The Bill That Really wasn't

Obama signs a bill that lets banks have US over a barrel once more
Last week, President Obama signed into law the Dodd-Frank Wall Street Reform bill – hailed as the most sweeping overhaul of US financial regulation since the 1930s.

"Because of this law, the American people will never again be asked to foot the bill for Wall Street's mistakes," Obama boomed at the schmaltzy signing ceremony, amid bursts of applause.

"These reforms will put a stop to a lot of the bad loans that fuelled this debt-based bubble," the President gushed to America and the rest of the world. "This bill also empowers consumerse_delivering the strongest consumer financial protections in history."
It would be reassuring if we could agree with Obama, concluding that Dodd-Frank will help to prevent the next systemic crisis and associated bail-out of "too-big-to-fail" banks. Reassuring, but wrong.
For despite some marginal regulatory improvements, this is no Rooseveltian legislative milestone. Amid the hype and back-slapping of last week's launch, the sad reality is that Dodd-Frank fails to address the fundamental problems that resulted in the sub-prime fiasco and the related damage to not just America, but the entire global economy.
The inherent feebleness of this door-stopping bundle of statute and its lack of desperately needed substance, was brilliantly captured by Laurence Kotlikoff, a highly-respected professor of economics at Boston University. "This law is like being invited to dinner and served pictures of food," Kotlikoff remarked.
It would be tempting to smile at such a wry observation if the situation it described wasn't so depressing. For what the US political establishment's non-response to the credit crunch illustrates is this: such is the lobbying power of the big Wall Street institutions that they not only caused a global economic crisis and then forced the US government to pay for a massive bail-out, but then used a slice of that bail-out cash to bribe politicians with campaign donations in order to block rule changes that might prevent a repeat performance.
That leaves the politicians and high-flying bankers happy, of course, while regular citizens – and their children and grandchildren – foot the multi-billion dollar bill.
The principal function of a financial services industry is to link savers with investors and creditors with borrowers, so facilitating broader commercial activity. Such intermediary functions are crucial to economic progress and can be the basis of a profitable and socially useful business.
What we've created, instead, is a group of institutions that between them comprise nothing less than a financial oligarchy. These guys have Western taxpayers over a barrel. And what's alarming is that there is almost nothing in this bill that will stop yet more too-big-to-fail calamities. Mr President, you have missed a historic opportunity and, for that, history's judgment will be severe.
In 1933, in the aftermath of the Wall Street crash, America introduced the Glass-Steagall divide – a firewall separating high-risk "investment banks" from regular "commercial banks". The idea was to draw a regulatory line in the sand, preventing Wall Street from playing fast and loose with the deposits of ordinary firms and households, deposits rightly covered by a state guarantee.
For more than 60 years that divide stood firm. But during the late 1980s and 1990s, increasingly powerful vested interests, first in the City and then Wall Street, pushed for the "co-mingling" of banking activities. The resulting "universal banks" eventually bestrode the Western world, particularly after Bill Clinton succumbed to the lobbyists' dime and formally repealed Glass-Steagall in 1999.
It is an indisputable fact that since that repeal, the Western world has lurched from crisis to crisis. Little wonder, given that the end of Glass-Steagall allowed investment banks to borrow heavily against their taxpayer-backed deposits, then place vastly leveraged heads-I-win-tails-the-government-loses bets on risky investments such as internet stocksor sliced-and-diced sub-prime mortgages. Yes, bank failures happened under Glass-Steagall, but they were less frequent and far smaller.
Obama didn't consider re-instating Glass-Steagall. On the contrary, he packed his administration with the same people who helped Clinton remove it.
During his first year in office, the President dithered over financial reform but then, in the aftermath of an electoral mauling in Massachusetts, he placated those calling for root-and-branch banking reform by calling in former Federal Reserve Chairman, Paul Volcker.
The so-called "Volcker Rule" is the centrepiece of Dodd-Frank and as such, is indicative of the entire package. It's designed to restrict the ability of universal banks to speculate with taxpayer-backed money, rather than making sure by keeping deposit takers and investment banks separate.
Volcker places limits on so-called "prop" trading without defining what it is, so allowing banks to exploit what they claim is "the grey area between market-making and speculation".
Wall Street firms will also still be able to lever up punters' money and deal in credit-default swaps – the main culprits in the AIG bankruptcy, which cost US taxpayers $182bn and counting – while also destroying Bear Stearns and Lehman. The only stipulation is that ratings agencies should classify such derivates as "investment grade". Such agencies are unreformed and were at the heart of the last debacle – so that's hardly reassuring.
Last-minute changes mean that banks can, anyway, use 3pc of their tier-one capital for out-and-out speculation, circumventing Volcker. That doesn't sound much, but once levered up 50-times – and such a figure isn't unusual – this huge loophole in Volcker is more than enough to allow investment banks to keep destroying themselves in full knowledge the state will pay. Adding insult to injury, Wall Street then secured delays to the introduction of Volcker – or what's left of it – that in some cases will last for more than 10 years.
The closer you look at Dodd-Frank, the more apparent becomes Wall Street's influence. Limits on leverage – rejected. Limits on bank size – rejected. Restrictions on derivatives – well, some trading will go through a central exchange, allowing more scrutiny, but it's entirely unclear how much.
At every turn, this bill avoids decisions, delegating them instead to an army of regulators who will turn generalities into actual rules. If the banks were able to skew Dodd-Frank their way , think of the influence they'll have when the details are hammered out behind closed doors.
Obama put the spotlight on the creation of a consumer protection bureau – an attempt, before November's mid-term elections, to make arcane legislation meaningful to the public. Are there limits on credit card interest, ensnaring adjustable rate mortgages or predatory pay-day loans? Nope.
Some other omissions in the bill are breath-taking. There is no mention of Fannie Mae or Freddie Mac – the government-sponsored mortgage-providers that have already cost $145bn in bail-out cash, rising to almost $400bn by 2019. No mention, either, of capital requirements – which means the global banking system must rely, once again, on the ridiculous Basel process for resolving this crucial issue. Once again, Obama missed a chance to give a lead when it comes to financial reform.
Based on sound-thinking courageous judgment, the Glass-Steagall legislation was only 17 pages long. Packed with wheezes and loop-holes, Dodd-Frank runs to 2,319 pages. Enough said.