms.

Last Friday also featured a New York Times article titled, “Banks’ Lobbyists Help in Drafting Financial Bills.” One bill that the Treasury Department opposed and that recently passed the House Financial Services Committee was in effect drafted by Citigroup’s lobbyists: “Citigroup’s recommendations were reflected in more than 70 lines of the House committee’s 85-line bill.” That article also states that banks are now finding “Washington a friendlier place.”  Not coincidentally, the article reports that “the financial industry has doubled its already considerable giving to political causes” and “bank lobbyists have blitzed the regulatory agencies writing rules under Dodd-Frank, chipping away at some regulations.” 

After the bill passed, Chris Dodd (now the head of the Motion Picture Association of America, a lobbying organization for the movie industry) said, “No one will know until this [Dodd-Frank] is actually in place how it works.” Three years after passage, many regulations remain to be written and the biggest banks have launched a “second front” to dilute its possible impact. Money talks, and Congress may be listening again.