Category: Dodd-Frank

The New York Times

On the stump, words like “Obamacare” roll off the tongue. “Swap execution facility,” not so much.

That has not stopped Republican presidential candidates from using the Dodd-Frank Act, the sprawling regulatory effort to address the causes of the financial crisis, as their newest anti-Obama target for what ails the economy.

Republicans have repeatedly invoked the law’s 848-page girth — and its rules on, among other things, trading derivatives and swaps — as a symbol of government overreach that is killing jobs.

But in trying to turn Dodd-Frank into the new Obamacare, the disparaging term that opponents use to refer to the new health care law, Republicans are largely ignoring the basic trade-off that the financial law represents, supporters say.

“Dodd-Frank is adding safety margins to the banking system,” said Douglas J. Elliott, an economic studies fellow at the Brookings Institution. “That may mean somewhat fewer jobs in normal years, in exchange for the benefit of avoiding something like what we just went through in the financial crisis, which was an immense job killer.”

So far, only a small portion of the law, which was signed by the president in July 2010, has taken hold. Of the up to 400 regulations called for in the act, only about a quarter have even been written, much less approved.

Dodd-Frank aims to rein in abusive lending practices and high-risk bets on complex derivative securities that nearly drove the banking system off a cliff. It creates a bureau to protect consumers from financial fraud, cuts the fees banks charge for debit card use, and sets up a means for the government to better supervise the nation’s largest financial institutions to avoid expensive and catastrophic failures. And it calls for swap execution facilities, or exchanges on which derivatives and other complex financial instruments are traded.

Republicans say Dodd-Frank is the root of some of today’s economic problems. It has stopped banks from lending to “job creators,” they contend, and is a direct cause of high unemployment. “It created such uncertainty that the bankers, instead of making loans, pulled back,” said Mitt Romney, the former Massachusetts governor, speaking at a South Carolina rally over Labor Day weekend where he again called for the law’s repeal.

“I think part of that flows from the fact that the people who were putting that together, Dodd and Frank,” he continued, referring to Democratic lawmakers former Senator Christopher J. Dodd of Connecticut and Representative Barney Frank of Massachusetts, “as much as anyone I know in this country were responsible for the meltdown that we had.” 

Mr. Frank demurs.  “Their claims are literally based on nothing but misconception,” he said. “The legislation is very popular. Nobody wants to go back to totally unregulated derivatives. Nobody wants banks to go back to making loans without having to retain some of them. This is a debate that is being conducted for the right wing.”

Rick Perry, the governor of Texas, has also called for the repeal of Dodd-Frank. “We have to end it right now,” he said, on the same weekend in the same state as Mr. Romney. Newt Gingrich said it is “a devastatingly bad bill” that is “killing small banks, killing small business, killing the housing industry.”  Representative Michele Bachmann regularly reminds voters that she introduced the first Dodd-Frank repeal bill this year.

Former Gov. Jon Huntsman of Utah agrees, but he wouldn’t stop there. He would also eliminate the Sarbanes-Oxley law passed in 2002, which set standards for corporate accountability in the wake of the Enron scandal.

The candidates could find that there are some political dangers to their deregulation strategy, as Republicans in Congress learned last year during the debate over the legislation. Then, opponents of measures to address the causes of the financial crisis found themselves rather easily painted as defenders of Wall Street financiers and the banking industry, rather than being on the side of borrowers and consumers. Mr. Obama has signaled recently that in the 2012 campaign he plans to portray Republicans as defending corporations and the wealthy.

These political risks probably account for the Republicans’ current effort to portray Dodd-Frank as an enemy of jobs rather than as a burden to banks. Most of the regulations included in the law fall on the big banks that were at the center of the financial crisis — Bank of America, Citigroup, Wells Fargo and JPMorgan Chase.

Those names rarely pass the candidates’ lips, however, as Republicans have turned Dodd-Frank into a piñata. Instead, they invoke community bankers — the small-town lenders who are more likely to be seen coaching a Little League team than wearing a pinstripe suit — as the beleaguered victims of overregulation.

Community bankers worry about Dodd-Frank rules setting limits on how much banks can charge for debit card transactions. Those rules have yet to go into effect. In the meantime, the bankers say, they have plenty of money to lend, but small-business owners are not asking for loans.

“There are a lot of qualified borrowers who don’t want to borrow, because they are not sure what is going to happen with the economy,” said R. Todd Price, president of the First State Bank of Mesquite, Tex. “I don’t know if that can be directly associated with Dodd-Frank,” he added. While the law “will put a whole lot more regulations especially on community bankers,” he said, “I think they’re yet to come.”

The arguments of the Republican candidates have some support among economists, particularly conservatives. Todd J. Zywicki, a senior scholar at the Mercatus Center at George Mason University, says that credit is the lifeblood of the economy, and that Dodd-Frank was designed to decrease access to credit. “Dodd-Frank is the thing that is most harming the economy right now,” he said. “Big business can deal with regulatory uncertainty, but it makes small businesses reluctant to take on risk and expand their operations.”

Unless Republicans capture the presidency and can also muster 60 votes in the Senate, it appears unlikely that Dodd-Frank will be repealed in full. Senate and House Republicans introduced such bills, but they have never been brought up for floor votes.

