Battle of Brooklyn, Pt. 2 – DFA Myths (Apr. 18)

Mike & Co. —

As the New York primary results roll in tomorrow, we’ll see how the past fortnight’s debate on Wall Street policy played in the financial capital of America.  After an at times tense debate last Thursday, the HRC campaign is in full throttle in the big apple, upstate, and on Long Island. I will join those of you in getting out the vote and maybe see you at the Sheraton in New York Times Square tomorrow night when polls close.

The exchanges on banking policy between HRC and Sen. Sanders Thursday night still resonate.  The Secretary reminded the audience that “we have the law” we need to handle TBTF banks while Sanders said he doesn’t “need Dodd-Frank now to tell me that we have got to break up the banks.”  Is that what Dodd-Frank says?

In the second part of our Battle of Brooklyn update series: a look at the biggest myths which surround the debate about DFA and its progress combatting TBTF.




The View from New York

Competing Views of Dodd-Frank

One of the critical arguments in the Democratic race has revolved around what to do about too big to fail banks.  On one side, Clinton argues for defense and support of Dodd-Frank, the comprehensive financial regulatory reform bill passed after 2007; on the other is Sanders, calling for TBTF banks to be broken apart by force, and soon.

Sanders’ view of DFA and TBTF have attracted particular scrutiny, in part because of his interview with the New York Daily News editorial board.  In that interview, he was asked how he would break up banking institutions, a central campaign theme, and fumbled his answer. Letting the banks decide how is like letting the fox guard the henhouse.  There were a lot of double takes and doubts he knew what he was saying.

Sanders quickly added that he would either “have legislation passed” or give the Treasury secretary the authority to “determine, under Dodd-Frank, that these banks are a danger to the economy.”   How’s that again?

Paid speeches to institutions such as Goldman Sachs

The issue was brought up again at the debate last week and probably definitively answered.  HRC had been pressured by Sanders on why she won’t release the transcripts of speeches at financial firms, implying that she is indebted to Wall Street banks.

Asked point blank what vote or issue position of HRC’s reflects the influence of Wall Street, Sanders could name nothing.

Her rejoinder:  “He cannot come up with any example because there is no example.”   After loading the deck for months, alleging undue influence, Sanders shot a blank.

The View from Washington

Politics or Policy?

Criticism of Dodd-Frank ramped up early last week, as results of the Fed and FDIC living will assessments were leaked to the Wall Street Journal on Tuesday evening.  Sen. Bob Corker called the leak “very disconcerting,” adding that it “undermines the credibility of the living wills process.”  An investigation into the leak has been launched by both regulators.

A WSJ op-ed called the living will process further proof that DFA is retreating in the face of judicial oversight.  Citing the FSOC’s loss against MetLife (already being appealed), and tough questions facing the CFPB from a federal judge, the editorial board asserts that these setbacks are caused by the fundamental failure of DFA “to keep its central promise.”

Rhetoric vs Reality

That’s a particularly pessimistic view.  It also intentionally misreads the implications of recent developments.  Starting from the fundamentally flawed premise that Dodd-Frank was meant to be an instant panacea to the financial market’s misdeeds, DFA critics have feigned frustration and impatience that an immediate cure did not result and advocate repealing the law.

Far from being the death of Dodd-Frank, or even reflections of its supposed inadequacy, calls for transparency and accountability are part of an evolutionary path toward better regulations.

The Myths of Banking Regulation

Critics of DFA and banking regulations in general have a small stable of repeatedly used canards trotted out whenever the topic is discussed.  Here are three:

  •  Big Banks have grown substantially since 2007:  Banks have expanded roughly 38 percent since 2007  but what’s not mentioned is that much of that growth stemmed from government-endorsed mergers at the height of market panic (such as Bank of America’s acquisition of Merrill Lynch).  This myth also suffers from not distinguishing monetary size from relative size.  Today, despite their size, the four largest banks hold a lower share of assets than they did during the financial crisis.

This view conveniently ignores the fact that some banks like Citi –- the only bank to pass both of last week’s living wills tests — have significantly cut operations and complexity in response to DFA.


  • Bank size is directly related to bank risk: Perhaps an unintended consequence of the phrase “Too Big to Fail” is that a firm’s size is now the basis of the public’s perception of its risk.  But a large firm is not necessarily a risky one.  DFA is not a deus ex machina designed to liquidate all firms above a certain size.  Risk matters.
  • Capricious and unaccountable regulators are strangling the market:  The financial market has not performed very well in the past quarter, causing many to blame “burdensome” regulations and call for transparency and accountability in DFA institutions.  The reality is that the financial sector is feeling the sting of global economic issues – poor growth in Europe and low commodities prices especially.

The top U.S. banks in 2015 – JPMorgan, Goldman Sachs, BoA, and Citi also happened to be four of the top fives  banks in the U.K and Germany.  Some of those banks were also the biggest players in Switzerland and Japan.  Even after Dodd-Frank, America’s banks — compliant with, if not in some cases transformed by DFA, remain dominant.

Primary Perspective 

New York is more than Wall Street.  “People upstate have a particular bias against downstate and Wall Street is the exemplar of what they don’t like about downstate.”  Upstate also matters — NYC constitutes less than 30 percent of the state’s population.   Former Sen. Clinton’s many years of focusing on the economic challenges facing upstate — starting with her Senate campaign’s “listening tour” through the region 16 years ago — is why few voters really view her as some kind of stalking horse for the Street.




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