When President Barack Obama first swore the oath of office, the backdrop was a financial system in flames. Four years on, the fires are out, but those who hoped Obama would make capitalism fundamentally safer are disappointed.
Barring another crisis in the next four years, the president may have missed his best chance for a more significant overhaul of finance. But there are still things he can do in a second term to at least ensure that the accomplishments of his first term, embodied in the Dodd–Frank Wall Street Reform and Consumer Protection Act, don't go to waste.
Obama can't rewrite laws or bend independent agencies such as the Federal Reserve to his whim. Any reform efforts are countered by a multitude of tireless financial lobbyists who have resisted every step of the way -- often successfully -- bankrolled by a deep-pocketed industry with influence over regulators, lawmakers and the media.
But Obama can set the agenda, with his words and with the people he puts in key jobs, to let Wall Street know that Main Street will always come first.
Because Main Street may be starting to wonder.
"We are losing public support," said Sheila Bair, former chairman of the Federal Deposit Insurance Corporation, expressing disappointment with the sluggish pace of reform. "The longer this drags on, the more people get cynical."
The sprawling Dodd-Frank reform act, passed in 2010, is chock full of rules that could help avert another crisis. It forces banks to pay penalties for being too large and gives officials tools to possibly wind down a failing big bank safely. It orders the regulation of complex derivatives and tries to make it harder for banks to gamble with their own money. It establishes new bodies to oversee risks in the financial system and protect consumers.
But about two-thirds of Dodd-Frank's rules have not yet been finalized, and more than one hundred rulemaking deadlines have been missed. Meanwhile, no banker has yet gone to jail for any of the actions leading up to the crisis, and efforts to hold the banks accountable have been few and far between, consisting mainly of modest fines, with the banks neither admitting nor denying wrongdoing.
That raises questions about where financial reform will rank among Obama's many second-term priorities, from seemingly endless battles with Congress over the federal budget deficit to gun control, immigration and national security.
"In fairness, the president has very big issues he has to deal with," said University of Maryland law professor Michael Greenberger, a former director of the Division of Trading and Markets at the Commodity Futures Trading Commission. "But I don't see the inner workings of the White House worrying about the market reform issue."
The White House did not respond to a request for comment.
Reform advocates warn that retreating from even the modest advances of Obama's first term mean his presidency could ultimately be known, like those of Ronald Reagan and Bill Clinton, as having planted the seeds of future financial disasters.
There are reasons to doubt the system is significantly safer than it was before the crisis. The biggest banks are bigger than ever, and their risks are still mainly hidden from public view. At the same time, financial markets are more complex, and financial regulators are still outgunned, outstaffed and outsmarted by the powerful banks they regulate.
"I think the failure to set our economy straight with regard to the financial sector could well be the blight that the president had a chance to but did not correct," said Bart Naylor, financial policy advocate for the nonprofit group Public Citizen.
Many reformers were particularly discouraged by Obama's recent nomination of White House Chief of Staff Jacob "Jack" Lew for the post of Treasury secretary in his second term. As secretary, Lew would be one of the nation's top financial regulators and chair the Financial Stability Oversight Council established by Dodd-Frank to watch out for risks in the financial markets.
Though all agree that Lew is smart and a peerless expert on the federal budget, he has professed limited understanding of financial markets. He also made millions working for Citigroup just before it was bailed out in the crisis, in a unit that made bets against mortgage-backed securities. He got that job on the recommendation of a colleague in the Clinton administration, former Treasury Secretary Robert Rubin, one of the chief architects of market deregulation in the 1990s. Lew has said that he didn't think deregulation led to the financial crisis, a view in line with Rubin's laissez-faire approach. Lew's pick signals that financial reform will take a back seat in Obama's second term to matters of the budget. That may prove shortsighted.
"If you care about the fiscal crisis, the first place to start is to make sure we prevent another financial crisis," said Neil Barofsky, former inspector general for the Troubled Asset Relief Program, the crisis-era bailout fund. "We're having this fiscal crisis now because of the financial crisis. If we have a $4 trillion or $5 trillion hit from another crisis, negotiations over the sequester will be nothing."
In interviews with The Huffington Post, Barofsky and other reform advocates identified at least five things that must happen in Obama's second term to maintain the momentum for reform and make another devastating crisis less likely.
They agree that there is almost certainly no chance that Obama will embrace more dramatic reform ideas being advocated in some circles, including breaking up large banks or reinstating the Depression-era Glass-Steagall Act separating commercial and investment banking. Even the five modest goals presented here might be too much of a stretch, they fear. But they are possible.
