In Print: Volume 89: Number 1
By Joel Seligman
89 Wash. U. L. Rev. 1 (2011)
The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act both transcends and transforms financial regulation. The immediate setting of the law is by now a familiar one. By 2008, there was an urgent need for a fundamental restructuring of federal financial regulation, primarily based on three overlapping causes. First, an ongoing economic emergency initially rooted in our housing and credit markets, which has been succeeded by the collapse of several leading investment and commercial banks and insurance companies, dramatic deterioration of our stock market indices, and a rapidly deepening recession. Second, serious breakdowns in the enforcement and fraud deterrence missions of federal financial regulation, as illustrated by matters involving Bear Stearns and the other four then independent investment banks subject to the SEC’s former Consolidated Supervised Entities program, led to the government creation of conservatorships for Fannie Mae and Freddie Mac and the Bernard Madoff case. Third, a misalignment between federal financial regulation firms and intermediaries. The structure of financial regulation that was developed during the 1930s did not keep pace with fundamental changes in finance.
• In the New Deal period, most finance was atomized into separate investment banking, commercial banking, or insurance firms. By 2008 finance was dominated by financial holding companies, which operated in each of these types of firms and cognate areas such as commodities.
• In the New Deal period, the challenge of regulating finance was domestic. By 2008, when credit markets were increasingly reliant on trades originating from abroad, the fundamental challenge was increasingly international: major financial institutions traded simultaneously throughout the world and information technology made international money transfers virtually instantaneous.
• In 1930, approximately 1.5 percent of the American public directly owned stock listed on the New York Stock Exchange. A report estimated that in the first quarter of 2008, approximately 47 percent of U.S. households owned equities or bonds. A dramatic deterioration in stock prices affected the retirement plans and the livelihood of millions of Americans.
• In the New Deal period, the choice of financial investments was largely limited to stocks, debt, and bank accounts. By 2008 we lived in an age of complex derivative instruments, some of which experience had shown were not well understood by investors and on some occasions by issuers or counterparties.
• Most significantly, our system of finance was more fragile than earlier believed. The web of interdependency that was the hallmark of sophisticated trading meant that when a major firm such as Lehman Brothers went bankrupt, cascading impacts had powerful effects on the entire economy.
The primary enduring response to the 2008–2009 financial meltdown was the enactment of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act is long—the statutory material in H.R. 111-517, the Conference Report that included the final bill, is approximately 845 pages. But the length is explicable given there are sixteen titles addressing fundamental aspects of bank and bank holding company securities, commodities, and mortgage regulation, with detailed new material on orderly liquidation authority, creation of a new Bureau of Consumer Financial Protection, regulation of such previously unregulated areas as investment advisers to hedge funds and OTC derivatives, significant strengthening of payment clearance and settlement, investor protection, credit rating agencies, asset-backed securities, corporate governance, and the Public Company Accounting Oversight Board.