A Forgettable Anniversary

Thursday, 22 Aug 2013 07:49 AM

By Neal Asbury

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Reacting to the 2008 collapse of Lehman Brothers, which portended a further implosion of banking, The Wall Street Reform and Consumer Protection Act (Dodd-Frank) was enacted in 2010. As this financial catastrophe reaches its third anniversary, a recent bipartisan panel from the American Enterprise Institute characterized the Dodd-Frank Act for what it is: "a failure." This is one forgettable anniversary.

The panel, according to Forbes, noted that Dodd-Frank did not remove protections for "too big to fail" banks and that it has "utterly failed in its purpose of reducing the systemic risk posed by enormous financial institutions."

How can we tell it's a disaster? As is his custom when one of his programs fails, President Obama is launching a national public relations campaign to try and convince uninformed people that Dodd-Frank is working.

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Let's take a step back to the remarks Obama made when Dodd-Frank was passed:

"Now, let's put this in perspective. The fact is, the financial industry is central to our nation's ability to grow, to prosper, to compete and to innovate. There are a lot of banks that understand and fulfill this vital role, and there are a whole lot of bankers who want to do right — and do right — by their customers. This reform will help foster innovation, not hamper it. It is designed to make sure that everybody follows the same set of rules, so that firms compete on price and quality, not on tricks and not on traps."

Yes, bankers who want to do right. Former Sen. Ted Kaufman, D-Del., blamed heavy lobbying by financial firms — which he said accounted for more than 90 percent of the political activity around the passage of the 848-page bill — for the ineffective regulation of too big to fail financial firms. When Democrats hold their noses for legislation something really is rotten on Capitol Hill.

Kaufman, writing for Forbes, agreed with the flaws inherent in Dodd-Frank. "Except for a recent promising development involving capital requirements for megabanks, Dodd-Frank has not delivered on what it promised. By and large, those agencies charged with writing the regulations to bring the legislation to life have been overwhelmed by a combination of congressional underfunding and a massive lobbying effort by the megabanks that increasingly seem to control Washington. The Davis Polk law firm has been keeping tabs on what has actually been accomplished. Their latest count says that only 155 of the 398 rule makings required by Dodd-Frank have been finalized."

So three years into Dodd-Frank, nothing has happened. Most economists agree that the megabanks are even bigger and more than ever too big to fail.

As Kaufman noted: "The international agreements needed to implement Dodd-Frank's solution — an 'Orderly Liquidation Authority' — are still not in place. Even if they were, the authority would not work to resolve our bloated banks in a real-life crisis. Regulatory agencies have largely failed to impose new rules with real teeth. Instead of writing legislation that fixed problems, Dodd-Frank kicked the can down the road to regulators who have been overwhelmed by Wall Street and underfunded by a hostile Congress."

A story in Commentary magazine noted that that there were over 30,000 banks in 1920. Today, there are 5,582, of which 5,500 are community banks.

What is not widely understood is that while community banks represent 98.5 percent of American banks, they only have 12 percent of the banking assets. But the megabanks, representing only 0.21 percent of all banks, have 69 percent of all banking assets. So when a megabank fails, the repercussions are enormous.

However, the number of community banks keeps falling. Since January 2013, 18 community banks have failed, and many more are in dire straits.

The real tragedy here is that when community banks fail, local consumers and businesses no longer have access to local borrowing resources. They are forced to go to communities where they are unknown, along with their credit history and reputation.

Even though interest rates are low, consumers and businesses are borrowing less, which further hampers business for banks. On top of that, complying with new regulations increases banks' costs. They can't lend and they can't make money — a recipe for disaster.

Traditionally, leather was the gift synonymous with a third wedding anniversary. Today, it is crystal and glass. This makes perfect sense for Dodd-Frank because they both can so easily shatter.

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