Financial Regulatory Forum

Dodd says the threat to financial reform real but not complete – Complinet Interview

By Guest Contributor
December 6, 2010

U.S. Senator Christopher DoddBy Ted Knutson, Complinet

As Democratic U.S. Senator Christopher Dodd prepares to leave office, Republicans are threatening to chip away at what may be his biggest legislative accomplishment: the Wall Street regulation overhaul he helped steer through Congress this year as chairman of the Senate Banking Committee. It was the biggest fix to the financial regulatory system in 70 years, and Republicans emboldened by November election gains are looking to deny regulators the extra money they want to enforce it, and to delay seating a head of the Consumer Financial Protection Bureau (CFPB).

Dodd said in an interview with ThomsonReuters unit Complinet that the damage to a “real darn good bill” could be real, but not complete. In his half-hour interview last Friday, Dodd looked ahead to the future of the Dodd-Frank Wall Street Reform and Consumer Protection Act and back at the two-year process that led to its creation.

Complinet: How much would it damage regulatory reform if Republicans block budget increases for the Securities and Exchange Commission and the Commodity Futures Trading Commission that say they need to implement it?

Dodd: Historically, they’ve starved the SEC and more aggressively the Federal Trade Commission and turned them into shell organizations. That’s their way of approaching things rather than taking things head on. They’ll frame it as a deficit reduction move to hide their real motive. The story of the financial crisis wasn’t Wall Street was greedy. We’ve known that for a long time. The story is the people responsible for reining in risky behavior chose not to do it.

Complinet: One agency unpopular with Republicans, the Bureau of Alcohol, Tobacco and Firearms, went without a nominee to head it for two years. Could the same happen with the CFPB?

Dodd:  It could be, and it puts the bureau at risk. The administration missed a window of opportunity by not putting a nominee up in September. Now when someone comes up, the Republicans can say we’ll get your nominee through but we will have to change the funding mechanism.

Complinet: Who could be confirmed?

Dodd: (Federal Deposit Insurance Corporation Chairman) Sheila Bair. She would have been a natural. She has great support with both parties and she is credible with Republicans since she worked as chief counsel for [former Kansas Republican Senator] Bob Dole. But she has let it be known she doesn’t want the job.

Complinet: The loudest refrain from supporters of Dodd-Frank was “no more bailouts.” Yet, a lot of people have said, and I think you are one of them, that Congress is at its best when members place the interest of the country ahead of considerations of their own political survival. If some future Treasury Secretary and Federal Reserve Chairman would come to Congress, as Hank Paulson and Ben Bernanke did, and say you must pass this legislation tomorrow or there will be no economy, do you think they would be turned down?

Dodd: Right now they would be. In four, five or ten years they would be. The argument Paulson and Bernanke could make is they didn’t have any tools. Today the tools are there. If the Financial Stability Oversight Council does its job, it can reduce the chances that a financial company in the future would be seeking a bailout because of higher capital standards and other ways the council has to promote solvency. The one issue that had to be resolved that hasn’t been is bankruptcy law. The bankruptcy structure is not sophisticated enough to unwind highly interconnected institutions. The bankruptcy courts could do it, but they’d be making up the process. Reforming the bankruptcy process should be high on the priority list for the Senate Judiciary Committee. I plan to talk to Chairman Patrick Leahy about this soon.

Complinet: What one provision in the November 2009 draft of the bill you took out of the final bill do you wish most you could have left in?

Dodd: A single prudential regulator. Regulatory arbitrage still could happen. It is one of the shortcomings of the existing landscape that a financial institution could shop for the least stringent overseer.

Complinet: You said a number of times you thought you could get Republican votes for the bill in the Senate Banking Committee. With 30 years of experience in the Senate and three years as committee chair, if you can’t predict the behavior of your colleagues that well, what chance does a voter have?

Dodd: I did know them well. In another year, with other circumstances, we would have gotten 80 votes in the Senate rather than 60. The Republicans on the committee ended up with the best of both worlds. They got some of what they wanted – most of the parts of the derivatives section, too-big-to-fail and the placement of the consumer agency in the government – and they didn’t vote for it.

Complinet: When a regulator is highly visible, be it a traffic cop or a “financial cop,” most people find it easy to resist the temptation to break the law. So if you were designing a system to prevent speeding, how would you make it so pervasive that drivers would obey the limits on an open road even when there are no patrol officers in sight?

Dodd: My personal preference to make that happen has no likelihood of becoming law. I’d prefer a more principles-based than rules-based financial regulatory system. It is more intimidating. With a rules-based system, you hire bright 24-year old kids in law or with MBAs and they can look at a rule and find a crack big enough to drive a Mack truck through. With a principles-based system, the regulator has a broader domain since he can demand someone live up for more than the letter of a rule.

Complinet: As chairman of Senate Banking Committee for the last three years, you have heard from some of the most brilliant financial industry and regulatory minds in the country. What are the investing lessons you have learned from the crisis you plan to tell your two grade-school age daughters some day?

Dodd: That there are bad actors and a lot of competent fair people who work in financial services. I didn’t realize that bifurcation existed before our hearings. We had people in the industry sitting across the table from the committee who said they operated from the same rule book, exercised the same behavior, and they don’t.

Complinet: When I was outside your office after one committee session, the chairman of the Financial Crisis Inquiry Commission, Phil Angelides, went in and didn’t leave for a half hour. I assume you met with him and other FCIC members other times as well. What contribution did the panel make to the bill?

Dodd: We corroborated (the causes of the meltdown), but they didn’t find anything new. We all knew what the causes were. We all knew at the beginning. If we had waited to act as some Republicans wanted, we wouldn’t have been able to draft and pass a bill.

Ted Knutson is Washington, DC correspondent for Complinet. Ted contributes news and analysis addressing regulatory compliance issues via Complinet’s Regulatory Insight platform.

Complinet, part of ThomsonReuters, is a leading provider of connected risk and compliance information and on-line solutions to the global financial services community. Established in 1997, Complinet serves over 100,000 industry professionals in 80+ countries. Our connected approach provides one single place to get all the relevant regulatory news, analysis, rules and developments from the region to support firms in highly regulated industries.

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