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The Public Policy
Dodd-Frank’s Mystery SIFI Theater
New evidence of the banking law’s gross unconstitutionality.
Following the financial crisis, there was a desire to protect the nation against banks becoming so large that their failure would threaten the entire financial system. The result was the Dodd-Frank financial reform act, signed into law in 2010. Now there’s a renewed debate over whether the nation’s biggest banks are still too big to fail, after Mitt Romney, in the first Presidential debate, called Dodd-Frank, the “biggest kiss that’s been given to — to New York banks I’ve ever seen.” One of the law’s co-authors, Rep. Barney Frank (D.-Mass.), hotly disputed that assertion, saying that if a bank “gets into so much debt that they [sic] can’t pay off all their debts, they are put out of business” and noted that many firms were resisting Dodd-Frank’s implementation.
Last week, Dodd-Frank defenders got a boost thanks to a report produced for the Securities Industry and Financial Markets Association (SIFMA), which argues that Dodd-Frank’s “orderly liquidation authority” (OLA) provided what the author called a “meaningful answer to too-big-to-fail,” and treats opposition to the law as a mystery.
The law’s critics also chimed in. There are, in fact, many aspects of Dodd-Frank that entrench too-big-to-fail status for big banks. As former White House Counsel C. Boyden Gray and attorney Adam White outline them in a Weekly Standard cover story, the new regulatory burdens imposed by the law will place smaller banks at a disadvantage relative to the bigger banks that can better absorb the compliance costs. In fact, some smaller banks may have to merge to deal with the costs effectively, creating yet more big banks in the process.
There’s an even more troubling aspect of Dodd-Frank, which Gray and White do not mention. The act designates the too-big-to-fail institutions as SIFIs — Systemically Important Financial Institutions. SIFIs are subject to additional regulations and eligible for OLA. Most importantly, they have to pay staggeringly large fees to help clean up the mess when a peer SIFI fails. That’s right — Dodd-Frank requires some financial institutions to pay to fix problems created by others.
This means that there are two classes of SIFIs — 1) the high-rolling institutions that may be tempted to take unreasonable risks with the money people have entrusted to them, and 2) the large stable firms that actually have the money (again, entrusted to them by clients) that can be expropriated by government to pay for the mistakes of the first class. In effect, Dodd-Frank turns responsible institutions into cash cows to pay for the “orderly liquidation” of the irresponsible.
The moral hazard involved in this situation should be obvious. In fact, the OLA and bailout fees together represent an opportunity for regulators to nationalize SIFIs, turning them into new versions of Fannie Mae and Freddie Mac, with all that entails. The idea that Dodd-Frank provides a “meaningful answer to too-big-to-fail” turns out to be a fiction — and not a very believable one.
This is why responsible institutions have been resisting Dodd-Frank. It’s also why state attorneys general are very worried about the damage that this process could do to holdings in state pension funds, which are already under great stress.
Furthermore, the law designates other firms besides banks as SIFIs, including large insurance firms. There is no good reason for this. As State Farm points out, “insurance companies in general, and mutual insurers in particular, do not engage in the types of unregulated, highly leveraged and interconnected activities that threaten the financial stability of the United States (e.g. speculative participation in credit default swaps).” This raises the possibility that regulators could try to broaden the category still further, and designate, say, large retailers and even manufacturers as SIFIs.
It is all so unnecessary. Chapter 11 bankruptcy could provide a perfectly acceptable method for liquidating a bank, as former Federal Reserve Chairman Alan Greenspan noted at the SIFMA meeting last week. However, until Dodd-Frank is repealed or replaced, that will not happen.
Yet, there is another possible solution to the Dodd-Frank mess. The State National Bank of Big Spring, the Competitive Enterprise Institute, and the 60-Plus Association have joined to together to sue over the constitutionality of the law, which creates agencies that violate the separation of powers, among other things. As my CEI colleague John Berlau noted recently, there are now several prominent Democrats who recognize the damage Dodd-Frank is doing. In other words, more and more people are realizing that Dodd-Frank is an example of mystery SIFI theater, and heaping well-deserved opprobrium upon it.
About the Author
Iain Murray heads the Center for Economic Freedom at the Competitive Enterprise Institute and is the author of Stealing You Blind: How Government Fatcats Are Getting Rich Off of You.
Pecos Pete| 10.29.12 @ 7:15AM
A solution not requiring judicial action: Elect a majority Senate and House of Representatives and President. A majority Congress of Republicans could (will?) repeal Dodd-Frank (and, of course, ObamaCare).
Von Mises Jr| 10.29.12 @ 7:45AM
Simply repealing Dodd Frank will be difficult since some RINO's voted for this Bill that required 60 votes to overcome a filibuster.
ObamaCare was passed with Reconciliation that is a Budget process only requiring 51 votes. So a simple majority in the Senate can repeal ObamaCare, but Dodd Frank will need to be weakened or needs 60 votes to repeal. Romney could use the Obama Executive Order tactic to let it die on the vine.
The Senate was not in session when the one Board's appointee Cordray was inserted. He will be removed without a Senate approval if I understand correctly.
