One year after the passage of Dodd-Frank, Mike Konczal, a
fellow at the Roosevelt Institute spoke with a New York
financial lawyer who writes under the pseudonym Economics of
EoC spent over 20 years as an in-house lawyer at one of the
big investment banks and has spent the majority of his
professional life in and around US financial law. He has
followed the Dodd-Frank rulemaking process very closely and
blogs at Economics of
Contempt. The interview is reproduced below.
Mike Konczal: It’s been one year since
the Dodd-Frank Act passed. There are dozens of articles saying
it’s going terribly, dozens saying we
don’t know how it’s going, and even a
handful saying progress is being made. How has the past year
gone for financial reform and Wall Street?
Economics of Contempt: On the whole, I’d say
it’s going pretty well. But part of the problem
with assessing the Dodd-Frank rulemaking process is that most
people think of the regulators as a single, coherent entity.
The reality is that there are at least seven different agencies
that are writing the regulations for Dodd-Frank, and within the
main regulatory agencies, each rulemaking task is assigned to a
different team of staffers and lawyers.
Some of them are doing an excellent job, and some of them
are doing a poor job. Of the proposed rules and final rules
that have been issued so far, there are many more good rules
than there are bad rules. Sadly, most pundits like to seize on
one example and extrapolate out to Dodd-Frank implementation in
general, which is beyond illogical.
Unfortunately, it’s still too early to make any
definitive pronouncements, simply because most of the major or
consequential Dodd-Frank rulemakings are still outstanding. We
have proposed rules for some of the major rulemakings, and most
of those proposed rules are quite strong. The proposed rules
for resolution plans (known as living wills), reporting
requirements for hedge funds and private equity funds, and the
capital and margin requirements for over-the-counter (OTC)
derivatives all stand out as strong rules.
Of course, there have also been some disappointments. The
Fed relented on interchange and raised the swipe fee cap from
12 to 21 cents in its final rule, which was disappointing.
Treasury also exempted FX swaps and forwards from
Dodd-Frank’s clearing and electronic trading
requirements, which I wish they hadn’t done. But
again, the good rules clearly outnumber the bad rules.
The first stop on financial reform is dealing with
Too Big To Fail financial firms. How is the process of making
them less prone to collapse and more manageable to resolve
I think this is going well. We basically knew what the rules
for the resolution authority were going to look like already
— they were going to be very similar to the rules
governing FDIC (Federal Deposit Insurance Corporation)
resolutions of commercial banks.
The real movement in this space has been in the so-called
resolution plans that the major banks have to submit (and
regularly update). The proposed rule on resolution plans was
very strong — it ensures that the FDIC will have all
the information it needs when it comes time to actually resolve
a major bank.
That’s crucial, because a successful resolution
of a major bank will have to be planned out in advance and be
reasonably comprehensive. The proposed resolution plan rule
also allows the FDIC and the Fed to identify any legal or
funding structures that would cause problems in a future
resolution, and gives the FDIC the authority to force the banks
to restructure in a way that would make a future resolution
The FDIC and the Fed were supposed to vote on the final rule
for resolution plans earlier this month but ended up pushing
the vote to next month. I think the final rule just
wasn’t finished in time, which is
There are a lot of articles saying that the Volcker
Rule is, or will be, dead on arrival and easily avoidable for
high-end financial firms. What’s your
I said from the outset that the Volcker Rule, as drafted by
Senators Merkley and Levin, would be way too easy to
circumvent. There are simply too many loosely-drafted
exceptions to the proprietary trading ban. The industry has
definitely come around to my interpretation, and
it’s true that most people in the industry
don’t expect the prop trading ban to be effective
That said, I can’t claim vindication yet. The
Fed hasn’t issued the proposed rules implementing
the Volcker Rule yet (although they’re expected by
the end of the summer). Until we see the Fed’s
proposed rules, it’s impossible to say that the
Volcker Rule is dead.
Relatedly, bringing new kinds of transparency and
accountability to the derivatives market was a key goal. How is
Progress is very good there. The CFTC (Commodity Futures
Trading Commission) and SEC (US Securities and Exchange
Commission) have both proposed robust derivatives trade
reporting rules — if anything, the CFTC’s
proposed rule on post-trade reporting is a little too
The CFTC proposed a rule requiring that most swap trades be
publicly reported immediately after they’re
executed (the so-called real-time reporting requirement). Block
trades and large notional swap trades would only be given a
15-minute delay under the CFTC’s proposed rule,
which pretty much everyone not named Gary Gensler thinks is far
too short a delay.
I expect the CFTC to lengthen the delay in its final rule
(and I suspect that was Gensler’s plan all along
— cagey bastard), but the delay for publicly reporting
block swap trades definitely won’t be longer than
one day. I don’t know how you describe that as
anything other than a win for Dodd-Frank.
