Five years ago today, Barack Obama signed one of the most important but least understood bills of his presidency: the Dodd-Frank financial regulation overhaul, which represents his main response to the enormous financial crisis that arrived immediately before his election. The law has many detractors and few fans. Pundits argue that it either suffocates the biggest banks with red tape or did nothing to change anything; that it is either a complete takeover of the financial sector or a series of things with no overall logic whatsoever.

This is all mistaken. Dodd-Frank was part of an international, clear plan to reform the most obvious financial sector flaws that contributed to the crisis. Results, though often stalled, are overall positive and substantial — and in each case there's a clear path forward building on the bill.

Dodd-Frank has three core pillars

To understand American financial reform, it's crucial to understand the broad principles that took hold internationally after the financial crisis. In September 2009, the G20 group of the world's 20 largest economies met in Pittsburgh to discuss financial reform priorities. They released a statement on how they would "adopt a set of policies, regulations and reforms to meet the needs of the 21st century global economy." The international context matters because financial flows in the modern day are highly global, and any given country's approach needs to reflect a broader logic.

The Dodd-Frank bill has three pillars, two deriving from the G20 statement and one reflecting the more US-specific cause of consumer protection:

Fixing the broken consumer finance system by ending a system in which consumer protection was a secondary mission for many agencies and making it the primary mission of one agency, the Consumer Financial Protection Bureau.

by ending a system in which consumer protection was a secondary mission for many agencies and making it the primary mission of one agency, the Consumer Financial Protection Bureau. Fixing derivatives by having them "be traded on exchanges ... and cleared through central counterparties." Derivatives would be forced into regulated marketplaces, where the risk they posed would be limited.

by having them "be traded on exchanges ... and cleared through central counterparties." Derivatives would be forced into regulated marketplaces, where the risk they posed would be limited. Fixing "too big to fail" by "building high quality capital" to make large banks less likely to fail and "cross-border resolutions [of] systemically important financial institutions" so a large financial firm that did fail (like, say, Lehman Brothers) could be shut down in a noncatastrophic way, just as the FDIC does regularly with small banks.

Protecting consumers

The pre-crisis years saw not just an explosion of general financial risk, but a multitude of regulatory breakdown that allowed abusive anti-consumer practices to flourish. Alan Greenspan and the Federal Reserve refused to investigate subprime mortgages as they bubbled up in the greater economy over the 2000s. Indeed, federal regulators were actively fighting states' efforts to put limits on subprime mortgages.

The overriding theme to these failures is that there were too many people who had representing the interest of consumers in their mission but no person who had it as a specific mission. In the words of Georgetown law professor Adam Levitin, consumer protection was an "orphan mission." Ten different agencies — the alphabet soup of the OCC, OTS, NCUA, Federal Reserve Board, FDIC, FHFA, HUD, VA, FTC, and DOJ — all had responsibility for consumer protection, which in practice meant that nobody had it.

There was no institutional infrastructure to build expertise around these matters, and no will to carry it out.

As Raj Date, a managing partner at Fenway Summer and the former first deputy director of the Consumer Financial Protection Bureau, told me, "Regulatory agencies are filled with, as it turns out, human beings. So they behave like other companies or teams of human beings in that they can be really great at doing one thing, or possibly two. So if something is priority number 3 or 4 or 400, well, then it's not a priority at all."

Dodd-Frank's solution was to create the CFPB, largely along the lines proposed by Elizabeth Warren back in 2007 in an article that warned about the problems of America's fragmented and inadequate system of consumer protection.

The CFPB's key achievements

As a brand new agency, the CFBP launched one year after Dodd-Frank was signed, and in the past four years it's accomplished a lot. The bureau works through two primary channels. First, it fines businesses for bad practices, creating a real penalty for breaking the law. Second, it's started to shed light into the previously dark areas of the credit, debt, and financial systems.

Through 2015, there's been $10.1 billion in relief to consumers, much of it stemming from manipulative conduct in mortgage services or deceptive practices in the credit card industry.

The CFPB launched an investigation into the for-profit college ITT and argued it "misled students by overstating their salaries and job prospects upon graduation." This action helped launch a series of important investigations into for-profit schools that has so far culminated in the collapse of Corinthian Colleges.

