Happy 5th Birthday, Dodd-Frank!

I just read an excellent "explainer" at Vox that lays out how the Dodd-Frank legislation is addressing the issues of the 2008 financial melt down.  Here's a sample:

The Dodd-Frank bill has three pillars... :

• Fixing the broken consumer finance system by ending a system in which consumer protection was a secondary mission for many agencies and making it the primary mission of one agency, the Consumer Financial Protection Bureau.

• Fixing derivatives by having them "be traded on exchanges ... and cleared through central counterparties." Derivatives would be forced into regulated marketplaces, where the risk they posed would be limited.

• Fixing "too big to fail" by "building high quality capital" to make large banks less likely to fail and "cross-border resolutions [of] systemically important financial institutions" so a large financial firm that did fail (like, say, Lehman Brothers) could be shut down in a noncatastrophic way, just as the FDIC does regularly with small banks.

Read the entire explainer at: http://www.vox.com/2015/7/21/9004155/dodd-frank-explainer

And on his blog at Mother Jones, Kevin Drum, notes that the Fed has ... 

announced new capital requirements for large, systemically important banks that could devastate the financial system if they failed. These new requirements can be met only with common equity, the safest form of capital, and are in addition to the 7 percent common equity level already required of all banks:

Read the whole post here: http://www.motherjones.com/kevin-drum/2015/07/big-banks-get-their-new-marching-orders-fed


Update: Better Markets has a PowerPoint presentation on the 5th anniversary of Dodd-Frank available for download here: http://www.bettermarkets.com/cocpowerpoint

Banks Need to Have More Skin in the Game

If you only contact your US Representative and Senators about one thing this year, it should be about putting in place sensible banking regulations.

Check out this New York Times opinion piece to find out why:

http://www.nytimes.com/2013/08/26/opinion/were-all-still-hostages-to-the-big-banks.html

Here's a sample:

Prudent banks would not lend to borrowers like themselves unless the risks were borne by someone else. But insured depositors, and creditors who expect to be paid by authorities if not by the bank, agree to lend to banks at attractive terms, allowing them to enjoy the upside of risks while others — you, the taxpayer — share the downside.

Implicit guarantees of government support perversely encouraged banks to borrow, take risk and become “too big to fail.” Recent scandals — JPMorgan’s $6 billion London trading loss, an HSBC money laundering scandal that resulted in a $1.9 billion settlement, and inappropriate sales of credit-card protection insurance that resulted, on Thursday, in a $2 billion settlement by British banks — suggest that the largest banks are also too big to manage, control and regulate.

NOTHING suggests that banks couldn’t do what they do if they financed, for example, 30 percent of their assets with equity (unborrowed funds) — a level considered perfectly normal, or even low, for healthy corporations. Yet this simple idea is considered radical, even heretical, in the hermetic bubble of banking.

When we deposit money in a bank, we are lending it to the bank and they invest it.  If banks were risking more of their own money (equity) and that of their shareholders' (potential dividends), they would be inclined to take fewer risks with our money.

What would a "Main Street" rescue package look like?

I'm pretty convinced now that it's a good thing that Congress didn't pass the big bailout bill yesterday. We know now that there's no way "Club for Growth" Republicans like our own Tim Walberg will permit spending money to benefit the middle class or re-regulating the financial system.

Here's a link to an article by Dean Baker at Talking Points Memo. What he says about the root of the problem being the dramatic loss of the home equity we have been using to get credit for our purchases makes sense to me. I agree with his proposed solutions: have the federal government buy direct equity stakes in the failing institutions to provide them with capital, and send money to state and local governments to use for infrastructure projects and other expenditures to stimulate the economy. This approach seems to me to be much more "Main Street"-friendly.