But there has also been relatively little resistance from Democrats in defense of Dodd-Frank. Federal agencies have been busy writing regulations to put the law into effect, but those efforts have not generated the widespread public debate that occurred when the legislation was debated in Congress. Without someone on the Democratic side actively fighting on its behalf, Dodd-Frank, for the moment at least, has been left without a champion.

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U.S. regulators are set to vote next week on a final rule governing the plans large banks must draft on how they can be liquidated if they are heading toward failure.

The 2010 Dodd-Frank financial oversight law requires these "living wills," which are part of the government’s new power to seize and break up large, failing firms.

The Federal Deposit Insurance Corp announced plans on Thursday for its board to vote on the final rule on Tuesday. It is drafting the rule with the Federal Reserve.

Regulators have to approve the plans once banks submit them. They can force changes to the structure of banks or other large financial companies if they believe the institution could not easily be liquidated once in trouble.

Former FDIC Chairman Sheila Bair, who left her post in July, had stressed the need for regulators to force banks to simplify their operations, such as by creating more subsidiaries, if the plans could not be easily executed.

The rule applies to banks with more than $50 billion in assets and to other large financial companies whose sudden failure could roil financial markets.

Proponents of this new power to seize and liquidate firms argue it will curb taxpayer bailouts and limit the sort of market turmoil caused by the 2008 bankruptcy of Lehman Brothers.

But analysts and market participants have expressed skepticism, saying the government would not let a large bank fail out of fear it would wreak havoc on the economy.

The banking industry raised some concerns about the earlier proposed version of the living will rule, which was released in April.

Banks such as Wells Fargo have said regulators need to do more to ensure that the plans remain confidential and not subject to disclosure through lawsuits or Freedom of Information Act requests.

Banking groups have also asked regulators to start off with a pilot program rather than subject all eligible institutions to the requirement right away.

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Yahoo! News

The papers are full of stories about how Congress and the regulators are going to take Standard & Poor’s and the other big ratings houses down a notch in the wake of the subprime crisis and S&P’s downgrade of Treasury debt.

Don’t bet on it. I spoke to some of their smaller competitors this week to gauge the health of the ratings industry. To hear them tell it, business for the big boys is good and probably getting better. Here’s why: The Dodd-Frank financial reform act was thought by many to reduce the influence of ratings houses by deleting references to them in the federal laws governing bank and pension investments. But as regulators plod through the mammoth task of coming up with the rules to implement Dodd-Frank, competitors say the big ratings houses are successfully protecting some of their most valuable advantages.

Such as: Rating derivatives like collateralized loan obligations, which contain a murky and constantly changing collection of bank loans. While the Securities and Exchange Commission has proposed new rules that would require ratings houses (or Nationally Recognized Statistical Rating Organizations as they are called) to submit more documentation of how they arrive at their conclusions, it wouldn’t require them to reveal all of the data, in real time, on the derivatives they monitor.

Underwriters and ratings houses both understandably resist the release of such data, which they consider proprietary. Brokerage firms and analysts also resisted Regulation FD in the 1990s, which required companies to release market-moving information simultaneously to everyone. They lost and stocks no longer mysteriously gyrate during closed meetings between company executives and sell-side analysts.

"Wall Street thrives on inefficient pricing and a wide bid-offer spread," said Glenn Reynolds, chief executive of CreditSights, which sells fundamental analysis on companies and debt securities to institutional investors. "One of the ways you keep it inefficient is by keeping the data behind walls."

S&P, Moody’s and Fitch all maintain terabytes of data about the securities they rate, which they can slice and dice into even more lucrative products such as analytical tools for investment managers to monitor risk.  The big ratings houses "have tried for years to overhaul their businesses and get into data analytics," said Reynolds, who competes in some of the same markets. "The more captive, proprietary data you get by dint of being a ratings company, the more you can turn it into another data stream."

It’s this opportunity that might explain the 5.2% stake in Standard & Poor’s parent McGraw-Hill recently assembled by Jana Partners and the Ontario Teachers’ Pension Plan. Jana has discussed splitting up the company, possibly jettisoning its lagging education unit, to unlock the $55-a-share value Lazard and others have identified at McGraw Hill. In its most recent earnings call, the company noted that its newly created McGraw Hill Financial unit racked up first-half revenue growth of 15% with a 30% operating margin. The company predicted margin improvements in its structured-finance business.

James Gellert of Rapid Ratings, another small competitor in the debt-rating business, said there are a number of details in Dodd-Frank and previous laws that together help to maintain the dominance of the big ratings houses. For example a 2006 law required firms to have three years’ experience with a particular product before applying for NRSRO status. Now there are a handful of competitors including A..M. Best, Kroll, Egan-Jones and Japan Credit Rating Agency. But through the thick of the subprime crisis, when the Big Three were slapping triple-A ratings on paper that often turned to junk, the rules "completely protected their business," Gellert said. Data from those years is still largely unavailable to new competitors, he said.

The rules adopted and being considered by the SEC focus on changing the behavior of the ratings houses, without changing the underlying market for the data that drive securities prices. SEC-licensed NRSROs will have to supply information on how they rate securities, who does the rating and whether they subsequently take a job with a securities underwriter, for example. They won’t have to share the underlying data they use to change a rating, however, which investors and rival analysts could use to determine more than just the default risk on a security.

