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Worried About ‘Too Big To Fail’ Banks? Ignore Romney’s Attacks In The Debate

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Worried About ‘Too Big To Fail’ Banks? Ignore Romney’s Attacks In The Debate


The big question is not whether to dismantle Dodd-Frank, but whether it gets implemented correctly.

Wednesday’s presidential debate had a relatively detailed discussion of the Dodd-Frank financial reform bill. From a transcript, this is how President Obama described what the bill does:

We said you’ve got — banks, you’ve got to raise your capital requirements. You can’t engage in some of this risky behavior that is putting Main Street at risk. We’ve going to make sure that you’ve got to have a living will so — so we can know how you’re going to wind things down if you make a bad bet so we don’t have other taxpayer bailouts. […] And, you know, I appreciate and it appears we’ve got some agreement that a marketplace to work has to have some regulation. But in the past, Governor Romney has said he just want to repeal Dodd- Frank, roll it back.

And so the question is: Does anybody out there think that the big problem we had is that there was too much oversight and regulation of Wall Street? Because if you do, then Governor Romney is your candidate. But that’s not what I believe.

The sleepy delivery aside, this is a good description. I would have liked to have seen a reference to the CFPB (“cops on the beat protecting consumers”) and derivatives reform (“making sure our financial markets are transparent”), since they are both under serious attack by conservatives. But it’s not bad for a high-level overview.

What was Mitt Romney’s critique of Dodd-Frank?

One is it designates a number of banks as too big to fail, and they’re effectively guaranteed by the federal government. This is the biggest kiss that’s been given to — to New York banks I’ve ever seen. This is an enormous boon for them….We need to get rid of that provision because it’s killing regional and small banks. They’re getting hurt.

Let me mention another regulation in Dodd-Frank. You say we were giving mortgages to people who weren’t qualified. That’s exactly right. It’s one of the reasons for the great financial calamity we had. And so Dodd-Frank correctly says we need to have qualified mortgages, and if you give a mortgage that’s not qualified, there are big penalties, except they didn’t ever go on and define what a qualified mortgage was.

It’s been two years. We don’t know what a qualified mortgage is yet. So banks are reluctant to make loans, mortgages. Try and get a mortgage these days. It’s hurt the housing market because Dodd-Frank didn’t anticipate putting in place the kinds of regulations you have to have. It’s not that Dodd-Frank always was wrong with too much regulation. Sometimes they didn’t come out with a clear regulation.

First off, as Adam Levitin notes, the reason that we don’t have a QM definition is because that requires having a CFPB director. And who has been blocking a CFPB director consistently from the beginning? Senate Republicans. President Obama had to recess-appoint a director in order to get this rule started, much to the chagrin of Republicans. So it is a bit much to block the nominee necessary to start the agency and then complain the agency isn’t getting things done.

That said, there are two major complaints here. The first is that Dodd-Frank’s “resolution authority” and regulations for systemically important financial institutions (SIFI) are a “wet kiss” to the banks, and the second is that qualified mortgages are holding up the financial market. Let’s take them in turn.

SIFI and Too Big To Fail

Part of Dodd-Frank’s approach involves creating a graduated system of regulatory burdens for risky financial firms, combined with special resolution authority powers housed at the FDIC to resolve these firms when they fail. This gets attacked by conservatives, an attack Mitt Romney reiterated, because, they believe, it has three problems: (1) it picks a handful of winners, (2) protects those winners from competition through regulations that have no teeth, and (3) gives a signal to the market that these firms will be bailed out again in the future.

To address complaint (1), all bank holding companies with $50 billion or more in consolidated assets are included without a necessary designation, and systemically important financial institutions (SIFI) are included as well after a determination process. So it isn’t just the top five firms, but instead the 35-plus that are all larger in size. If it were an advantage to be declared systemically important, SIFI financial firms would be fighting to get the designation. By all accounts they are not, and indeed they are fighting against this status.

