The Final Call

New financial industry law doesn't solve problems that led to crisis, experts warn

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“With the President's signature today, our nation is taking a step forward for middle-class consumers and working families,” House Speaker Nancy Pelosi (D-Calif.) said in a statement. “The Dodd-Frank Wall Street Reform and Consumer Protection Act enact the toughest set of Wall Street reforms in generations—and the strongest consumer protections in history.”

The Obama administration and the Democratic-controlled Congress are claiming its passage as one of their most significant achievements, on top of health care reform, college financial aid reform, and credit card reform. To be sure, the bill was passed despite fierce Republican opposition.

The law itself is far-reaching and contains 16 different titles, or sections, of provisions.

Title I creates the Financial Stability Oversight Council and the Office of Financial Research, two new agencies attached to the U.S. Department of Treasury—designed to look at the overall well-being of the economy.

Title VI includes the Volcker Rule, which states that a bank cannot engage in proprietary trading that is not in the best interests of its clients. Paul Volcker, former Chairman of the Federal Reserve, is chairman of President Obama's Economic Recovery Advisory Board.

Economist Ellen Brown told IPS that the rule got heavily watered down in Congress.

“Originally it was the Glass-Steagall act in 1930s, you can't speculate with depositors' money. You have to separate your gambling business (investments) from your commercial banking business. That rule was brought down in 1999... So, there was an attempt to go back to that,” Ms. Brown said.

“That attempt to get that into the reform bill failed. Volcker stepped up with his version—the banks would have to separate it off—but that failed as well. The only part that's left is, they're allowed to speculate with only their tier 1 capital, four percent of their deposits,” Ms. Brown said, stressing, “That's supposed to be ‘your' money, good liquid assets … that was supposed to be there to back up your other deposits.”

Title VII includes regulation of the so-called credit default swaps and credit derivatives that were partially to blame for the U.S. economic collapse of 2007.

But Ms. Brown criticizes the bill for allowing the derivatives or credit default swap market to continue.

“They (financial institutions) have to be more transparent with them. They have to register those things. I really think they should get rid of that whole market. It's a bad business. The whole thing is gambling. The credit default swaps are merely bets. You sell off your risk to someone else. But the parties (who bought the risks) just went bankrupt, except for AIG; they got bailed out,” Ms. Brown said.

“What they should've done is had honest banks keep loans on their books like they used to do, to make sure they're credit-worthy borrowers,” Ms. Brown said.

Title X creates the Bureau of Consumer Financial Protection, and establishes it within the Federal Reserve.

Harvard Law Professor Elizabeth Warren first proposed an independent consumer protection agency in 2007, and such an agency was originally proposed in the House. However, in the final version of the bill, the agency was no longer independent, being housed in the Federal Reserve. It does have an independent budget and administrator as well as broad rule-writing authority, but no enforcement authority.

Shortly after the law passed, numerous national advocacy groups sent emails, Facebook messages, and petitions urging President Obama to appoint Ms. Warren to the new bureau. The Progressive Change Campaign Committee, Public Citizen, and U.S. Sen. Al Franken (D-Minn.) had collected over 200,000 online signatures as of August 09, 2010.

Activist Ed Magedson, who runs the website, ripoffreport.com, is not impressed with the vague descriptions of this new agency. His website collects complaints from consumers about banks and other companies. He calls the new law “a big pile of garbage.”

“What's the point of having an agency? We already had the Federal Reserve and they weren't doing anything,” Mr. Magedson said. “What they need to do is, if they get more than five of the same type of complaint, they need to have that investigated and resolved within 14 days.”

The law also does not end the practice of U.S. banks growing so large that they become “too big to fail.” At the beginnings of the most recent economic collapse, there were many banks that were deemed so integral to the U.S .economy that taxpayers had to save them from collapsing with a massive bailout.

“They did not break up ‘Too Big to Fail,',” Ms. Brown said. “JP Morgan, Citigroup, Bank of America, and Wells Fargo have $7.4 trillion in assets, half of the GDP (Gross Domestic Product) of the whole country.”

Speaker Pelosi claimed it did end “Too Big to Fail.” However, Ms. Brown believes that's deceptive.

“They have the option supposedly (to break up banks) if something is happening that is jeopardizing the whole system. Under what circumstances would they do that? Meanwhile, they (the banks) are huge and they're taking over all small banks,” Ms. Brown said.

Sens. Sherrod Brown (D-Ohio) and Ted Kaufman (D-Del.) proposed an amendment that would limit a bank's share of total insured deposits, out of all deposits nationwide, to 10 percent. That amendment failed in the Senate, 33 to 61.