The Dodd-Frank Act: Good intentions and a lot of complexity

Introduction

Post the Global Financial Crisis (GFC) in 2008 and collapse of Wall Street investment banks and institutions US lawmakers felt the need to respond to the GFC with new laws for the financial sector. Prominent Democrats Senator Chris Dodd and Congressman Barney Frank introduced a bill to the US Congress which became The Dodd–Frank Wall Street Reform and Consumer Protection Act 2010 (aka Dodd-Frank). This Act was signed into law by Barack Obama. As the description on the first page of the legislation shows it certainly has laudable goals.

To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

It is not possible in a blog post such as this one to give a blow-by-blow account of this law but a summary can be found here.

The chart below shows the different government powers and agencies responsible for Dodd-Frank and their relationships.

Source: JPMorgan Chase: Found here.

Complex Regulations

The biggest criticism of Dodd-Frank is that it contains a huge amount of regulation and bureaucracy. So are these criticisms justified and how many are included? One of the leading sources of information about Dodd-Frank is a US law Firm Davis Polk who maintain a website with the latest information on this law.

It is important to understand that writing of rules for Dodd-Frank is an ongoing process with the total according to Davis Polk being 398. The graphic below where this process is at as of 1st December 2014.

Source: Davis Polk: Found here.

So the next obvious question is they’re still writing these rules so why is that such a big deal? The answer is the number of agencies responsible for writing the rules and their mind boggling complexity. The Economist in a 2012 article on Dodd-Frank gives an example.

SECTIONS 404 and 406 of the Dodd-Frank law of July 2010 add up to just a couple of pages. On October 31st last year [2011] the agencies overseeing America’s financial system turned those few pages into a form to be filled out by hedge funds and some other firms; that form ran to 192 pages. The cost of filling it out, according to an informal survey of hedge-fund managers, will be $100,000-150,000 for each firm the first time it does it. After having done it once, those costs might drop to $40,000 in every later year.

The article then goes on to talk about the so-called ‘Volcker Rule’.

Take the transformation of 11 pages of Dodd-Frank into the so-called “Volcker rule”, which is intended to reduce banks’ ability to take excessive risks by restricting proprietary trading and investments in hedge funds and private equity. In November four of the five federal agencies charged with enacting this rule jointly put forward a 298-page proposal which is, in the words of a banker publicly supportive of Dodd-Frank, “unintelligible any way you read it”. It includes 383 explicit questions for firms which, if read closely, break down into 1,420 sub-questions, according to Davis Polk, a law firm. The interactive Volcker “rule map” Davis Polk has produced for its clients has 355 distinct steps.

These two examples give a good idea of the problem! I’ve got no sympathy for the banks but that is crazy bureaucracy  at work.

Davis Polk published a series of graphics on some of the mind boggling numbers regarding this law (correct as of July 1st 2013).

• 13,789 pages of rules.
• 15 million words of rules.
• The rules are equal to 28 copies of Tolstoy’s War and Peace.
• The longest rule is 342 pages long.

Now naturally all these rules and complex regulations are a dream come true for bureaucrats and lawyers!

Comment

When looking at this law it is clear there were good intentions at work but it is hard to see how such complex over the top law making is an answer. The length of some of the rules is just insanity. As someone who believes in small government I fail see how such an approach as taken here is an ideal way to deal with the problems at hand and make US financial institutions accountable in an efficient manner.

It will be fascinating to watch progress in 2015 as additional complex rules are added.