Sunday, May 29, 2011

Dodd-Frank Rollback Underway: A Snapshot of an Irresponsible Governing Elite

As previously argued on this blog, the Dodd-Frank Act stands as a monument to the recklessness and ineptitude of our governing political and economic elite. Recent events demonstrate the depths of the dementia. As predicted, the Dodd-Frank Act (which was never much of a reform) is in the process of being diluted, rolled-back, and stalled by intense lobbying efforts of industry interests. Over-matched regulators suffer budget cutbacks and Congressional obstruction while the megabanks use their government guaranteed capital to foil any real reform.

The SEC, for example, is mired in litigation (against Antonin Scalia’s son no less) over its efforts to implement power given it under Dodd-Frank to grant shareholder access to management’s proxy to nominate directors. The SEC, in an unprecedented move, stayed its own rule pending the outcome of Business Roundtable v. SEC. That case now has been fully briefed but probably will not be decided until the Supreme Court weighs in. That could be sometime in 2012 or 2013. Given the Supreme Court’s manifest inclination towards corporatocracy, it seems unlikely that it would allow the SEC’s rulemaking to stand. Shareholder nominations to the board simply upset the current economic power structure too much for the Court to rule otherwise.

On another front, a bill moves through Congress that would delay the implementation of derivatives regulation. Dodd-Frank originally set July 21, 2011 for the SEC and CFTC to promulgate rules to mandate clearing of derivatives. Such rules will now probably take effect no earlier than September 30, 2012. There is pressure to delay implementation of Dodd-Frank to match the European regulation of derivatives. And, the GOP controlled House appears poised to cut the CFTC’s budget by 15%. Despite the expanded regulatory powers granted by Dodd-Frank the agency has suffered from miserly funding since the GOP takeover of the House. The SEC faces similar challenges and cash shortfalls.

These budget constraints at key regulatory agencies have real negative impact on the stability of our financial system. Regulatory agencies have already missed dozens of deadlines for rulemaking set in Dodd-Frank and many more deadlines are about to be missed. What good are the new SEC whistle blower rules if the SEC lacks enforcement resources?

In any event, the head of the Financial Services Roundtable, an industry lobbying group, promises that a bill rolling back some parts of Dodd-Frank will become law in 2012 or 2013. Elizabeth Warren appears to lack any chance of being appointed to head up the new Consumer Financial Protection Bureau created by Dodd-Frank. And, the Obama Administration has also dragged its feet in making key appointments.

Dodd-Frank is in limbo, to say the least. On the other hand, bank CEO compensation increases apace (last year set new records) and the system continues to encourage excessive risk at taxpayer expense.

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