The CFPB wrote a rule determining what makes a "qualifying loan" for the purposes of mortgage making, requiring lenders to determine that borrowers have an ability to pay the mortgages they take out.

The agency has also written rules over the debt payments and servicing for mortgages, and is investigating the debt payments and servicing of student loans, with a hint to writing future rules.

It is supervising the previously opaque consumer credit reporting market, as well as non-bank debt collectors. Consumers, individually, have very little power to police these markets, and regulators previously ignored them.

The CFPB is operating, as intended, as a "cop on the beat" whose sole focus is to aggressively seek out instances of anti-consumer malfeasance. These are markets where any one individual doesn't have the time, expertise, or resources to combat fraud. Thus, assigning that responsibility to one team of administrators can do the work better and more efficiently than any individual.

The CFPB remains intensely controversial

Republicans have never liked the idea of the CFPB, and since its inception they've employed a number of strategies to undermine the vigor with which it can operate. The CFPB features a single director, funding that comes from the Federal Reserve, and a dedicated focus on consumer protection — all designed to create an agency that would be relentless in its efforts. Initially, Senate Republicans refused to appoint anyone to run the CFPB unless a board replaced the director, funding was to be directed by appropriations, and the focus on consumer protection was diluted with an additional "safety and soundness" mission.

Meanwhile, in the House, Jeb Hensarling (R-TX), the chair of the Financial Services Committee, told the Wall Street Journal that the CFPB is "the single most unaccountable agency in the history of America."

The reality is that the CFPB was consciously designed to mimic the structure of the Office of the Comptroller of the Currency, a bank regulator focused on safety and soundness that is widely seen as pro-bank. The OCC is also self-funded, and has a director and a clear mission. What's more, far from unaccountable, the CFPB is set up so its regulations can actually be vetoed by a collection of other regulators if they feel the consumer agency is going too far.

Republicans, however, are determined to see changes made and will almost certainly renew their push for these steps if they get a more sympathetic president in 2017.

Derivatives reform

Derivatives are complicated trading instruments that brought much trouble to the financial markets in 2008. They are contracts written to derive their value from the movements in the price of other things — stocks, bonds, foreign currencies, or physical commodities like oil or wheat. Many derivatives trade in a reasonably transparent and well-understood way, but it was an important family of derivatives known as swaps — which include the credit default swaps that bankrupted AIG and hid the real risks assumed by banks that appeared healthy but were in fact in major danger — that most needed reform. These instruments trade opaquely, over the phone, between many individual firms in what is called the over-the-counter market.

Progress on derivatives reform

Dodd-Frank's core idea about derivatives was to move stocks onto public exchanges, like a stock exchange, and into centralized clearinghouses, to aggregate and monitor their risks. This transparency, centralization, and attention to process should allow for greatly improved risk management. Dodd-Frank also encourages standardization, which in turn improves transparency (the swaps are easier to understand), which in turn further improves risk management.

"So many of the problems we saw in the derivatives market stemmed from a bad structure. They traded behind closed doors, through a handful of dealers, with very little oversight," Caitlin Kline of the financial reform think tank Better Markets told me. "Under Dodd Frank, derivatives will now have the basic transparency and risk mechanisms of other financial markets, which is meaningful and long overdue."

The Commodity Futures Trading Commission (CFTC) is the agency tasked with most of these actions. So far it has made considerable, though still incomplete, progress:

In fall 2013, the CFTC finalized its rules and launched the first swap execution facility (SEF).

Starting in early 2014, major interest rate swaps and credit default swap (CDS) indices were mandated to trade on these facilities. By early 2015, 54 percent of interest rate swaps and 71 percent of CDS indices are trading under these SEF platform.

These facilities create a process for posting and adjusting the capital necessary to hold derivatives, as well as unwinding them in case of a bank failure. As MIT finance professor John Parsons told me, "There does seem to be a more thoroughgoing appreciation of what a sizable derivatives book might mean for risk."

Unfinished business on derivatives

Yet there still remains a lot of work. There are five major remaining obstacles in the derivatives market.

