As the Dodd–Frank Act approached its third anniversary in mid-2013, federal regulators failed to meet statutory deadlines for more than 60% of the required implementing rules. The financial industry has undermined Dodd–Frank by lobbying regulators to delay or weaken rules, by suing to overturn completed rules, and by pushing for legislation to freeze agency budgets and to repeal Dodd–Frank’s key mandates. The financial industry did not succeed in its efforts to prevent President Obama’s re-election in 2012. Even so, the Obama Administration has continued to court Wall Street’s leaders and has not placed a high priority on implementing Dodd–Frank.
At first glance, Wall Street’s ability to block Dodd–Frank’s implementation seems surprising. After all, public outrage over Wall Street’s responsibility for the global financial crisis impelled Congress to pass Dodd–Frank in 2010 despite the financial industry’s intense opposition. Moreover, scandals at systemically important financial institutions (SIFIs) have continued to tarnish Wall Street’s reputation since Dodd–Frank’s enactment. However, as the general public’s focus on the financial crisis has waned—due in large part to massive governmental support that saved Wall Street—the momentum for meaningful financial reform has faded.
Wall Street’s political and regulatory victories since 2010 shed new light on the financial industry’s remarkable success in gaining broader powers and more lenient regulation during the 1990s and 2000s. Four principal factors account for Wall Street’s continuing dominance in the corridors of Washington. First, the financial industry has spent massive sums on lobbying and campaign contributions, and its political influence has expanded along with the growing significance of the financial sector in the U.S. economy. Second, financial regulators have aggressively competed within and across national boundaries to attract the allegiance of large financial institutions. Wall Street has skillfully exploited the resulting opportunities for regulatory arbitrage.
Third, Wall Street’s political clout discourages regulators from imposing restraints on the financial industry. Politicians and regulators encounter significant “pushback” whenever they oppose Wall Street’s agenda, and they also lose opportunities for lucrative “revolving door” employment from the industry and its service providers. Fourth, the financial industry has achieved “cognitive capture” through the “revolving door” and other close connections between Wall Street and Washington. A widely-shared “conventional wisdom” persists in Washington—notwithstanding abundant evidence to the contrary—that (i) giant SIFIs are safer than smaller, more specialized institutions, (ii) SIFIs are essential to meet the demands of large multinational corporations in a globalized economy, and (iii) requiring U.S. SIFIs to comply with stronger rules will impair their ability to compete with foreign financial conglomerates and reduce the availability of credit to U.S. firms and consumers.
Despite Wall Street’s continued mastery over Washington, two recent events could lead to a renewed public focus on the need for stronger restraints on SIFIs. In March 2013, Attorney General Eric Holder admitted that global SIFIs are “too big to jail,” and a Senate subcommittee issued a stunning report on pervasive managerial failures and regulatory shortcomings surrounding JPMorgan Chase’s “London Whale” trading scandal. In response to those events, Senators Sherrod Brown and David Vitter introduced a bill that would require SIFIs to satisfy much higher capital requirements and would also limit their access to federal safety net subsidies. The Brown-Vitter bill could prove to be a milestone because it demonstrates Dodd–Frank’s inadequacy and because it also focuses the “too big to fail” debate on issues where Wall Street is most vulnerable – including dangerously low levels of capital at the largest banks and extensive public subsidies exploited by those banks.
GW Paper Series
GWU Legal Studies Research Paper No. 2013-117; GWU Law School Public Law Research Paper No. 2013-117
Arthur E. Wilmarth, Jr., Turning a Blind Eye: Why Washington Keeps Giving In to Wall Street, 81 University of Cincinnati Law Review 1283-1446 (2013).