Of course, some people will inevitably look at the lack of
transparency in the derivatives markets today and declare that
Dodd-Frank is a failure. But transparency is only achieved
through robust reporting requirements, and designing and
implementing a robust reporting regime (from scratch) takes
What’s going on with the ratings
agencies? Do they just get a free pass on
Basically, yes. That’s easily
Dodd-Frank’s biggest shortcoming. I wish I knew
how to fix the rating agency problem, but I genuinely
don’t. The rating agencies are so hard-wired into
the financial system that it’s very difficult to
experiment with untested reform proposals. That’s
why Barney Frank balked at the Franken Amendment, which was a
toy model masquerading as a reform proposal.
When financial firms are lobbying against
Dodd-Frank, what does it look like? Do they have receptive
audiences? Are they coordinating well or throwing each other
under the bus?
Lobbying in the rulemaking process is done primarily through
comment letters and face-to-face meetings with regulators.
Whether the audience is receptive, especially for face-to-face
meetings, very much depends on the regulator who’s
in charge of writing the particular rule. Sometimes they
genuinely want to hear the banks’ feedback, and
other times they have absolutely no interest in the
Typically, banks use face-to-face meetings to underscore
what their top issues/concerns are and to make any arguments
that rely on proprietary data. Hedge funds tend to favor
face-to-face meetings so that they don’t have to
detail their concerns in publicly available comment
The big financial firms have been coordinating well with
each other on some issues and throwing each other under the bus
on other issues. Due to the sheer range of issues being
addressed in the Dodd-Frank rulemaking process, this was
inevitable. Big foreign banks have different incentives than
big US banks on some issues (for example extraterritoriality),
but they’re aligned on other issues (for example
To be honest, I’ve seen more coordination
between the major banks than I expected, but I think
that’s primarily because the trade associations
such as Sifma, Financial Services Roundtable and Isda have been
so eager to get paid and stay involved.
Will enough of the muscle of Dodd-Frank be put into
place so that it holds, or will a lot of it be able to be
compromised quickly under any future Republican
That is scary. If that nightmare scenario came to pass, I
suspect that some very important pieces of Dodd-Frank would
stand a decent chance of getting repealed. Republicans would
obviously go after the CFPB (Consumer Financial Protection
The other measures I’d expect them to target
would be the regulation of"systemically important financial
institutions, the Volcker Rule and the derivatives end-user
During the financial reform debates, there was a
group of people who thought Dodd-Frank wasn’t
going far enough. What’s something that has
happened that has proven them wrong, and something that has
happened that has proven them right?
As you say, the "Dodd-Frank didn’t go far
enough" crowd tends to think that one of the main reasons why
the major banks should be broken up is that they have a
dangerous amount of political power. I think that the big
banks’ political power, especially after the
crisis, is massively overrated by pundits, and I think the
interchange vote proved this.
The big banks spared absolutely no expense in trying to roll
back the Durbin Amendment (the interchange rules). The big
banks mounted an all-out, eight-month lobbying campaign against
the Durbin Amendment, and they even had the powerful community
banks on their side. But they still lost the vote.
Yes, the Fed compromised in its final rule by raising the
swipe fee cap to 21 cents, but that isn’t what the
banks wanted and wasn’t what their lobbying
campaign was aimed at. They wanted the Durbin Amendment gone,
and they were rebuffed.
Now for something that’s proven my side wrong.
I think it’s fair to say that my preferred
regulatory regime relies fairly heavily on the regulators. The
past year has, unfortunately, proven that you
can’t always count on regulators having adequate
funding to perform at the level envisioned by my side.
A decade from now, how will Dodd-Frank have changed
the political economy of the country? Is it way too early to
tell, or is it just not relevant to how Dodd-Frank is
A decade from now, I think Dodd-Frank will have changed the
political economy in the sense that it will make high finance
less profitable and less attractive to talented employees
— but the changes will be at the margin.
One of the problems with lamenting the financialisation of
the US economy is that no one ever explains what they would
consider a successful de-financialisation. Finance is a global
industry and US financial institutions provide significant
financial services to foreign investors.
It’s also fair to say that the US has a
comparative advantage in financial services. So given that
comparative advantage, and the global nature of the financial
industry, where is the line between a healthy US financial
industry and the unhealthy financialisation of the US
So coming back to Dodd-Frank, I think that it will
inevitably reduce the financial industry’s share
of the economy, simply because it will make the industry less
profitable. But will it achieve the de-financialisation of the
US economy? That depends on how you define a successful
I haven’t spent enough time looking at the
numbers to have a fully articulated view on the appropriate
size the US financial industry, so I’m afraid
I’ll have to give a terribly unsatisfying answer:
I don’t know.
Mike Konczal’s interview with Economics of
originally published here on July 21.