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"Too Big to Fail" Survived Dodd-Frank; How Will America Handle the Next Financial Crisis?

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Ark Law Group Student Voices ScholarshipIn response to our scholarship topics around the success or failure of Dodd-Frank, Student Voices runner-up Samuel Johnson turned to expert research. He shares the views of finance professionals who are skeptics as to whether the initiative has truly protected anybody and whether “Too Big to Fail” still looms over us.

“The roots of this skepticism are that financial analysts don’t believe that the government has either the political capacity to let a mega-bank fail nor the proper regulatory mechanisms to liquidate them without systematic catastrophe," he writes.

While there have been gains won in the realm of assisting homeowners who suffered in the crisis, if success is measured through the prevention of another financial explosion, he suggests it has likely failed to do its intended job.

In addition to being published on our website, Samuel and each of our runners-up won a $50 gift card for their response to one of the following questions:

  1. The “Dodd-Frank” Wall Street Reform and Consumer Protection Act was passed in 2010 to promote the financial stability of the United States by improving accountability and transparency in the financial system and to protect consumers from abusive financial services practices. Six years later, do you feel that the goals of Dodd-Frank have been met?
  2. What else could the financial services industry do to support greater financial equality for Americans?

Samuel's full essay can be read below, or you download the PDF here.

Bookmark our scholarship site and be sure to check back for updates on our next opportunity.

On American Financial Reform

To deal with the questions “Has Dodd-Frank worked?” and “What else could the financial services industry do today?” we must have a basic understanding of:

  1. What is Dodd-Frank? How has it been implemented?
  2. What role does the financial services industry play in the global economy? What adjustments can be made that would pass a cost-benefit analysis?

Wall Street Survived Dodd-FrankWhile the provisions of Dodd-Frank are public record, the much more interesting question is how it has been applied. Joe Nocera from the New York Times reports “There are many aspects of the law on which Democrats and Republicans disagree. But there is one area in which the two sides are largely in agreement: 'Too Big to Fail' is still with us.” (July 2014). Nocera cites skepticism within the financial sector and regulatory bureaucracy as to how well Dodd-Frank has guarded us against another financial crisis.

The roots of this skepticism are that financial analysts don’t believe that the government has either the political capacity to let a mega-bank fail nor the proper regulatory mechanisms to liquidate them without systematic catastrophe. The reason the regulatory structure remains impotent is for the truism that governs our economic order - monied interests get their way. For example, the living-will rule in Dodd-Frank was designed to give banks an opportunity to plan out a liquidation process in exchange for not being broken up. In 2015 Public Citizen released a report stating:

“Indeed, the major banks have failed to submit living wills that the regulators have deemed ‘credible.’ In the latest round, Bank of America confided that it would not be able to submit a complete plan until sometime in 2017. JP Morgan’s latest plan spans 200,000 pages.” (Five Years 2015)

With the volatility of United States politics it's hard to imagine these negotiations to conclude before a more bank friendly government chances its way into power and alters or abandons the public interest measures. Additionally, of the 390 federal rules mandated by law 83 have not even been proposed. Difficulties and complications will continue to arise in this environment of debating between regulators and lobbyists on laws after the President puts down his signature.

Gains have been won in other areas such as capturing ten billion dollars to assist homeowners who suffered under the crisis, but if the point of Dodd-Frank was to protect the public from another financial explosion it is unlikely it have succeeded. It being an inevitability that there will be another crisis of some sort it is only at that future (hopefully very far away) point that we can honestly assess whether it worked. However, if my assessment is correct that leaves the question as to what is the right way.

We need a moral separation between bank and state The financial meltdown of 2008 has plenty of blame to go around in which the state and the banks take the vast majority. If democracy is to have any meaning at all the state needs to be imposing rules on the banks instead of negotiating with them. The insufferably slow and “always up for debate” regulatory structure ensures that the status quo will either be maintained or take Herculean strength to move a millimeter. What is needed are unambiguous statutes on how commercial and depository banks will function that include no stipulations, a complete overhaul of what financial instruments are acceptable, and criminal prosecution with asset seizure for not obeying those laws. Regulators as well must have harsh punishments and other strong incentives to not be captured by the banks.

The unfortunate truth of my proposal is that it will never be implemented. The bureaucracies are entrenched and the countervailing interests too strong. America’s role in the global economy is to be a place where the wealthy can put their money and receive returns. Our labor force has been deindustrialized and despite Trump’s overtures it will not be undone. Those jobs either evaporated with automation or were sent to the Far East - neither of which will be undone except perhaps by some ill-conceived Luddite movement. In a global, free-trade world the only way you win is by playing your part as well as possible, which in the US’s case means the military, banking, advertising, and technology.

It is my pragmatic opinion (as opposed to the previous moral one) that the next financial crisis is a fait accompli. The U.S has no choice but to maintain its financial services industry. It’s a prime mover in economic growth and there is no industrial base to back it up. The money needs to keep flowing and that means returns must stay high. As pressures continue to hit higher profit margins risk taking will increase along with it and that has predictable consequences.

The only question that actually remains is when it does happen do we do the 2008 dance all over again or do we make real reforms that will actually protect the average American?

Ross Kilburn

Ross Kilburn

Ross Kilburn is the co-author of The Ark Law Group: Complete Guide to Short Sales.

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"Too Big to Fail" Survived Dodd-Frank; How Will America Handle the Next Financial Crisis?