For (2), it makes sense that they are fighting the designation because Dodd-Frank requires more capital and includes more requirements for riskier firms. Take Sec. 165, which requires “large, interconnected financial institutions” to be subject to “prudential standards…more stringent than the standards and requirements applicable to non-bank financial companies and bank holding companies that do not present similar risks to the financial stability of the United States.”

Or Sec. 171, which requires that capital requirements scale with “concentrations in market share for any activity that would substantially disrupt financial markets if the institution is forced to unexpectedly cease the activity.” The idea is that if a firm wants to get bigger or engage in riskier activity, the normal prudential requirements to hold more capital and plan for a failure should scale as well.

For (3), the question is whether it will work or whether the market will think there will be endless bailouts. As I’ve described at length elsewhere, the resolution authority in Dodd-Frank is designed to precommit against bailouts. You need three institutions to approve resolution, who must consider the decision with a bias toward the market and the bankruptcy code. If there’s a liquidation, the FDIC has to wipe out shareholders, hit creditors, fire management and board members, and can’t buy equity in the firm to keep it alive. The problem we face isn’t Dodd-Frank, but Congress and the executive branch passing “TARP: Part Two.”


  1. Dominick Vila October 8, 2012

    We need strong and effective regulation to minimize the risk of a sequel to what happened brought us to our knees during the S&L debacle when Reagan was in office and to the financial institutions disaster when W was in office. Most importantly, we need to expand the authority of regulators to ensure they have the ability and access they need to do their job effectively.
    I think it is important to remember, however, that what happened to our financial institutions was the result of unadultered greed. Nobody forced banks to lend to people who could not afford the houses they were purchasing, and nobody forced them to engage in the smoke and mirrors scam known as the sub-prime or derivatives. They gambled with assets they did not have and we, the taxpayers, were left holding the bag.

  2. Fran October 8, 2012

    I have siad over and over again…when Mitt was talking about his math skills they were so fuzzy non of it added up…I loved the way Mike Konczal describe everything..it was to the tee. thanks…Mike…Mitt is a con-artist and an actor to a tee…that is with the narcissistic personality he possesses…believe me…he wants to pull the wool over everyone’s eyes…and he is convincing to a lot of people..but, not to people like Mike Konczal…Mitt’s math added up wrong in everyway.

  3. Lorraine October 8, 2012

    I wish I could take credit, but this was written by another and posted on another site, a number of us said we were going to repost:

    “Snow White, Superman and Pinocchio are walking along. They see a sign: “Contest for World’s Most Beautiful Woman.” Snow White goes in, later comes out smiling, wearing a crown. They walk along and see another sign: “Contest for World’s Strongest Man.” Superman goes in, later comes out smiling, wearing the belt. They walk along and see a sign: “Contest for World’s Greatest Liar.” Pinocchio goes in, later comes out with his head down crying. “Who the hell is Mitt Romney?” Pinocchio sobs.”

    1. Ed October 9, 2012

      spot on, I would expect Paul Ryan was a close second!

  4. howa4x October 8, 2012

    We’ve already seen a bank loose 7 billion on a risky bet in Europe outside of regulatory oversight. they could cover that one but what if it was a 700 billion bet lost? Would the banking industry expect to be bailed out again? I think a major part of Dodd-Frank that the banks are fighting is not only the capital requirements, but the living will that they have to submit. In that will the board of directors and all the upper management must be removed, if the bank fails, so no golden parachuttes this time. I think if I was a manager of a public pension I would avoid the major bank stocks. There is too much risk in the world and major banks can deal in that risk outside of our boarders. The republicans are playing a dangerous game here. Say they win, repeal Doo/Frank and greed once again takes over in the form of a bubble, like the tech or housing ones. The banks will once again over extend themselves, and if they crash again and pull the economy down, do you think anyone with any sanity will ever vote for a republican again?

    1. S-3 October 8, 2012

      America needs more sane people in it to ojoin with Earth itself and move forward, sir… And I WILL aim to be one of them…

      1. howa4x October 8, 2012

        I agree that’s why my wife and I recycle and compost so much that we put out 1/2 a bag of gargage a week We are committed to lowering our carbon footprint


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