The whole Bill can be left floundering. If the Senate remains in Democrat hands and Romney wins, failure to pass a Budget means Mitt gets to decide what gets funded. What goes around comes around.
TLP| 10.29.12 @ 10:36AM
Really?
60 Votes to Kill a Filibuster?
We don't need no Steenking 60 Votes.
Or, have you forgotten how we got Obamacare Rammed up our Asses.
From now on and Forevermore, RECONCILIATION is the Coin of the Realm.
That's what makes PAYBACK such a B*tch.
Von Mises Jr| 10.29.12 @ 11:35AM
Romney can simply suspend Dodd Frank with an Executive Order since Obama is so fond of them with some 923 and counting.
ObamaCare was passed by reconciliation but it will also die a slow death regardless since some states will refuse to fund the infrastructure. The Republicans will make sure the Federal Government doesn't get the funds to step in.
While I understand how this mucked up Marxist has destroyed our Rule of Law, I think it will be so much more sweet to use the Constitution they hate to stick ObamaCare up their posteriors.
TLP| 10.29.12 @ 4:59PM
No.
The Rules have been Changed, forevermore.
I Refuse to play be a different set of rules, than my Opponent.
That is a Fool's Errand, and Suicide, pure and simple.
WE WILL RAM OUR CORRECTIVE MEASURES right down their MFing Throats. And they will Learn what Revenge is.
A Meal, best served Cold.
SIC SEMPER TYRANNUS!
Occam's Tool| 10.29.12 @ 2:02PM
The boys at Mystery Science Theatre 3000 now have a website called Riff-Trax, where they continue the grand tradition.
Michael J Nelson, former head writer for MST3K and now for Riff-Trax, is a devout Christian and Conservative---you can catch him sometimes on Ricochet, as well. I have no financial interest in Riff-Trax, I just want to see it do well because it is as funny as hell. www.rifftrax.com.
John II, NB.
philippic| 10.29.12 @ 11:48AM
agree that D-F is bad juju. that said....Wall Street did go off the deep end and millions were bilked. aside from fixing the political machinations (or at least getting some accountability) that lay at the heart of the financial crisis, how do you propose to handle Wall Street's excesses?
Von Mises Jr| 10.29.12 @ 1:15PM
How about privatizing Fannie, Freddie and getting a new president whom understands finance?
We need someone who will appoint Fed Chairmen whom does not create a stock bubble, an internet bubble, then a housing bubble and now a government bubble.
Volume on Wall Street is pathetic and new business starts sucks hind teat. GDP growth is anemic and profits are falling. Unemployment is outrageous and Obama's BLS is apparently not producing jobs numbers this week.
Perhaps we can get some politicians that are not in bed with Wall Street. How about the excesses of Solyndra, Ener1, A123 Systems, Solar Trust....
philippic| 10.30.12 @ 11:53AM
agree on all accounts + jail time for wall street crooks + jail time for corrupt Union leaders + censure and banishment for crooks like Frank, Rangel, et al + censure/investigation/fines for the likes of James Johnson and other Fanny/Freddy crooks
philippic| 10.30.12 @ 11:55AM
+ OWS leadership accountability/jail time for destruction of public & private property, rapes, etc.
philippic| 10.30.12 @ 11:57AM
+ forfeiture of the first $20 million Hollywood 1 per centers bilk from the public
topcat52| 10.29.12 @ 11:55AM
So SIFI is SciFi. What a shock.
dherion| 10.29.12 @ 1:21PM
Why would two Congressmen (Dodd and Franks) be allowed to pass a bill 'fixing' a problem they helped cause? Are we living in 'the Matrix.' It's surreal.
Wizard| 3.31.13 @ 3:43AM
Yep. Like I keep saying, letting Dodd and Frank write "financial reform" legislation is a lot like hiring arsonists to rewrite building codes after a catastrophic fire. The financial meltdown was caused by excessive state meddling in markets, and Dodd and Frank were among the chief meddlers.
JD| 10.29.12 @ 1:36PM
You'll see no liberal trolls on this article. It's too right, and too smart for them. They only flock to articles about candidates, where they can use subjectivity to hate, unencumbered by reality.
Occam's Tool| 10.29.12 @ 2:04PM
Indeed. And, interestingly, no comments from the supposed former Captain of Industry, Jack in Wi.
Albert Constantine Jr.| 10.29.12 @ 4:08PM
They seem to be avoiding many of the Benghazi stories, as well.
Cats1cowboy| 10.29.12 @ 4:47PM
What the h*ll does "too big to fail" mean? What arrogance. KMA
oldeham| 10.29.12 @ 5:10PM
This is an interesting post but what I found most interesting is the picture. If you combine the intelligence of Frank, Dodd, Obama, Biden, Waters, Reid, and Schumer would not have the IQ of a typical 2 year old. But you have an mean, nasty playground bully.
atilla| 10.31.12 @ 10:07PM
BUT WILL THEY GO TO PRISON?????
THAT'S THE ONLY QUESTION!