Dodd-Frank Wall Street Reform and Consumer Protection Act:
Is It Working?
By
Brian Wilens
During 2008, America suffered one of the worst financial crises since the Great Depression. The first indication that the economy was in danger was when the housing prices started to decline in 2006. Initially, it wasn’t seen as a threat. Realtors felt that the overheated market would safely return to a sustainable level. What they didn’t realize was that there was a dangerously high number of homeowners with questionable credit ratings who had loans for 100% and sometimes more of their home’s value. Banks resold these mortgages as part of mortgage-backed securities. It was originally thought that the problems with subprime mortgages would remain
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Dodd-Frank succeeds in reducing the likelihood of another financial crisis and new rounds of bailouts. It does so by forcing banks to hold more capital to lower the chance of failure, enforcing derivative trades on exchanges, eliminating risky trading from institutions whose failures could damage the broader economy, and by creating a stable method of liquidating failing institutions. (Yglesias)
In contrast, some believe Dodd-Frank hasn’t done enough in four years, and therefore is bad legislation. Let’s look at one of the most significant purposes of Dodd-Frank: ending too-big-to-fail. Dodd-Frank tried to eliminate the issue of too-big-to-fail by ending taxpayer funded
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financial system as a whole. However, its effectiveness in four years is questionable. Many people have argued that Dodd-Frank is doing its best and can only get better. Is that true? It’s possible. However, there is a lot of evidence to say that not only is Dodd-Frank less effective than intended, but that there are also holes in its inner workings that perpetuate the problems it’s trying to solve. It fails to truly end too-big-to-fail, liquidation seems to reflect the bailouts used before the financial crisis, and implementing Dodd-Frank has put strain on the financial industry and its
Consequently, the provisions to separate commercial banking from securities and investment firms were regarded as a way to diminish the risk associated with providing such deposit insurance. Although some historians argue that the depression itself is what caused the collapse of the banking system, in 1933 the general consensus was that banks had provoked the failure by engaging in shady and abusive practices with depositor’s money. Congressional hearings conducted in early 1933 seemed to indicate that bankers and brokers were guilty of “disreputable and seemingly dishonest dealings, and gross misuses of the public's trust” (“Understanding How”, 1998). The Glass Steagall act was the main legislative response of President Roosevelt’s administration to the unprecedented financial turmoil that was facing the nation in the middle of a deep depression. It was intended to regulate and stabilize the banking industry, reduce risk, and provide consumers with confidence in the financial
In addition, the Federal Reserve did badly on supervision of the financial market. Many banks did not have enough ability to value their risk. The Federal Reserve and other supervision institution should require these banks to enhance their ability of risk valuing.
So, while the purpose of congressional oversight today is similar to what it was decades ago, it is clear that oversight no longer means what it once die. In the end, I propose this is true today because of one simple concept: times are changing and so are politics.
In Karen Hos’ Liquidated, she aims to study the relationships between corporate America and the worlds greatest financial center. . . Wall Street. She puts all her three years of research in her ethnography and thus the very first page of chapter one, we can already understand Hos’ determination to understand what Wall Street is all about. The first main theme explained is the relations in Wall Street that are based on a culture of domination of staff members, their irresponsibility dealing with corporate America, and constant changes that occur during this process. Another major theme we see in her ethnography is that Wall Street, first used for the communities wellbeing, is now profit oriented.
Leading up to the crisis of the housing market, borrowers got mortgages without understanding the terms. Banks were giving out loans to people the banks weren't sure could pay the money back. The closer to the crisis, the higher the frequency of illegitimate loans and mortgages. Because there were so many mortgages on houses that could not be paid back, millions of mortgages were foreclosed on, and the houses we...
A majority of mortgage defaults that Americans used were on subprime mortgage loans, which were high-interest-rate loans lent to people with high risk credit rates (Brue). Despite knowing the risks, the Federal government encouraged major banks to lend out these loans to buyers, in hopes, of broadening ho...