Neither Gellert nor Reynolds is interested in transforming his firm into an NRSRO, citing the high costs of compliance with the many new rules. Reynolds would love to issue reports on the collateralized loan market, for example, which was $100 billion a year before the crash and is expected to rise to $10 billion in issuances this year.

Getting information about the loans backing an illiquid, thinly traded tranche of a CLO now is nearly impossible, Reynolds said, since only the underwriters, trustees and ratings firms have the underlying data and frequently they have signed non-disclosure agreements. "It’s not illegal to share it, you just can’t get it," Reynolds said. "We’ve tried."

The SEC has launched into the commendable task of removing references to bond ratings from the laws governing banks and professional investors. One core problem with the old system was managers could pull down a few hundred thousand a year for the job of identifying ‘AAA’ on a security; now they have to do their own due diligence, too. But as Reynolds and Gellert point out, the most important reform would be requiring underwriters to make public all the data on the corporate loans, mortgages, real estate and other assets behind the securities they sell, so that any analyst — not just an SEC-certified ratings firm — can make an informed decision about their value.

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Mortgage industry trade groups sent a flurry of letters to federal regulators this week in efforts to alter the upcoming risk-retention rule before the extended comment period expired Aug. 1.

The rule, proposed in April under the Dodd-Frank Act, would require lenders to maintain 5% of the risk on all loans pooled into securities. The most heated debate revolves around the rule’s exception: the qualified residential mortgage. Among requirements such as a strict debt-to-income limit and new servicing standards, the QRM must have at least 20% down from the borrower, according to the initial proposal.

The comments could be divided into two camps: those who claim the current QRM standards would constrict a still struggling housing market and those who would like to see their businesses included in the QRM definition.

While regulators are mulling over the comments, a spokesperson for the Federal Reserve could not give a timeline for when the final rule would be published.

The Mortgage Bankers Association CEO David Stevens said the rule as it is currently written deviates from the original lawmakers’ intent. The mortgage bankers would rather eliminate the QRM, its mandatory debt-to-income thresholds, servicing standards and the down payment requirement.

"While a reasonable and affordable cash investment or LTV requirement may be warranted, the rules should not hardwire a specific amount but instead permit offsetting factors in the context of prudent underwriting," Stevens wrote. "Higher LTV loans may pose greater risks. However, these risks can be mitigated by compensating factors such as strong credit and appropriate documentation."

The National Association of Realtors letter complained that mortgages written outside of the QRM would carry higher interest rates and fees, choking off what little demand remains on the market.

"The proposed rule should be withdrawn, revised and republished for public comment. If not, then millions of hard-working, creditworthy consumers will not be able to achieve their dreams of owning a home," NAR President Ron Phipps wrote.

The Mortgage Insurance Companies of America wrote in an attempt to steer private insurers somewhere into the QRM definition. The current QRM definition does not include privately insured low down payment loans.

MICA tapped Milliman, an insurance consulting firm, to perform a study. It found that mortgages underwritten with private mortgage insurance showed lower default rates. The trade group then suggested raising the QRM maximum LTV ratio from 80% to 97%.

"Congress intended for private mortgage insurance to play a role in the housing finance system within the structure of the QRM definition; and the data unequivocally supports the essential role of private MI in contributing to overall performance of low down payment mortgage loans," MICA Executive Vice President Suzanne Hutchinson wrote.

The American Land Title Association also looked for a way into the QRM definition.

"Obtaining a title insurance commitment will provide lenders a more complete picture of the borrower’s debt by showing debts tied to the collateral’s title that cannot be found in a credit report," ALTA wrote.

Community banks also weighed in with last minute lobbying efforts. The Independent Community Bankers of America complained risk retention "over-regulates" the market "to the point of choking off the flow of credit."

"The serious contraction that would occur in the mortgage market would significantly limit credit availability. It’s ironic that the lenders that would remain would be those that played a role in the housing crisis through lax underwriting standards and predatory practices — while community banks that did not contribute to the disaster would be forced out," the ICBA wrote.

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According to the Grant Thornton bank executive survey released Thursday, nearly half of bankers believe financial reform under the Dodd-Frank Act will not effectively prevent another taxpayer-led bailout. They do, however, report a growing confidence in the current economic recovery.

The results are published in association with Bank Director magazine. In the survey 48% of bankers polled said Dodd-Frank will not effectively detect broad risks capable of driving the economy back into a recession. Only 4% believe the sweeping reforms of the new law will be totally effective while 34% expect Dodd-Frank will only partially protect against economic risks.

As a way to bolster the effectiveness of Dodd-Frank, the Federal Deposit Insurance Corp. will call for banks to raise more capital.

FDIC acting chairman Martin Gruenberg, presented the argument for this hedging as he spoke before a Senate committee on banking, housing and urban affairs on the anniversary of Dodd-Frank.

"In this sense, stronger bank capital requirements complement the Dodd-Frank Act resolution tools designed to prevent future bailouts of financial companies," said Martin Guenberg of the FDIC. "Insufficient capital, in contrast, heightens a banking system’s exposure to periodic crises. The knowledge that capital cushions are thin compared to the magnitude of risks that abruptly and unexpectedly loom large can contribute to a panic atmosphere and feed a crisis."

Bankers serving local communities are seeing improvements in there pockets of the nation, the survey also found. About 44% of respondents expect things to improve going into 2012.

