It’s going to be a long, slow, painful process to incorporate Dodd-Frank into today’s financial wealth-producing sausage factory.
“Regulators in Washington, in Basel, Switzerland, and elsewhere have failed to agree on rules for the much-touted “resolution authority” in the new law. Theoretically, this rule is supposed to give the United States the right to liquidate or unwind a failing firm, no matter how big, without the systemic crash that nearly followed the Lehman bankruptcy of September 2008. The rule is still just a draft, however, and so far it doesn’t look very workable internationally.
“Citibank is a $1.8 trillion company, in 171 countries with 550 clearance and settlement systems,” says one senior Federal Reserve Board regulator who would speak frankly only on condition of anonymity. “We think we’re going to effectively resolve that using Dodd-Frank? Good luck!” He calls the failure to clarify resolution authority one of the law’s “major failings.”
“Dodd-Frank has its defenders, of course. FDIC head Sheila Bair—the regulator most responsible for implementing the resolution authority—says that the rule is still being developed, along with the 250-odd other Dodd-Frank regulations and studies in process. In an interview with National Journal last week, Bair sternly warned Wall Street against overconfidence and defended the government’s stance. “The first thing everybody needs to understand about [the rule] is that it puts the burden on the institution itself to show it can be resolved. It’s not our obligation to show whether Citi or any large institution can be resolved” or broken up in a crisis, said Bair, a tough critic of banks, who plans to leave her job by summer. “If they’re not able to rationalize their legal structure or the resolvability of financial operations,” she said, the FDIC and the Fed will have the power to order structural changes and the divesting of assets.
“Serious questions remain, however, about whether the Fed, FDIC, or other regulators will ever have the know-how—or backbone—to demand that firms divest themselves of dubious or risky assets. “Bottom line: Nobody on Wall Street believes that these big institutions are no longer too big to fail,” says Dan Senor, a New York City hedge-fund manager who doubles as an informal Republican advisor in Washington. “No one believes they would not be bailed out and backstopped in some way by the government. That’s just the reality.” Senor, a graduate of Harvard Business School, adds: “No one on Wall Street believes you can look at the financial statements of these big companies and understand them. They’re incomprehensible. They were incomprehensible before the crisis, and they’re incomprehensible today. So how [are] the SEC or other regulators going to be able to do it?”
“Bair says that the major international financial institutions would be well advised to remember that “the law is the law,” and that it would be dangerous indeed to assume that firms like Citi are too big to fail. “If I were an investor, I would not assume that whatsoever,” she says. “I think some of these large entities try to make it sound more complicated than it really is. I don’t know that’s the case.… Most of these international operations are concentrated in major jurisdictions where we have a good bilateral relationship.”