President Obama and his allies have sought in recent weeks to defend the 2010 financial reform law, claiming success in making the financial system safer and taking on critics on the Right and Left who have suggested otherwise.
The law’s defenders have become more assertive as the Democratic primary has taken a stridently anti-Wall Street tone and as lawmakers and regulators have contemplated the next steps for reshaping the financial system.
“Wall Street reform — Dodd-Frank — the laws that we passed have worked,” President Obama said after a meeting with financial regulators earlier in the month. “I want to emphasize this because it is popular in the media, in political discourse — both on the Left and the Right — to suggest that the crisis happened and nothing changed. That is not true.”
Obama’s remarks were just the first of similar comments from high-ranking officials.
“I feel a great deal has been done,” Federal Reserve Chairwoman Janet Yellen said Wednesday at a press conference. “We have been working at this for a number of years, and I believe we have made very substantial progress.”
Citing new stress tests for banks to test their safety, stricter supervision, higher capital standards and other new rules, Yellen said there has been a “quantum leap” in the oversight of the financial system and of big banks in particular.
On the other side of the debate, most prominently, is Bernie Sanders, the Vermont senator running a populist campaign for president who has called for breaking up big banks and claimed that the business model of Wall Street is fraud.
More recently, a new top critic of the status quo has emerged from within the Federal Reserve System. Federal Reserve Bank of Minneapolis President Neel Kashkari in February announced his plans for examining the merits of breaking up the big banks or regulating them like utilities. The announcement drew special note given Kashkari’s background working for one of the biggest banks, Goldman Sachs, and administering the now-hated TARP bailout in the Bush Treasury.
Yet administration officials have countered that line of thinking, arguing that the banking sector’s strong performance amid recent financial market volatility demonstrates that the 2010 Dodd-Frank financial reform law, with all its new rules, truly has improved the safety of the system.
Speaking at an event hosted by the Chamber of Commerce Wednesday, Treasury official Antonio Weiss called it “no accident” that banks performed well during the turmoil of January and February, stating that, “without question, the reforms adopted following the crisis have created a stronger, more resilient system.”
“In short, financial reform has passed its first series of tests,” Weiss said. Weiss is viewed skeptically by some liberal bank critics wary of his background as an investment banker. His appointment to a top Treasury post subject to confirmation was blocked by liberal Democrats, led by Sen. Elizabeth Warren, D-Mass.
Yet Barney Frank, the former House Financial Services Committee chairman whose name is on the 2010 law, shared Weiss’ view in an op-ed published in the Washington Post on Friday. In the article, Frank took aim at Sanders, Kashkari and other proponents of breaking up big banks, arguing that Dodd-Frank has worked and that they have failed to state how small banks must be kept. Forcing big banks to downsize, Frank argued, would cause an “enormous disruption” to the financial system.
Those arguments are not likely to sway skeptics on the Left.
“We don’t feel the job is over,” said Marcus Stanley, policy director for the group Americans for Financial Reform, which advocates tighter regulation of the financial system.
Stanley, an advocate of downsizing the largest banks, said the Obama administration is “going to tout their successes, of which there have been some,” with Dodd-Frank. But he added that the system would face a new test in upcoming weeks with the latest feedback from regulators on the banks’ living wills.
Under Dodd-Frank, the banks are required to submit directions for how they would safely go through bankruptcy, without causing a panic or necessitating bailouts, in the case of a failure. If regulators determine that those plans, called living wills, are not credible, and the banks fail to correct them after repeated warnings, the regulators have the power to force divestitures.
Warren and other Democrats have pushed the Fed and Federal Deposit Insurance Corporation to jointly declare banks’ living wills not credible. She also used the fact that the agencies have not affirmatively declared the plans credible to suggest that they are still not capable of failing without endangering the system.
“Living wills are one of the primary tools that Congress gave to regulators to make sure that the taxpayers will not be on the hook if another giant bank fails,” Warren told Yellen in a Senate hearing in February.
Not all the administration’s problems are to the left, however. Republicans also have attacked the legacy of Dodd-Frank, arguing that its many rules and regulations have hurt banks’ ability to make loans to businesses and expand the economy.
Speaking at a conference of bankers last week, Republican House Financial Services Committee Chairman Jeb Hensarling issued an unusually stark condemnation of the law, pledging that he “will not rest until Dodd-Frank is ripped out by its roots and tossed on the trash heap of history.”