"The survey reveals increased optimism, albeit cautious at times," said Nichole Jordan, national banking and securities industry leader at Grant Thornton.

"And as the economy recovers, one of the greatest assets of any bank is confidence — confidence from consumers and regulators, and confidence within banks themselves to jump start hiring.," she added.

Nearly one-third of bankers report plans to increase hiring in the next six months, while 16% expect to decrease hiring. The majority expect hiring levels to remain around the same.

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Huffington Post

Happy Birthday Dodd Frank,
Happy Birthday to you,
You’ve lost all your muscle,
And your teeth are gone, too.

One full year after the financial reform bill spearheaded through Congress by Christopher Dodd and Barney Frank was signed into law, Wall Street looks and acts much the way it did before. That’s because the Street has effectively neutered the law, which is the best argument I know for applying the nation’s antitrust laws to the biggest banks and limiting their size.

Treasury Secretary Tim Geithner says the financial system is "on more solid ground" than prior to the 2008 crisis, but I don’t know what ground he’s looking at.
Much of Dodd-Frank is still on the drawing boards, courtesy of the Street. The law as written included loopholes big enough to drive bankers’ Lamborghini’s through — which they’re now doing.

What kind of derivatives must be traded on open exchanges? What are the capital requirements for financial companies that insure borrowers against default, such as AIG? How should credit rating agencies be funded? What about the much-vaunted Volcker Rule requiring that banks trade their own money if they’re going to gamble in the stock market — how should their own money be defined? What "stress tests" must the big banks pass to maintain their privileged status with the Fed?
The short answer: whatever it takes to maintain the Street’s profits and perquisites.
The law included a one-year delay, ostensibly to give regulators time to iron out these sorts of details. But the real purpose of the delay, it’s now obvious, was to give the Street time to expand the loopholes and fill the details with pablum — when the public stopped looking.
Since Dodd-Frank was enacted a year ago, Wall Street has spent as much — if not more — on lobbyists and political payoffs designed to stop the law’s implementation than it did trying to kill off the law in the first place. The six largest banks spent $29.4 million on lobbying last year, according to firm disclosures — record spending for the group. This year they’re on track to break last year’s record.

According to the Center for Public Integrity, the Street and other financial institutions engaged about 3,000 lobbyists to fight Dodd-Frank — more than five lobbyists for every member of Congress. They’ve hired almost the same number to delay, weaken, or otherwise prevent its implementation.
Meanwhile, the portion of the law that’s now supposed to be in effect is barely being enforced. That’s because the agencies charged with enforcing it, such as the Securities and Exchange Commission, don’t have enough money or staff to do the job. Congress hasn’t seen fit to appropriate these necessities.

Several of these agencies are still lacking directors or commissioners. Senate Republicans have refused to confirm anyone. They wouldn’t even consider Elizabeth Warren to run the new consumer bureau.
Many of same business leaders who blame the sluggish economy on regulatory uncertainty are complicit in all this. A senior vice president of the Chamber of Commerce told the New York Times that "uncertainty among companies about the rules of the road is keeping a lot of capital on the sidelines." The Chamber has been among the groups responsible for keeping Dodd-Frank at bay.
But it’s the biggest Wall Street banks — the ones that got us into this mess in the first place, and got bailed out by the public — that have taken the lead in killing off Dodd-Frank. They can afford the hit job.

At the same time, their executives — enjoying pay and bonuses as large as in the boom days of the housing bubble — are busily bankrolling both political parties, although Republicans are favored in this election cycle. A significant portion of Mitt Romney’s sizable war chest has come from the Street. President Obama is no slouch when it comes to pulling at the Street’s purse strings.
Bankers try to justify their shameful murder of Dodd-Frank by saying tightened regulatory standards will put them at a disadvantage relative to their overseas competitors. JP Morgan’s Jamie Dimon had the nerve to publicly accost Ben Bernanke recently, complaining that the law’s implementation would harm the Street’s competitiveness.
The argument is pure claptrap. In the wake of global finance’s near meltdown, Europe has been more aggressive than the United States in clamping down on banks headquartered there. Britain is requiring its banks to have higher capital reserves than are so far contemplated in the United States. In fact, senior Wall Street executives have warned European leaders their tighter bank regulations will cause Wall Street to move more of its business out of Europe.
Wall Street is global because capital is global. JP Morgan Chase, Goldman Sachs, Citigroup, Bank of America, and Morgan Stanley are doing business in every corner of the world. Goldman even advised Greece on how to hide its growing indebtedness, before the rest of the world got wind, through a derivatives deal that circumvented Europe’s deficit rules.
The real reason Wall Street has spent the last year bludgeoning Dodd-Frank into meaninglessness is the vast sums of money it can make if Dodd-Frank is out of the way. If you took the greed out of Wall Street all you’d have left is pavement.
Wall Street is the richest and most powerful industry in America with the closest ties to the federal government — routinely supplying Treasury secretaries and economic advisors who share its world view and its financial interests, and routinely bankrolling congressional kingpins.