The Dodd-Frank Wall Street Reform and Consumer Protection Act brought the most significant changes to financial regulation in the United States since the reform that followed the Great Depression. It made changes in the American financial regulatory environment that affect all federal financial regulatory agencies and almost every part of the nation’s financial services industry. Like Glass-Steagall, the legislation passed after the Great Depression, it sought to regulate the financial markets and make another economic crisis less likely. Banks were deregulated in 1999 by the Gramm-Leach-Biley Act, which repealed the Glass-Steagall Act and essentially allowed for the excessive risk taken on by banks that caused the most recent financial crisis. The Financial Stability Oversight Council was established through the Dodd-Frank Wall Street Reform and Consumer Protection Act and was created to address the systemic risks in the United States financial system and to improve coordination among financial regulators.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
It can be argued that the economic hardships of the great recession began when interest rates were lowered by the Federal Reserve. This caused a bubble in the housing market. Housing prices plummeted, home prices plummeted, then thousands of borrowers could no longer afford to pay on their loans (Koba, 2011). The bubble forced banks to give out homes loans with unreasonably high risk rates. The response of the banks caused a decline in the amount of houses purchased and “a crisis involving mortgage loans and the financial securities built on them” (McConnell, 2012 p.479). The effect on the economy was catastrophic and caused a “pandemic” of foreclosures that effected tens of thousands home owners across the U.S. (Scaliger, 2013). The debt burden eventually became unsustainable and the U.S. crisis deepened as the long-term effect on bank loans would affect not only the housing market, but also the job market.
That said the overarching objective of the act continues to be to reduce risk in the financial industry, and subsequently reduce the risk posed by “too big to fail” institutions to the rest of the economy. This focus will be the key provisions of the Act, the reasoning behind said provisions, their implementation, and the subsequent impact on the industry. In order to analyze the direct effects Dodd-Frank had on the industry, Goldman Sachs will be used as an illustration of the industry before and after Dodd-Frank. The key provisions in focus are: Systemic risk regulation, The Volcker Rule, Regulation of financial instruments (Securitization and
Jordan Belfort is the notorious 1990’s stockbroker who saw himself earning fifty million dollars a year operating a penny stock boiler room from his Stratton Oakmont, Inc. brokerage firm. Corrupted by drugs, money, and sex he went from being an innocent twenty – two year old on the fringe of a new life to manipulating the system in his infamous “pump and dump” scheme. As a stock swindler, he would motivate his young brokers through insane presentations to rile them up as they defrauded investors with duplicitous stock sales. Toward the end of this debauchery tale he was convicted for securities fraud and money laundering for which he was sentenced to twenty – two months in prison as well as recompensing two – hundred million in restitution to any swindled stock buyers of his brokerage firm (A&E Networks Television). Though his lavish spending and berserk party lifestyle was consumed by excessive greed, he displayed both positive and negative aspects of business communications.
The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.
The term “too big to fail” became popular when a U.S. Congressman used it in a 1984 Congressional hearing. The theory behind “too big to fail” is that some financial institutions are vital to the economy because they are so big that if they were to fail that the economy would be in a disastrous state and therefore people believe that the government should step in and help support and save these financial institutions when they face problems. (Investopedia) I believe that this is right in assuming that the financial institutions are vital to the economy but I also believe that it is a waste of government and tax payers money to keep bailing out the big financial institutions every time they need to be bailed out. The solution that I and many other people believe to help this be less of a problem is to break up the bigger financial institutions into smaller ones.
It's the beginning of a process, also mandated by Congress, to examine whether the clauses help or hurt consumers (Fisher, 2012). Many consumers have always found themselves on the receiving end when it comes to financial difficulties. This is why the Dodd-frank act created the consumer financial protection bureau (CPFB) to help consumers and investors better understand the complex financial products they are purchasing. Critics have argued that the bureau will bring an extra cost of borrowing and credit cards by putting a burden on banks through increased regulation. From a personal perspective, the CPFBs benefits to consumers outweigh the burden on financial institutions. For instance, consider a situation where an investor is defrauded a sum of $100,000 dollars for a purchase of property that does not
“This near-death experience for the global economy led to renewed regulatory focus on the largest banks that are deemed “too big to fail” because of their importance to the worldwide financial system.”