Regulation. Derivatives oversight is fragmented across regulators. The CFTC is the main derivatives regulator and is doing a good job, but the SEC, which has jurisdiction over some of the riskiest swaps, has barely started its process.

Derivatives oversight is fragmented across regulators. The CFTC is the main derivatives regulator and is doing a good job, but the SEC, which has jurisdiction over some of the riskiest swaps, has barely started its process. Clear reporting. 2015 is likely to be a year when there are major breakthroughs in how accessible and timely prices from the derivatives market are going to be for the market as a whole.

2015 is likely to be a year when there are major breakthroughs in how accessible and timely prices from the derivatives market are going to be for the market as a whole. Regulating the clearinghouses. Derivatives clearinghouses need solid organization and governance in order to serve their purpose. Both regulators and market participants want to see additional stress testing and stability mechanisms for these institutions. These last two tasks are essential for the CFTC, though the agency remains underfunded relative to the tasks it needs to carry out, and many call for additional funding.

Derivatives clearinghouses need solid organization and governance in order to serve their purpose. Both regulators and market participants want to see additional stress testing and stability mechanisms for these institutions. These last two tasks are essential for the CFTC, though the agency remains underfunded relative to the tasks it needs to carry out, and many call for additional funding. End users. Dodd-Frank largely exempted derivatives "end users," such as farmers who are directly hedging agricultural prices rather than engaging in speculative trading. Spelling out how this works in detail matters, and industry still wants this expanded further. It could be a small exemption or turn into a massive loophole.

Dodd-Frank largely exempted derivatives "end users," such as farmers who are directly hedging agricultural prices rather than engaging in speculative trading. Spelling out how this works in detail matters, and industry still wants this expanded further. It could be a small exemption or turn into a massive loophole. International issues. Many derivatives trades cross international boundaries, and questions abound about how to regulate such transactions. Former CFTC Chair Gary Gensler fought hard to expand the reach of US regulations so that they applied to all trades that cause risk to the US financial system, regardless of where they take place. He noted that all the major derivatives explosions in the past decades — AIG, Lehman, Citigroup's off-balance sheet vehicles, Bear Stearns, LTCM, the London Whale of JP Morgan — all involved overseas derivatives trading creating US losses. But these rules are not yet in force and continue to face loud opposition, both from overseas firms and from foreign regulators defending their own sovereignty. Last year the rules survived a legal challenge by the financial industry, but sensitive negotiations with European regulators on key provisions keep the full implementation in limbo.

Making big bank failures less likely

The last step is dealing with "too big to fail." And here, there are two steps: making a failure less likely, and then having a working procedure to handle the failure when it does happen. Think of it like speed limits and safety belts for the financial industry. Let's start with the first part.

Capital requirements simply require banks to fund themselves with a minimum amount of equity, rather than debt. Because they require banks to switch to one source of funding from another, there's much less cost to these requirements than other forms of regulations, and by directly reducing the chance of failure they reduce the likelihood of a financial crisis. During the financial crisis there was simply not enough capital in the financial system to handle a sudden panic.

New limits on bank risk

In order to make firms less likely to fail, Dodd-Frank directed regulators to raise capital requirements, especially for firms over $50 billion in size. These firms were declared "systemically important financial institutions" (SIFI), and put under a host of additional requirements.

Capital is simple in a simple model, but in the real world of banking it isn't just one thing. Dodd-Frank recognizes this by tackling bank risk across a variety of channels:

Risk-weighted capital. Capital that is adjusted for risk has increased significantly, such that we could see a 14 percent ratio by the time the process is done. A capital surcharge for the largest firms is still awaiting finalization.

Capital that is adjusted for risk has increased significantly, such that we could see a 14 percent ratio by the time the process is done. A capital surcharge for the largest firms is still awaiting finalization. Leverage ratios. The leverage ratio is the kind that isn't adjusted on the internal models of banks. It too has increased, but this time to only 5 or 6 percent, depending on the firm. There's been a fight over which of these is more important, with some saying only leverage ratios should count and others saying risk weighting is essential, but the truth is that both should be in play, as they each measure a different thing, complementing and checking each other.