How else can you explain why the Street was bailed out with no strings attached? Or why no criminal charges from being brought against any major Wall Street figure — despite the effluvium of frauds, deceptions, malfeasance and nonfeasance in the years leading up to the crash and subsequent bailout? Or why Dodd-Frank has been eviscerated?
As a result of consolidations brought on by the bailout, the biggest banks are bigger and have more clout than ever. They and their clients know with certainty they will be bailed out if they get into trouble, which gives them a financial advantage over smaller competitors whose capital doesn’t come with such a guarantee. So they’re becoming even more powerful.
Face it: The only answer is to break up the giant banks. The Sherman Antitrust Act of 1890 was designed not only to improve economic efficiency by reducing the market power of economic giants like the railroads and oil companies but also to prevent companies from becoming so large that their political power would undermine democracy.
The sad lesson of Dodd-Frank is Wall Street is too powerful to allow effective regulation of it. We should have learned that lesson in 2008 as the Street brought the rest of the economy – and much of the world – to its knees. Now we’re still on our knees but the Street is back on top. Its leviathans do not generate benefits to society proportional to their size and influence. To the contrary, they represent a clear and present danger to our economy and our democracy.
They should be broken up, and their size must be capped. Congress won’t do it, obviously. So we’ll need to rely on the nation’s two antitrust agencies — the Federal Trade Commission and the Antitrust Division of the Justice Department. The trust-busters are now investigating Google. They should be turning their sights onto JPMorgan Chase, Citigroup, and Goldman Sachs instead.

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Jamie Dimon keeps a tally of the ways Wall Street already has been affected by the largest overhaul of financial regulation in generations.

At a June 7 conference in Atlanta, the JPMorgan Chase & Co. (JPM)chief executive officer reeled off items from his list during a session with Federal Reserve Chairman Ben S. Bernanke: Banks are putting aside more capital. Off-balance-sheet business has been “virtually obliterated.” Accounting is more transparent.

“Regulators, I can assure you, are much tougher in every way and shape possible,” Dimon told the central banker, suggesting that the rules are going too far.

Some things may not seem to have changed much since the credit crisis nearly toppled the financial system in 2008. A handful of large banks dominate Wall Street, where workers with higher salaries than most professionals collected cash bonuses averaging $128,000 last year. Executives have fared even better; Dimon’s compensation rose 51 percent to $23 million.

Moreover, a year after the Dodd-Frank Act became law, hundreds of rules mandated by statute have yet to be written. Financial firms, consumer groups and regulators are still engaged in hand-to-hand combat over many of them. Deadlines for implementing the law are being pushed back as agencies find themselves unable to cope with the sheer size and complexity of the task under the timetable set by Congress.

House Republicans, swept into power in the November elections, are pushing bills to revise, delay or repeal parts of the law including the consumer bureau, derivatives rules and the registration requirements for private equity advisors.

‘Pretty Powerful’

Still, Dimon’s complaint illustrates that Dodd-Frank is rippling through the U.S. financial system. However slowly, firms have begun changing the way they do business in response to the rules and in anticipation of what lies ahead.

“Many people think that not much has happened because so much of it is delayed and behind schedule,” said Roy C. Smith, a finance professor at New York University’s Stern School of Business. “That is not the case. In fact, the statute has pretty powerful provisions in it with respect to regulating systemic risks.”

In Smith’s view, the power of Dodd-Frank can already be seen in moves like Citigroup Inc. (C)’s decision to sell off lines of business such as its consumer-lending unit. New regulations governing different lines of business, in addition to the substantial increase in the amount of liquid capital banks must hold, are making it too expensive for financial institutions to stay at their current size, Smith said.

‘Cost of Regulation’

While some of this streamlining would have happened as a response to the crisis without Dodd-Frank, the law is ensuring that it continues, he said.

The law’s authors “are creating a cost of regulation that causes you to break yourself up,” Smith said. “They’ve done it in a back-door way, and they’ve done it with a slow-burning fuse, but there’s no doubt that if Dodd-Frank had not been passed, the odds are much greater that this would have gone back” to the old ways.

Dodd-Frank is simultaneously leading to the end of some Wall Street practices and creating new opportunities.

The looming threat of provisions such as the Volcker Rule, which will largely bar banks from trading solely for their own profit, has already spurred a stream of departures from the proprietary trading desks of firms including Goldman Sachs Group Inc. (GS) and Deutsche Bank AG.

At the same time, the law requires swaps to be traded on a platform that allow multiple bids and offers to be made by multiple participants. Some firms are preparing so-called swap execution facilities to take advantage of the new market.

Strategy Shifts

Eris Exchange, an electronic futures exchange, opened for business in Chicago a year ago in direct response to Dodd-Frank, and has since traded more than $33 billion in notional value of interest-rate swap futures contracts, the company’s chief executive officer, Neal Brady, told lawmakers at a Senate hearing last month.

“There certainly have been shifts in approach and strategy for a lot of people,” said Kevin McPartland, a senior analyst in New York with Tabb Group, a financial markets research and advisory company.

Even as regulators rush to finish rules governing swaps, there has been a “slight uptick” in electronic trading to make sure the system works when regulations are ready, he said.

Besides changing how financial institutions make their money, the act has begun to influence some of their practices, said Jo Ann Barefoot, a Washington-based bank consultant.

Consumer Bureau

The new Consumer Financial Protection Bureau, with expanded powers to enforce existing laws banning ”unfair, abusive and deceptive practices,” is set to begin operations July 21, exactly a year after President Barack Obama signed Dodd-Frank into law. Already, some banks are hiring internal consumer advocates to help ensure that their policies on overdraft fees and other issues will not be flagged as abusive, she said.

