Dodd-Frank Act – Are Changes On The Way?


Traders and the public as a whole were horrified as we all watched the stock market fall dramatically during 2008 and 2009. Not only was the market in free fall, but housing prices were also taking a nosedive. There was an overabundance of easy credit and other systemic factors which led to the situation which was unfolding before us all. This period of time came to be known as “The Great Recession” and it resulted in some of the most sweeping reforms ever enacted by the government. There was a general public outcry for something to be done to prevent this type of situation from ever happening again.


A Tough Spot For Congress

Congress was in a particularly difficult situation as it tried to both react immediately to what was happening and at the same time look for longer term solutions. As the market was unable and declining rapidly Henry Paulson, Ben Bernanke, and others met on Capitol Hill to discuss options with lawmakers. The President at the time was George W. Bush, a Republican, but the Congress was dominated by Democrats having come off of their victories in the 2006 Midterm elections. Both parties would have to work together on something that neither had prepared for, and they had to act quickly.


A Stimulus Bill Passed In Haste

As if all of this was not pressure enough, the 2008 election was just around the corner as well. As some of the largest banks in the entire country were on the brink of potential bankruptcy and collapse, the country would be deciding on a new President and Congress in just a little over a month. There was a lot of pressure on lawmakers to do what they felt was right. Out of all of this we received the bill commonly known as TARP (Troubled Asset Relief Program). It was a controversial bill which allowed the government to purchase assets (often bad mortgage bets) made by the largest banks in order to get them off the balance sheets of those banks. The government was purchasing these assets for pennies on the dollar compared to what the banks originally paid for them, but at that point in time the government was the only buyer will to step up and pay anything for them at all.

Given all of this history, Democrats in Congress in particular sought to avoid such a scenario from ever happening again. On November 8th, 2008 then Senator Barack Obama was elected as the 43rd President of the United States. Simultaneously, the country elected a large Democratic majority to the House of Representatives and a so-called “super majority” of Democrats (60) to the United States Senate. With these types of numbers the Democrats would technically not have to rely on any Republican votes to get anything that they wanted done so long as they could keep their own members on the same page.


Getting To A More Long Term Solution

There were a variety of issues which this Congress desired to work on. Health care was at the top of mind as the new President had campaigned heavily on creating a new healthcare system to get more Americans insured. At the same time, the President and Congress understood that they really must first focus on cleaning up the economic mess that they found presented to them. The first matters of business would be to work on pieces of legislation that would help regulate the same industries that had caused the financial crisis in the first place. The banking and mortgage lending industries were on notice.

The Democrats got to work quickly to pass banking regulations via a bill that would come to be known as the Dodd-Frank Act. It received this name in honor of the two primary sponsors of the bill Christopher Dodd and Barney Frank. One Senator and one Congressman was exactly what was needed to get this bill to work.


What Is In The Dodd-Frank Act?

The Dodd-Frank Act also sought to protect consumers from abusive lending practices that were so rampant during the years leading up to the crash. The main way that it does this is through the creation of a new agency called the Consumer Financial Protections Bureau (CFPB). The Bureau exists to try to protect consumers from risky lenders and risky lending practices. It is debatable how much power this bureau really has, but at least there is some watchdog on the case for the worst of the worst cases. It even has a 24 hour hotline which consumers can call to file a complaint or ask a question.


The Provisions That Traders Care About

For traders it is important to consider the implications of this legislation on the markets. A robust banking system is necessary for the trust of investors at large. If the banks are not lending and functioning as they normally would, then the system itself does not function. People have to know that the money they put in the bank will be available to them whenever they need it.

Dodd-Frank contains provisions which could potentially break up big banks if they reach a status where they become “too big to fail”. This was the popular terminology given at the time for a bank considered too vital to the overall health of the financial system to allow to fail. This idea drew a lot of criticism from people at the time, thus the legislation sought to avoid having a situation in which banks were ever too big to fail again. The level of success of this piece of the legislation is highly debatable as well.


Insurance Companies Meet New Scrutiny As Well

Investors in insurance companies must also consider the Dodd-Frank Act as well. These companies are regulated more closely by the government as a result of this new law. Insurance companies such as AIG were a leading culprit in the crash of 2008. The company made a lot of insurance bets on the mortgages of people who could not afford them. It was a complex web of deals, but the bottom line was that AIG was a big problem for a lot of people. Now, the government keeps a closer eye on these transactions. For some people this may be comforting, but in another sense it could restrain some companies from reaching their full financial potential.


Repeal On The Way?

The final consideration for traders and anyone else concerned is that the Dodd-Frank Act may not be around for much longer, or at least not in its current form. Following the most recent election in 2016 Republicans took control of the Presidency and both chambers of Congress. They largely voted against it when it was first formed and have made noises about repealing it going forward. In fact, it might be among some of the first matters of business that the new government takes on. Given all of this, traders ought to keep a sharp eye on developments in this area.