Groundbreaking legislation generally springs from extraordinary circumstances. In the case of the far-reaching Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the extraordinary circumstance was the worst financial crisis since the Great Depression, a debacle that cost the U.S. trillions of dollars, millions of jobs, millions of homes lost to foreclosure, and the failure of some of the nation’s biggest financial institutions.
The 2008 credit crisis that triggered the 2008-2009 recession was not an accident, former Senator Chris Dodd told participants at the 2013 SVIA Fall Forum. Rather, he said, it was a consequence of an outdated banking regulatory system that had its roots in the 19th century. He reasoned at the time that if such a crisis could happen once, it could happen again—absent a major overhaul of the regulatory regime.
But a major overhaul would not be easy. Over the prior 60 years, most financial industry reforms had been incremental in nature, and the nation seemed to have little appetite for major change. But after the credit crisis, Dodd said, “the question was, are we going to just move on and assume that the world as it existed in 2007 and 2008 didn’t need to be reviewed?” His answer was “no.”
“You need to move at certain moments legislatively; the window is only open at certain times,” he said. “You never could have passed anything like this bill in 2005, 2006, or 2007, and you couldn’t have passed it today.”
As chairman of the Senate Banking Committee (he’s now chairman and CEO of the Motion Picture Association of America), Dodd began working with Barney Frank, then chair of the House Financial Services Committee, to try to construct a financial architecture that would be more reflective of the 21st century. They were spurred to action in part, Dodd said, by the release in April 2008 of reform recommendations from the Group of Twenty, which includes finance ministers and central bankers from 19 countries plus the European Union. “I felt it was critically important that the U.S. lead,” he said. “If we didn’t act, someone else would, and we would be playing by somebody else’s rules, not ours.”
The bill that Dodd and Frank drafted was not perfect, Dodd conceded, noting that it included some provisions that he didn’t like but that were necessary to win support from a sufficient number of legislators for passage. But he said he believed that passage was critical, and that he did not want perfection to be the enemy of the good. The resulting legislation was widely recognized as the most far-reaching since the reforms that followed the Great Depression. Among other things, it created stronger capital and liquidity standards for financial institutions, imposed new regulations on derivatives, and created new protections for American consumers against predatory lending practices. Most importantly, Dodd said, it helped restore faith in the U.S. financial system.
As originally written, many in the financial services industry worried that the Dodd-Frank Act’s regulations pertaining to derivatives trading might be construed to include stable value contracts. Dodd noted that Congress inserted language in their bill requiring regulators to study that issue, and gave them authority to conclude that stable value contracts are not derivatives, or, in the language of the legislation, “swaps.” Further, the bill said that if regulators conclude that stable value contracts are swaps, they have authority to exempt them from the new regulations. Regulators have not yet completed that study, but the stable value industry has consistently maintained that stable value contracts are not derivatives. Until regulators complete the study and make a final ruling, the contracts remain exempt from the new regulations.
