If you think that the Dodd-Frank bank reform legislation will put the kibosh on future bad bank bailouts, think again. A virtually unknown federal agency known as the Financial Stability Oversight Council can formally designate certain large banks and nonbank financial companies as "systemically important financial institutions" (SIFIs) -- a.k.a. Too Big To Fail So Taxpayers Must Bail.
According to an October 2011 article in the Weekly Standard by C. Boyden Gray, the former White House counsel under President George H. W. Bush, instead of ending a subsidy to big banks, Dodd-Frank intensifies it by lowering the asset threshold from $100 billion to $50 billion, and including not just banks but also nonbank financial companies.
Before Dodd-Frank, says Gray, a handful of big banks enjoyed unofficial too-big-to-fail status among investors, simply because of the banks' disproportionate size -- $100 billion in assets was a common benchmark. Because those banks were seen as enjoying the likely protection of government intervention to prevent their failure, investors saw the banks as less risky than their "small enough to fail" competitors. Accordingly, the big banks were able to attract investment capital at much lower cost.
To make matters worse, the FSOC can and likely will override decisions made by the Consumer Financial Protection Bureau, according to Raj Date, who until recently was Deputy Director of the CFPB. In a March 2010 article he wrote for McClatchy-Tribune News Service when he was executive director of the Cambridge Winter Center for Financial Institutions Policy, Date observed that at least six of the nine voting members of the Stability Council would have voted against the regulation of non-traditional mortgages during the housing bubble that preceded the bust, including then-Treasury Secretary John Snow, Fed Chairman Alan Greenspan, OCC chief John Dugan and SEC head Christopher Cox.
So whose idea was the FSOC in the first place? Surprise, surprise: retired Senator Chris Dodd of Connecticut who probably ranks down near Tom Delay when it comes to compromised politicians. From receiving favorable refinancing terms on his homes due to being in the "Friends of Angelo" VIP program, named for Countrywide CEO Angelo Mozilo, to insisting during the subprime crisis that Fannie Mae and Freddie Mac were "fundamentally strong" no doubt as a result of campaign contributions, Dodd often prioritized loyalty to his donors over his constituents.
According to a March 2010 article in the Chicago Tribune, "Financial Overhaul Plan Toned Down," that month then-Senate Banking Committee Chairman Dodd unveiled his plan to overhaul the rules governing financial institutions, a more modest proposal than President Obama had envisioned a year earlier. Dodd abandoned the stand-alone CFPB that was proposed by Obama and instead proposed the FSOC.
Thankfully Dodd has retired and the CFPB has survived, although it's yet to be seen whether its decisions will be hamstrung by the FSOC. And where are the new politicians who will lock the revolving door between a job serving the public and one ripping off the public? One of the few politicians with the guts to take on this corruption is Rep. Peter DeFazio (D-OR) who authored a bill that requires regulators on the FSOC to sit out any vote that would overturn a CFPB regulation that would impact their former employers.
As DeFazio pointed out in his press release, "the revolving door between Washington and Wall Street has been described by the Washington Post as spinning at a dizzying pace. It is no surprise that the New York Times dubbed Goldman Sachs 'Government Sachs' for all of the employees who bounce back and forth between the Capitol and its Manhattan office tower."
As DeFazio observes, several former Wall Street employees or bank officials would have been voting members of the FSOC if it had existed in their day. They include: former Treasury Secretaries Hank Paulson, previously CEO of Goldman Sachs, Nicholas Brady, previously an investment banker and Donald Regan, previously CEO of Merrill Lynch; along with former SEC head William Donaldson, previously an investment banker and former FDIC heads Donald Powell, previously CEO of First National Bank of Amarillo and Donna Tanoue, previously Vice Chairman of the Bank of Hawaii.
While the House passed the amendment unanimously it wasn't clear if it was signed into law. What's more, we need laws that prohibit members of Congress and those sitting on regulatory bodies from taking a future job as a lobbyist once they leave their jobs. As a result of this lack of courage to tackle the toxic effect of money on politics, expect that taxpayers will once again be on the hook for even more reckless banks.