“Banks are trying to be much more proactive in looking at fairness, rather than technical compliance,” she said. “A lot of the industry has not yet made that shift, but it’s happening rapidly.”

While the enactment of the law has begun to change the financial system, the lobbying battle in Washington rages on in Congress and the regulatory agencies.

The financial services industry, which is facing the largest re-write of its rules in more than 70 years, is deploying all of its expertise and resources to help shape the rules through research, comment letters and meetings with regulators, said Timothy Ryan, president and CEO of the Securities Industry and Financial Markets Association.

Lobbying Funds

The 10 largest U.S. banks by assets spent $11.2 million on lobbying in the first quarter of 2011, according to Senate disclosure forms. Five of the 10 firms, including JPMorgan and Goldman Sachs, spent more in the first quarter of 2011, in the wake of Dodd-Frank, than they did before its passage in the first quarter of 2010.

In addition, four Washington trade groups representing the largest banks — including Ryan’s securities association, the American Bankers Association, the Financial Services Roundtable and the Financial Services Forum — combined to spend $6.25 million in the first quarter.

“We’re working seamlessly with all of these trade groups,” said Ryan, whose group has filed more than 100 comment letters with the rule-writing agencies and is planning to increase its activity in the months ahead. “Almost all of us are working together now and we’re divvying up assignments based on expertise.”

Debit Cards

Provisions that bankers consider most harmful to their business models have gotten special attention. Many financial lobbyists, for example, spent a year fighting with retailers over the Dodd-Frank provision that cuts the fees merchants must pay each time their customers swipe a debit card — a revenue stream worth some $16 billion each year to banks large and small. The Fed on June 29 set the fee at about half the current average of 44 cents per transaction, after the banks argued that the original plan for a 12-cent cap was too low.

In Congress, lawmakers from both parties have rallied behind real estate brokers, homebuilders and consumer groups in pressuring regulators to water down a rule on mortgage risk retention, which would force lenders to keep a 5 percent stake in loans they bundle for investors. Republicans and Democrats in both chambers have also kept the pressure on the Commodity Futures Trading Commission and Securities and Exchange Commission to exempt commercial end users of derivatives from margin payments.

Consumer Group

“It feels like passing the legislation was one stage of a battle. Now we have to continue the work of implementing it,” said Lisa Donner, executive director of Americans for Financial Reform, an advocacy group that includes the AFL-CIO labor federation

Even if Dodd-Frank is fully implemented, some economists and analysts say, its provisions don’t go far enough to shrink large, interconnected banks and prevent them from taking on risks that could threaten the financial system again.

So long as “there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril,” Thomas M. Hoenig, president and chief executive officer of the Federal Reserve Bank of Kansas City, said at a conference on Dodd-Frank in June. “To more fundamentally address this issue, we must go beyond today’s Dodd-Frank.”

Dimon and Bernanke

At the June meeting with Bernanke, Dimon expressed the opposite concern when he rose out of the audience: “Do you have a fear, like I do, that when we look back” at all the Dodd- Frank rules, “they will be a reason it took so long that our banks, our credit, our businesses, and most importantly job creation to start going again?” he asked.

When Dimon had finished reeling off the ways the industry had already changed in the wake of the financial crisis, Bernanke paused and looked at him.

“Well, Jamie, that list you gave made me feel pretty good there for a while,” the Fed chairman said. “It sounded like we’re getting a lot done.”

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Does your broker work for you?

In the past, the answer to that question wasn’t quite clear. Under U.S. rules, brokers were required only to steer clients toward “suitable” trades or investments, not necessarily those in their “best interests.”

Among the changes already in motion from passage of last year’s Dodd-Frank Act are new rules to be written by the Securities and Exchange Commission to clarify the relationship between broker-dealers and their clients.

Under the rules, brokerages will probably have to draw up new disclosures to make clear that they are putting their client’s best interests first, a level of responsibility known as a fiduciary standard.

“There’s no question that one of the public policy objectives will be to raise the bar for brokerage firms that provide personalized investment advice,” said John Taft, chief executive officer of RBC Wealth Management and chairman of the Securities Industry and Financial Markets Association, the lobbying group for the brokerage industry. “The firms that don’t put their clients’ interests first are going to change how they do business.”

As part of the Dodd-Frank financial-services overhaul law enacted last July, Congress asked the SEC to study existing standards. In a staff report issued in January, the commission found that many retail investors are confused by the different roles played by investment advisers and broker-dealers.

Brokers or Advisers

Registered investment advisers follow principles outlined in the Investment Advisers Act of 1940and must put their clients’ best interests first. Broker-dealers adhere to the Securities Exchange Act of 1934 and currently have only to recommend products that meet their clients’ needs when sold.

To ease customer confusion, the commission recommended that broker-dealers adopt a fiduciary standard “no less stringent than currently applied to investment advisers.”

Republican commissioners Troy Paredes and Kathleen Casey issued a joint statement taking issue with the report. “The study unduly discounts the risk that, as a result of the regulatory burdens imposed by the recommendations on financial professionals, investors may have fewer broker-dealers and investment advisers to choose from, may have access to fewer products and services, and may have to pay more for the services and advice they do receive,” the statement said.


