Six years after the financial industry had to be rescued by the federal government, the American economy remains at risk of another catastrophic sequence of over-speculation and bailouts.
The 4-year-old Dodd-Frank Act promised to overhaul the financial sector. But many of the law’s regulations on proprietary trading, opaque derivatives, and the health of America’s banks have been delayed or watered down by slow-moving agencies within the Obama Administration, notably the Securities and Exchange Commission and the Commodity Futures Trading Commission.
As of July 1, only 208 of the 398 rules required by Dodd-Frank were complete, according to analysts who track the law’s progress. About 45 percent of rule-making deadlines have been missed.
The heart of the legislation, the Volcker Rule, was supposed to go into effect in 2012, but has been delayed to 2015. The rule bans proprietary trading — banks making risky investments with clients’ money instead of their own — and limits banks’ investment in hedge funds and private equity.
Some large banks seem to have resumed the bad behavior that contributed to the Great Recession. A JPMorgan Chase trader known as the “London Whale” lost billions of dollars in gambling on credit-default swaps. Citibank faces a lawsuit over its handling of mortgage securities; because it failed a Federal Reserve “stress test” in June, its risky balance sheet could imperil the broader economy.
Congress has been predictably unhelpful on financial regulation since Republicans took control of the House of Representatives in 2010. Yet it should not have taken the Obama Administration five years to write the rules, however complex, to enforce Dodd-Frank.
The revolving door between financial regulators and big banks might explain some of the foot-dragging. Last month, the SEC approved a rule with a loophole that lets international affiliates of U.S. banks evade derivatives-trading rules.
Until the executive branch moves more seriously toward effectively executing the Dodd-Frank law, American consumers will remain exposed to the excesses of unregulated markets.