The Exchange

Sheila Bair: Two Years After Dodd-Frank, Why Isn’t Anything Fixed?

The Exchange

By Sheila Bair, guest columnist

The late Gilda Radner played an endearing character named Roseanne Roseannadanna on Saturday Night Live in the 1970s. The character would provide hilarious commentary on current events (usually accompanied by gross out observations on bodily functions) then conclude by saying "It's always something -- if it ain't one thing, it's another."

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Sheila Bair

As we are inundated with a continuing procession of financial scandals -- MF Global's bankruptcy, JP Morgan Chase's "London Whale" and his trading losses, Barclays' rate fixing, Peregrine Financial's fraud -- Roseanne's "it's always something" seems an apt description of the financial system today.

The Dodd-Frank Wall Street Reform Act, the landmark law enacted on July 21, 2010, was designed to end the kind of risk taking, greed, and avarice that brought us the financial crisis of 2008. Yet, notwithstanding thousands of pages of proposed and final rules to implement this important law, nothing much seems to have changed. The prospect of a quick buck too often trumps any notion of ethical behavior or gosh-forbid, long-term business relationships. Traders still feel they are masters of the universe, misappropriating customer funds, making outsized bets in the derivatives markets and fixing interest rates. Some of them apparently think that laws are made to be broken if they can improve their year-end bonuses. But after all, wasn't that the lesson learned from the hand slaps they received for the subprime mess?

A Problem of Culture

We've got a culture problem on the trading desks of the world's leading financial institutions.  Yes, some regulators and Members of Congress are busy issuing press releases proclaiming outrage, ordering up investigations, and calling for better "policies and procedures" at the nation's top banks but why don't they just fix this stuff? No bank, not even one which is ostensibly well run like Chase, should be allowed to use insured deposits to take big positions in tranched credit default swap indexes. These instruments are so volatile and risky that clearinghouses won't even accept them, so why is Chase using government-backed money to take those bets?

And why in the world didn't U.S. and U.K. regulators simply tell Barclays and other banks back in 2008 when reports of attempted manipulation first surfaced that they needed to use actual transactions in submitting Libor rates as opposed to their best guess about the current costs of interbank borrowing? The subjectivity built into the Libor process was ripe for abuse.

(For more from Sheila Bair, check out her recent appearance on The Daily Ticker below:)

Regulation Is Still Needed

The lesson of all of this goes directly against two decades of the mantra of "self-correcting" markets. Financial institutions cannot be relied upon to do the right thing, when doing the wrong thing will line their pockets. Regulators, not banks, need to set the rules and they must be clear, straightforward, and readily enforceable.

Yet, still, we see regulators who are too timid to take on major financial interests. Instead of just saying "no" they try to placate industry lobbyists by creating this clarification or that exception, resulting in indecipherable rules that are hundreds, and in some cases, thousands of pages long. The horrendously complex rules serve as competitive barriers for smaller institutions which cannot afford the high priced legal help required to decipher them. They also make it difficult for outsiders -- media, academics, and reform advocates -- to conduct meaningful analysis of the rules. And the irony is that once the rules have ballooned into Rube Goldberg monstrosities, the lobbyists who sought all the clarifications and exceptions ridicule the regulators for being heavy handed bureaucrats who are drowning the industry in red tape.

Toward a Regulatory System That Works

As a former regulator, I want my colleagues to succeed. Indeed, we all should cheer them on. Continued misconduct in the financial services sector has cut a wide swath of damage -- bank customers have been hurt, public confidence has been shaken, the reputations of traditional, well-run banks have been tarnished, and the shareholders who have invested in these financial behemoths have suffered substantial losses. Megabanks are trading at steep discounts to tangible book value, and with every new scandal, their share prices take a deeper hit. Indeed, Chase's share price dropped dramatically after its announced trading loss. As of this writing, Barclays' share price is down over 20 percent, as its shareholders confront a $450 million penalty from the Libor fiasco and untold litigation costs.

We need a regulatory system focused on the public interest, not the special interests. And we need strong, credible, influential voices who will weigh into the debate on the side of the population at large. This is why The Pew Charitable Trusts and the CFA Institute have created the Systemic Risk Council, a group of prominent academics, financial experts and former government officials formed to monitor the Dodd-Frank implementation and speak out when needed reforms go awry. We have already laid out several priorities which must be completed and for the most part, they address the obvious: tougher capital rules, derivatives reform, prudential standards for nonbank systemic institutions, and resolving the Volcker Rule. Over the next several months, our members will be sharing their thoughts with you on these and other priorities.

The system is not getting fixed and we need to send a message to Washington. We're tired of the 600-page swap definitions and thousand page mortgage disclosure rules. To quote Roseanne Roseannadanna again, "What are you tryin' to do? Make us sick?"

We need regulators to write rules that the public can understand and the examiners can enforce. They need to stop rising to the bait when lobbyists come in seeking special interest provisions. They need to work together to prioritize, coordinate, and finalize cohesive and effective rules that are targeted on the lingering problems in our financial system -- and Congress needs to support them. It's time to stop timidly working around the edges and get the job done.

Sheila Bair is the former chair of the Federal Deposit Insurance Corp. (FDIC) and current chair of the Systemic Risk Council.  The Council is an independent non-partisan group which monitors and encourages regulatory reform of U.S. capital markets focused on systemic risk.  It is comprised of a diverse group of prominent academics, financial experts and former government officials. For more information please visit, http://www.pewtrusts.org/our_work_detail.aspx?id=328809 and http://www.cfainstitute.org/ethics/integrity/Pages/src.aspx.

(Editor's Note: This is the first in a series of op-ed columns by members of the Systemic Risk Council on a variety of financial reform topics. The views expressed are their own.)

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