Under the previous suitability standard, brokers only had to recommend a product consistent with the investor’s goals, strategies and risk tolerance. When offering investment options to customers under a fiduciary standard, brokers will now have to document that it is the best choice for the investor, said Barbara Roper, director of investor protection for the Washington-based Consumer Federation of America.

The new standard won’t necessarily require that brokers include low-cost options in their menu of offerings, Roper said.

The SEC and Financial Industry Regulatory Authority oversee about 5,100 broker-dealers, about 4,500 of them Finra members, according to the agency report and the group’s website. In 2009, firms registered with Finra held more than 109 million retail and institutional accounts, with about 18 percent of those brokers also registered as investment advisers with a state or the SEC, the SEC report said.

Total retail assets managed by Finra broker members and registered investment advisers were $13.4 trillion at the end of 2010, according to data from Boston-based research firm Aite Group.

Common Standard

The agency is scheduled to propose rules for a common standard by the end of this year, according to its website. Brokers are expected to both disclose more information before working with customers, and provide more transparency when recommending products that may involve conflicts, Roper said.

“No matter how it’s written, if it’s written right, it will raise the bar across the industry,” Taft said.

The Dodd-Frank Act specifies that the uniform standard can’t weaken the existing obligations for advisers, according to Ira Hammerman, general counsel for Sifma. That means the SEC should create parallel rules, which still permit transaction- based advice paid through commissions instead of fee-only advice, he said.

A new standard will likely mandate that brokers provide additional disclosures about services, compensation, and conflicts of interest, said K. Susan Grafton, a former SEC attorney who works in the Washington office of Gibson Dunn & Crutcher LLP. The disclosures may be similar to those required as part of so-called ADV forms that advisers currently provide to investors.

‘Create Clarity’

“We already act in a fiduciary capacity, so we think this rule will just augment and create clarity for the consumer,” said Mark Casady, chairman and chief executive officer of Boston-based brokerage and advisory firm LPL Investment Holdings Inc.

Since most of LPL’s 12,500 advisers are registered both as brokers and investment advisers, they already uphold a fiduciary responsibility, Casady said. Since the firm also doesn’t sell proprietary products, he expects the new standard won’t really change their practices.

“It makes it clearer to the consumer that there’s a fiduciary standard being applied in both cases — it’s more a legal matter than a practice matter,” he said.

Under a common standard, the SEC may allow principal trading, which is when firms use their own stock inventories to fulfill trades, without requiring client permission each time a trade is made, said Mercer Bullard, founder of Fund Democracy LLC, an advocacy group in Oxford,Mississippi.

“It would violate Dodd-Frank to say that no broker is ever required under the best interest standard to disclose that,” Bullard said.

More Transparency

Other transactions that may require more guidance from the SEC include initial public offerings underwritten by the brokerage firm, said Sifma’s Hammerman.

Robert T. Mooney, chief compliance officer of Wells Fargo Advisors, said his firm supports the “harmonized standard of care.”

“It appears the standard of care will be a workable one that will continue to provide clients choice when determining the type of relationship they would like to have with their financial advisor,” Mooney said in an e-mail.

Richard Ketchum, Finra’s chairman and CEO, said at the regulator’s annual conference in Washington in May that brokers must “truly understand” complex products, such as structured notes, that they sell.

Representatives of Morgan Stanley (MS), Bank of America Corp. (BAC) and Edward Jones declined to comment, saying they didn’t want to speculate on changes before the fiduciary rules are written.

“The SEC is trying to find the sweet spot to adopt something that has important protections for investors, but doesn’t trigger pushback that ends up getting the regulation killed,” Roper said.

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Dodd-Frank, love it or hate it, will be one of they key stories this week as some significant deadlines come up this weekend.

But while "D-F", as I like to call it, is indeed a newsworthy item, there are several key positions that are vacant.

As of July 8th, the positions of the FDIC Chair, Comptroller of the Currency and the CFPB are all vacant. That’s right—vacant. Kind of ironic would you say that while Uncle Sam is facing a fiscal crisis, these positions are open.

After all, they’re only the leaders in the divisions that are supposed to regulate the banks and "protect consumers." No biggie. Not like the government could plan a year in advance to fill the jobs.

I caught up with Rep. Shelley Moore Capito, Chairman of the Subcommittee on Financial Institutions and Consumer Credit, on these openings and the landmark financial regulation that is sure to keep Wall Street on its toes for some time as regulators are in the process of making the rules they will need to follow.

LL: Some of my contacts are just shaking their heads at these openings. What do you think?

Rep. Capito: I certainly share their frustration.   None of these vacancies is a surprise. We’ve known they are coming for well over a year.  It is astounding that the Administration has not nominated someone to serve as director of the CFPB.    Not only are we coming out of a tremendous period of turmoil in the banking industry, the Dodd-Frank Act requires hundreds of new regulations to be written by federal regulators.   Now is not the time for numerous openings in leadership positions at bank regulators.

LL: You introduced H.R. 1667 To postpone the date for the transfer of functions to the Bureau of Consumer Financial Protection if the Bureau does not yet have a Director in place. Are you confident it will pass in the overall Senate?