The leverage ratio is the kind that isn't adjusted on the internal models of banks. It too has increased, but this time to only 5 or 6 percent, depending on the firm. There's been a fight over which of these is more important, with some saying only leverage ratios should count and others saying risk weighting is essential, but the truth is that both should be in play, as they each measure a different thing, complementing and checking each other. Capital to guide behavior. As a firm becomes underfunded, it will lose the ability to release dividends to shareholders until it gains more capital.

As a firm becomes underfunded, it will lose the ability to release dividends to shareholders until it gains more capital. Liquid capital. There are requirements to see if firms can survive a 30-calendar-day panic scenario, which would require them to have funds liquid enough to survive.

There are requirements to see if firms can survive a 30-calendar-day panic scenario, which would require them to have funds liquid enough to survive. The Volcker Rule. This is a requirement that the largest financial firms no longer engage in hedge fund–like "proprietary" trading for their own profit. After years of delays and brutal fighting, this rule was finalized at the end of 2013 and is slowly being implemented, with it fully in place in 2017.

The consistent application of these rules to all SIFI firms has helped reduce regulatory arbitrage, which is where firms are acting like banks without following the bank rules. Having to follow normal banking rules, GE recently sold off its GE Capital arm. As former FDIC chair Sheila Bair told me, "During the crisis, GE Capital found that they couldn't get funding without government support. So instead of dealing with a lot of new rules because of their systemic status, they decided to get out and become nonsystemic. This is precisely what Dodd-Frank was designed to do. We have one less systemic institution, and that's great."

Progress on bank capital remains vulnerable

Tighter bank capital requirements make banks significantly less profitable, and the industry has teamed up with congressional Republicans to advance a multi-pronged effort to undermine regulations that they say disadvantage American banks relative to foreign competitors. The most likely to move is the size of the threshold, which is currently $50 billion. The first major attempt to move this, spearheaded by Sen. Richard Shelby (R-AL), would have pushed the requirement up to $500 billion — under which Bear Stearns, whose collapse helped spark the financial crisis, would not have qualified for tougher rules.

Like any other ratio, capital requirements have a numerator and denominator, and the banks have gotten sneaky, and regulators complicit, in reducing the size of the denominator by making some assets ineligible or hidden in order to boost their numbers. Tightening up what goes in the denominator is essential.

Last, even under tougher rules capital still remains too low overall. As Bair told me, the battle over capital requirements isn't completed yet: "The leverage requirements have been strengthened but still remain far too low, especially for a holding company that is meant to be a source of strength. The surcharge on the largest entities isn't completed yet, and that could become vulnerable. Specific loss-absorbing debt hasn't even been proposed, even though it is needed for OLA to work effectively."

Dealing with busted megabanks

The financial sector bailouts were, rightfully, odious, but it's important to understand how we got into that situation. Failure is always structured by government regulations, as we can see with the bankruptcy code. However, there were several reasons the bankruptcy code wouldn't be appropriate for a financial firm. Bankruptcy is slow, while a financial crisis is quick. Bankruptcy isn't designed to preserve ongoing value or stop runs by paying special attention to short-term creditors. There's no guarantee of funding available for keeping crucial banking functions running. And bankruptcy is difficult for a financial firm with so many subsidiaries across many different countries.

But the goals of a bankruptcy are clear. The goal is to have shareholders lose their investment, creditors to suffer remaining losses, management to be fired, and the firm to be liquidated without cost to the public. This is the goal the FDIC has set out to do with something called Orderly Liquidation Authority (OLA), what Barney Frank has called "death panels" for the largest banks.

So what has been done?

A major problem with discussions over "too big to fail" is treating it as a simple on-off switch. Ending too big to fail is a continuum that is determined by the regulatory process, and there's been progress.

The subsidy "too big to fail" firms received during the crisis has fallen significantly, to the point where there's an active debate over whether it still exists. This means the financial markets don't believe the banks will be permanently bailed out.

The FDIC has devised an approach called "single point of entry" that should help it manage the failure of a large, complicated bank without destroying the rest of the financial system. A temporary company would come in and manage critical operating subsidiaries while the firm is being liquidated. This would result in the same losses necessary for fairness and justice, without the risks to the broader economy.

But there are important parts that haven't fully gone into effect yet, or even been proposed.

