It’s 2009… and people are furious.
The world is trying to dig itself out of the worst global recession since World War 2.
Millions have lost their jobs. Banks are folding like a pack of cards. And there’s a new
U.S. President in town trying to figure out what to do about it all.
You see, all this pain can be traced back to banks and more specifically, the risky
behaviors that triggered the subprime mortgage and global financial crisis.
That’s where the Dodd Frank Wall Street Reform and Consumer Protection Act - more
commonly known as Dodd Frank – comes in.
The law was first proposed by the Obama administration in June 2009 – and after a series of revisions
from Senator Chris Dodd and Representative Barney Frank (yes, that’s where the name
comes from) – President Obama signed it into law in 2010 with almost no Republican
support.
So what’s inside Dodd Frank – and how is it supposed to prevent something like the
financial crisis from happening again?
Well, it’s a long and complex piece of legislation – we’re talking hundreds of pages long
- that brought about the most significant changes to financial regulation in the U.S.
since the reform that followed the Great Depression.
So how is Dodd-Frank supposed to protect you and me? We’ve brought in a few experts to
explain.
Dodd-Frank created a new council made up of bigwigs from the Treasury Secretary, Fed,
SEC and more… Its goal is to keep banks, hedge funds and companies from becoming “too
big to fail.” It does that by making firms keep more money on hand and they even have
the power to break up companies that are a ‘grave threat’ to financial stability.
Agencies like Moody’s and Standard & Poor’s evaluate how risky an individual, company
or even government is to lend to. So in theory, a bad rating warns investors that these debtors
may not pay back their loan. But during the financial crisis we learned a lot of risky
debt was being given good ratings. Now these agencies are monitored- and unreliable ratings
could mean they lose their standing.
The Fed’s emergency loans during the financial crisis raised a lot of eyebrows, which is
why Dodd-Frank gave the government new power to audit these loans. Now the government has
authority to audit the Fed again in the future, and all emergency loans must be approved by
the Treasury.
There are many types of derivatives - ones that help keep the economy stable and ones
that did the complete opposite. One of the more controversial of these is the credit
default swap.
Here’s how it works. Say you’re giving a company a big loan. It’s a great deal
if you get all that money back, but what happens if the company goes bankrupt? That’s where
a credit default swap comes in. It’s your insurance.
But before Dodd-Frank, swaps weren’t regulated. And the sellers of the credit default swaps
didn’t actually have enough money to pay out if the worst happened.
Now thanks to Dodd-Frank, these insurance-type products are more heavily supervised.
When you deposit your money into a bank, you expect for it to be kept safe and sound. But
before Dodd-Frank, banks could use your money to trade for their own personal gain. Now,
they have to get out of that business – unless you specifically ask them to trade on your
behalf.
So do all these new rules mean we’ll never see something like the financial crisis again?
The jury’s still out on that one.
Supporters of the Bill say it has improved regulation and has made the US financial systems
more stable. But critics see Dodd Frank as the Obamacare for the economy and argue it
leaves American’s with fewer choices, higher costs and less freedom.
So what does the future hold for an act which regulators, even after five years, have only
competed two-thirds of?
Dodd-Frank was never popular with Republicans, so it’s likely with a Republican president
and Congress… Some if not all could be pulled… leaving its future
an uncertain one.