Rep. Capito: I think there will be support for a bill to delay the transfer of certain powers if there is no director in place.  It’s commonsense.  You wouldn’t set up a new company without the proper leadership on board, would you?  It baffles me that my bill, and other bills to improve the CFPB, have received so much harsh criticism.  I think it’s dangerous to characterize any suggestion to makes changes to the CFPB as “anti-consumer.”   No law is perfect, including Dodd-Frank.

That said, I certainly hope the President nominates a Senate confirmable candidate as soon as possible so this issue becomes moot.

LL: Who would you want to see as CFPB Director?

Rep. Capito: I am not picking favorites at this point.  As I’ve said all along, I support a five-person commission to lead the CFPB.

LL: Do you think "non-bank" financial institutions (payday lenders check cashing agencies and specialty mortgage shops ) be under the jurisdiction of hte CFPB?

Rep. Capito: The Dodd-Frank Act provides for these entities to be regulated by the CFPB.   It is too early to tell what extent the bureau will use their authority.   Many of these institutions are regulated at varying degrees at the state level.  Some states, like my home state of West Virginia, have banned certain practices.   We need to make sure there is proper oversight of these institutions.

LL: Many would argue it was the big banks and the specialty mortgage companies that were the biggest contributors to the mortgage crisis.

Wouldn’t that mean the CFPB should over see them?

Rep. Capito: The CFPB will have consumer supervision duties for institutions above $10 billion in assets so they will cover the “big banks.”   Non-bank financial institutions will also be covered by the CFPB although it is too early to tell to what extent the bureau will use their authority.   The mortgage crisis was not only a consumer issue, but also an issue of safety and soundness.   It will be critical for the CFPB to work well with the prudential regulators to ensure that consumer safety and the safety and soundness of institutions are intertwined.

LL: You were on the final conference committee. Dodd-Frank is celebrating its one year anniversary. How would you rate the landmark legislation. There are many unknowns still out there. Do you think Congress understands the magnitude of the legislation they passed?

Rep. Capito: D- There is no doubt that our nation’s financial regulatory structure needed to be updated and revamped. That said, simply creating another bureaucracy and putting more laws on the books will not in itself guarantee consumer protection.  We have heard from Elizabeth Warren that her intent with the CFPB is to remove outdated or unnecessary regulations as they develop new regulations for consumer finance. We have yet to see evidence of this. 

All regulators should be using this time to assess the regulations within their agencies to ensure we are not just simply adding another layer of regulations.    I would have preferred to streamline agency power and put in place a more nimble regulatory structure instead of passing a bill with thousands of new rules and regulations.

I won’t give it an “F,” however, because I think it’s counterproductive to write it all off.

LL: Jon Corzine told me Wall Street needs more time to react to Dodd-Frank. Has anyone in Congress thought of this? The ramifications if Wall Street’s infrastructure was not ready for the change?

Rep. Capito: I am more concerned about how smaller financial institutions like community banks and credit unions will fare as the CFPB starts to implement rules and regulations.  Although many claim that community banks and credit unions are “exempt” from the CFPB, they are not free from the rules and regulations the CFPB will be producing.

Large institutions already have armies of compliance officers and attorneys ready to absorb new rules and regulations; small institutions don’t have that luxury and every extra compliance officer they hire is less resources that can be directed towards growing economies across the nation.

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Washington lobbyists have been hard at work marshaling opposition to any attempts to impose a capital surcharge on our nation’s largest banks.

One of their most persuasive points seems to be that under the new Dodd-Frank regulatory regime banks are so tightly regulated that additional capital requirements are unnecessary.

"We don’t need additional capital to prevent future bailouts. The government already has the orderly resolution authority to make sure that no one is too big to fail," one lobbyist told me.

In other words, banks are trying to use Dodd-Frank as a shield against the only plausibly effective shield against future bailouts.

I won’t go into the case against resolution authority here. The FDIC says it will be effective. The banks agree. That’s all you should need to know to throw the entire thing into doubt.

Unfortunately, the banks seem to have found gullible dupes among the Republicans, many of whom are all too eager to see new capital requirements as an attempt to over-regulate or interfere with market processes.

I know it is probably useless to try to teach politically-minded people anything. If they were open to persuasion they probably wouldn’t be effective partisans to begin with. Ideological commitment, especially among the so-called moderates, is almost a pre-requisite to political success.

But let me try anyway.

The failure to impose additional capital requirements would allow our biggest banks to continue to enjoy the advantage of a decisive government subsidy. That subsidy comes in the form of the advantage they enjoy in funding their operations from the conviction among counter-parties that they will—come hell or high water—be bailed out.

Everyone in the world knows that there is no way Bank of America [BAC 10.70 -0.30 (-2.73%) ]or Citigroup [C 41.65 -0.92 (-2.16%) ] will ever be allowed to fail. Put all the anti-bailout language in the world into every bill passed by Congress, but no one will believe it. Everyone remembers that Barney Frank used to scream up and down the corridors of the Capitol Building that there was no government backing for Fannie Mae. As it turns out, there was. And is.

Higher capital requirements for the largest banks do not interfere with the operation of the free market. They are a necessary counterbalance to a government-created imbalance in the markets.

If you favor markets and oppose bailouts, there’s really no choice but to support increased capital requirements for the biggest banks. The banks may talk a free market game, but all they are really doing is protecting their government-supplied subsidy.

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