Frank Stein's Reviews > The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences

The New Financial Deal by David A. Skeel Jr.
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Jul 29, 11

Read in July, 2011

I know I just said I wouldn't read any more books on the financial crisis, but this is a book about what happened AFTER the crisis, so its technically not the same thing. My statement stands.

This is a book on the Dodd-Frank Act of 2010 written by a bankruptcy lawyer, David Skeel, and Skeel clearly shows his training by focusing overwhelmingly on the bankruptcy aspects the law (so much so that he does not even discuss the Durbin Amendment limiting bank interchange fees). That could give one a distorted view of the act, but it actually highlights how the whole regulatory structure set up by Dodd-Frank is essentially a way to avert and possibly subvert typical bankruptcy procedures. Even the Consumer Financial Protection Bureau, written by another bankruptcy lawyer, Elizabeth Warren, is predominately concerned with avoiding consumer bankruptcy.

Despite his suspicions about the act as a whole, Skeel is favorable to changes like the CFPB, the new clearinghouses and exchanges required for derivative trades, and the securitization rules that force banks to hold at least 5% of securitized assets on their books when selling off mortgage bonds or other debt instruments. The crucial flaw in the law, as he sees it, is that its new "resolution" authority, which allows the FDIC to capture "systematically important" banks when they are in danger of defaulting, also allows the FDIC and the Treasury to exercise almost complete discretion as to which creditors to pay off and how to unwind the captured company. The potential for political machinations is rampant, and the designation of at least 36 of these financial firms (those with more than $50 billion in assets) as "systematically important," means they will officially be marked as "too big to fail" and thus creditors will act appropriately, confident that they will get bailed out by the FDIC or government when push comes to shove, just like in 2008.

As Skeel shows, this part of the act is basically an attempt to enshrine the 2008 bailouts into law. Timothy Geithner, current head of the Treasury and the former head of the New York Federal Reserve, was both the premier instigator of the AIG bailout and the Obama administration's point person on writing the law. He used his draft to grant the Secretary of the Treasury (namely, himself) unprecedented power, including the position of "first among equals" on the new Financial Stability Oversight Council, and to guarantee the Treasury's ability to select firms to bailout and unwind. He even hired the law firm he previously hired to run the AIG bailout, Davis, Polk, & Wardwell, which also represented the financial industry's lobbying arm, to write much of the law. When Treasury submitted its draft bill to Congress, it still had the law firm's watermark on the pages, which they had neglected to delete.

As Skeel says, the law shuns a Brandeis-ian break-up of the banks for a "corporatist" association of big banks and big government that would seem to guarantee more bailouts and handouts. He's ultimately hopeful that a few simple new laws and new bankruptcy procedures could avoid the worse consequences of the act. I'm less so.
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