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With his signature to Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010, President Barack Obama enacted the most far reaching reform package that the financial sector has seen since the Glass-Steagal Act of 1933.  Given this monumental event, this wacked-out, oft-censored, and certain-Canadian-export-loving senior research analyst offers this opinion: 

Issue: The Federal Reserve

The legislation appropriately addressed the issue.  Maligned for its actions during our nation’s financial crisis, the Federal Reserve has emerged as the top regulator in the financial sector with expanded powers.  Despite acquiring a watchdog (i.e., the Government Accountability Office), Capitol Hill and the White House have admitted the key role our central bank played during the crisis and will play going forward. 

Issue: Too Big to Fail

The legislation did not go far enough.  Although the new law creates the Financial Stability Oversight Council with the power to seize troubled institutions and systematically dismantle them (i.e., the FDIC would handle the liquidation), it would be naïve to believe that our government would not rescue a financial institution whose failure would pose a threat to our country’s financial stability.  The new law only imposes stricter regulations on those Too Big to Fail.

Issue: Hedge Funds/Derivatives

The legislation addressed the issue.  Although the new law gives the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) greater power to regulate derivatives, and the “Volcker Rule” stops banks from trading with their own capital, arbitrage is the essence of the financial system (i.e., U.S. and worldwide).  Going too far with new laws and regulations would have placed the U.S. financial system at a competitive disadvantage with the rest of the world.

Issue: Protecting Main Street

The legislation went too far.  Although the new law creates the Consumer Financial Protection Bureau within the Federal Reserve to protect the American consumer from itself, Capitol Hill and the White House were riding a wave of consumerism.  All financial institutions, not just those “Too Big to Fail,” will experience decreased revenue and increased compliance costs.

Issue: Credit Rating Firms

The legislation addressed the issue.  The new law establishes an Office of Credit Ratings within the Securities and Exchange Commission (SEC) that can fine credit rating firms and empowers the SEC to deregister a firm that gives too many bad ratings over time.  The only drawback is that the regulator may become “the final word” on which rating firms assess certain securities.

Issue: Corporate Governance

The legislation went too far.  Although the new law gives shareholders nonbinding votes on executive pay and “golden parachutes,” and gives the SEC authority to grant shareholders the ability to nominate their own directors, it is too expansive.  The new law applies to all companies, not just those in the financial sector.

Issue: Preventing the Next Financial Crisis

The legislation did not go far enough.  Although the new law may mitigate in some form the next financial crisis, the law did not address a core issue from the last crisis.  Specifically, the Democratically-controlled Congress opted not to address government-sponsored enterprises Fannie Mae and Freddie Mac.

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