Sheila Bair: Two Years After Dodd-Frank, Why Isn’t Anything Fixed?

Publication: Yahoo! Finance

Author: Systemic Risk Council

07/20/2012 - This is the first in a series of op-ed columns for Yahoo! Finance by members of the Systemic Risk Council on a variety of financial reform topics. The views expressed are their own.


The late Gilda Radner played an endearing character named Roseanne Roseannadanna on Saturday Night Live in the 1970s. The character would provide hilarious commentary on current events (usually accompanied by gross out observations on bodily functions) then conclude by saying "It's always something -- if it ain't one thing, it's another."

As we are inundated with a continuing procession of financial scandals -- MF Global's bankruptcy, JP Morgan Chase's "London Whale" and his trading losses, Barclays' rate fixing, Peregrine Financial's fraud -- Roseanne's "it's always something" seems an apt description of the financial system today.

The Dodd-Frank Wall Street Reform Act, the landmark law enacted on July 21, 2010, was designed to end the kind of risk taking, greed, and avarice that brought us the financial crisis of 2008. Yet, notwithstanding thousands of pages of proposed and final rules to implement this important law, nothing much seems to have changed. The prospect of a quick buck too often trumps any notion of ethical behavior or gosh-forbid, long-term business relationships. Traders still feel they are masters of the universe, misappropriating customer funds, making outsized bets in the derivatives markets and fixing interest rates. Some of them apparently think that laws are made to be broken if they can improve their year-end bonuses. But after all, wasn't that the lesson learned from the hand slaps they received for the subprime mess?

A Problem of Culture
We've got a culture problem on the trading desks of the world's leading financial institutions.  Yes, some regulators and Members of Congress are busy issuing press releases proclaiming outrage, ordering up investigations, and calling for better "policies and procedures" at the nation's top banks but why don't they just fix this stuff? No bank, not even one which is ostensibly well run like Chase, should be allowed to use insured deposits to take big positions in tranched credit default swap indexes. These instruments are so volatile and risky that clearinghouses won't even accept them, so why is Chase using government-backed money to take those bets?

And why in the world didn't U.S. and U.K. regulators simply tell Barclays and other banks back in 2008 when reports of attempted manipulation first surfaced that they needed to use actual transactions in submitting Libor rates as opposed to their best guess about the current costs of interbank borrowing? The subjectivity built into the Libor process was ripe for abuse.

Regulation Is Still Needed
The lesson of all of this goes directly against two decades of the mantra of "self-correcting" markets. Financial institutions cannot be relied upon to do the right thing, when doing the wrong thing will line their pockets. Regulators, not banks, need to set the rules and they must be clear, straightforward, and readily enforceable.


Read the full article, Sheila Bair: Two Years After Dodd-Frank, Why Isn’t Anything Fixed?, on the Yahoo! Finance website.

(All Fields are required)