Banks are supposed to create living wills, explaining how they are structured to go through a failure. The Federal Reserve and, especially, the FDIC have faulted the first wave of these, writing that their first attempts "are not credible and do not facilitate an orderly resolution under the U.S. Bankruptcy Code."

Because of an addition to the 2005 Bankruptcy Act, derivatives contracts were exempted from crucial bankruptcy rules in a way that can lead to runs. Dodd-Frank delays this for domestic derivatives if the FDIC takes over the firm, but not for foreign ones, and not for bankruptcy. Industry groups and regulators are working on a voluntary solution but haven't yet reached one, and that might not be enough.

Rules to provide loss-absorbing capital haven't yet been proposed, and industry has a strong financial incentive to fight them. The more capital there is, the more breathing room regulators have in case of a failure to impose losses.

Republicans want to scrap this work

Republicans have decided that orderly liquidation constitutes a "permanent bailout," and removing OLA authority is a major plank of Paul Ryan's budget. Republicans say they would like the courts alone to handle these failures, even though fear that doing it this way would destroy the entire economy is exactly what led the Bush administration to resort to massive bailouts instead.

What Dodd-Frank doesn't do

Liberals who charge that Dodd-Frank somehow didn't change anything are badly mistaken. But they are right to say that while focusing on a few core issues it left other topics essentially unaddressed.

Big banks and finance

Dodd-Frank is a plan to reduce the odds of the failure of a gigantic bank and to mitigate the consequences of such a failure if it happens. During the passage of Dodd-Frank, there was significant debate over whether to break up the banks. Given concerns that they are too large to either be regulated, go into failure without bringing down the whole economy, or be constrained politically, many on the left will be pushing to break up the banks, as Bernie Sanders has in his plan.

But while Dodd-Frank is by no means a "break up the banks" law, it does contain tools that determined regulators could use to achieve that goal. If the living wills continue to be failures, regulators have the authority to break up the banks. And setting capital requirements higher for larger banks creates a nudge — and, given the right scale, a powerful nudge — for smaller banks.

There's also a broader worry that finance has gotten too big relative to the rest of the economy. As Marcus Stanley of Americans for Financial Reform argues, "There's been a hyper growth in the size and scale of finance since the late 1990s. Though this has leveled off in recent years, it hasn't decreased, and won't on its own."

Housing

The American housing finance system is still broken. Fannie Mae and Freddie Mac are still in receivership — owned and controlled by the federal government — while the pipeline through which mortgages can move from banks to investors is in tatters. The issue is, basically, gridlock. On the right there's a push to get the government entirely out of housing finance, while on the left there's interest in reconstituting Fannie and Freddie as genuine public agencies rather than the unholy hybrid they became post-privatization in the 1970s. In the center there are proposals to create an FDIC-like backstop for mortgage bonds that proponents say would combine the best attributes of both approaches, while detractors fear it would combine the worst. It doesn't look like the private market is coming back on its own, so this will continue to be a debate — albeit one that doesn't seem to be getting any closer to political resolution.

Fees

Fees for managing and advising investments account for one-third of the growth of the financial sector since the 1980s, and there are many questions about why this lucrative business has grown. Recently the SEC has been looking into fraudulent activities at private equity companies, while on the consumer side the Obama administration is pushing for investment advisers to be legally required to give advice that is in the best interests of their customers.

Short-termism

Financial markets have a great deal of practical control over the business practices of non-financial firms operating in the "real" economy. Many worry that this has resulted in excessive short-termism — Hillary Clinton has used the phrase "quarterly capitalism" — and is preventing investment, research, and long-term growth of the firm.

Laurence Fink, CEO of Blackrock, recently wrote that "effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy," and that this was being done at the expense of "innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth."

A good start

These challenges are real. But they shouldn't erase the real accomplishments of Dodd-Frank as a landmark piece of legislation. Before the crisis, banks had nobody challenging them on what they did to consumers, those wanting transparency for derivatives were removed from public office, and large financial institutions weren't seen as posing any special danger. Reform after the crisis was in no way inevitable, and the Dodd-Frank Act ensured that this old consensus would be destroyed. The new consensus can only be cemented with a real understanding of the substantial progress that has been made, and of the path forward.

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