One: First, Do No Harm
Dodd-Frank is far from perfect. It does not clear up the murk of bank balance sheets, bring sanity to executive compensation or much reduce the influence of flawed credit-rating agencies. Its provisions for winding down big banks might not work. But doing away with Dodd-Frank could be much worse; even the administration's harshest critics on the left admit it is better than nothing.
Critics on the right, meanwhile, wish it would just disappear, and they have been working with bank lobbyists to kill it, or at least water it down as much as they can. If he accomplishes nothing else on financial reform in his second term, Obama at least needs to keep fighting to preserve Dodd-Frank, these advocates said.
"Protecting what we have is first and foremost," said Bair.
Bair is hopeful that Obama and the Democratic senators who created Dodd-Frank have a strong incentive to preserve it. Others see Obama's attention wandering and worry the banks have an even stronger incentive to neuter the law.
Two: Finish The Rules Already
Congress passed the buck on putting Dodd-Frank's rules into effect to various regulatory agencies, where they have often gotten bogged down for one reason or another. According to a recent tally by the law firm Davis Polk, just a third of Dodd-Frank's rules are done. Only about half of the law's rules for derivatives have been finalized. Only about a quarter of the rules for winding down troubled banks are in place. Less than 10 percent of the bank regulations are done.
The Securities and Exchange Commission is still on the hook for finishing dozens of rules. But the process has ground to a halt with the departure of former chairman Mary Schapiro, leaving only four commissioners on the SEC: two Democrats who will vote to put rules in place and two Republicans who often won't.
"We need three votes to get rules through, or Dodd-Frank will be crippled," said Greenberger.
Three: Solve Too Big To Fail
One reform concept with bipartisan support is the idea that the biggest banks are still too big to fail -- in fact, they are bigger than before the crisis. The five biggest U.S. banks held about $8.7 trillion in assets at the end of the third quarter, the latest data available, or about 55 percent of the entire U.S. annual gross domestic product. That's up from about 43 percent before the crisis, Bloomberg noted recently.
Dodd-Frank offers at least two possible solutions to this problem, according to Marcus Stanley, policy director at the nonprofit Americans For Financial Reform: higher capital requirements for big banks, and the so-called Volcker Rule, which prohibits banks from gambling with their own money.
Both provisions could force big banks to get smaller, hiving off trading operations or other parts that make them too bulky. So far, neither provision has been finalized, and the Volcker Rule has been riddled with exemptions before it even takes effect.
Four: Get The Right People In Place
Though Lew may not eventually run the Treasury as a natural-born regulator, he should at least have a top deputy who will play the role of riding herd on regulation in a second term, many reformers said -- someone to speak up for Dodd-Frank, rebut bank lobbyists and understand the risks lurking in the system. The reported top pick to be Lew's No. 2, Morgan Stanley chief financial officer Ruth Porat, has the necessary expertise, but has lobbied regulators frequently on behalf of Wall Street since Dodd-Frank's passage.
Other key personnel decisions include getting that fifth SEC commissioner in place and making sure Commodity Futures Trading Commission Chairman Gary Gensler, the reformers' favorite Wall Street regulator, gets another term after his current stint ends in 2013.
The problem, though, is that even if you get good people in key positions, the agencies will be understaffed relative to the banks and lobbying firms they're opposing.
"The CFTC is radically underfunded," said Stanley. "Their personnel count is roughly pretty similar to the mid-1990s, and Dodd-Frank has increased their workload by eight-fold."
Five: Loophole-Free Derivatives Regulation
Perhaps even more important than fixing the problem of too-big-to-fail banks is making sure regulators can keep tabs on the exotic derivatives that contributed to the last crisis, from credit default swaps (CDS) to collateralized debt obligations (CDO) to CDOs stuffed with CDSs.
Again, Dodd-Frank has rules for that, but banks are pushing hard for a way out. Republicans last year introduced HR 3283, the Swap Jurisdiction Certainty Act, which would exempt overseas derivatives trades from Dodd-Frank rules as long as they were routed through a foreign subsidiary.
The bill is in limbo, but it's just one of many examples of banks tirelessly working to carve loopholes into obscure corners of the law dealing with obscure matters, where they can quietly make tons of money, while leaving the financial system at risk.
If anything is certain in Obama's second term, it is that this will continue.
"Part of the lobbying strategy is to wear you down, drag it out, until people get frustrated and lose confidence in regulators to do anything and the pressure subsides," said Bair. "That's why it's important that this stuff get done soon, not later, and as cleanly and effectively as possible.
"You will never make this industry happy," Bair warned of banks. "They will always want more."
This article is part of a series produced by The Huffington Post that closely examines the most pressing challenges facing President Obama in his second term. To read other posts in the series, click here.
This story appears in Issue 33 of our weekly iPad magazine, Huffington, in the iTunes App store, available Friday, Jan. 25.