Dodd-Frank _ Good, Bad, or Ugly?

Last Friday, I read an article in the Washing ton Post by C. Boyden Grey on Dodd-Frank financial reform law that was passed in June. Admittedly I didn’t know a whole lot about the Dodd-Frank legislation but I assumed that if it were written by Dodd and Frank, there couldn’t be much good in it.

 Mr. Grey sees Dodd-Frank as a real threat to the constitution. If we take at face value what Mr. Grey says about Dodd-Frank, then he is absolutely right. However, one should try to collaborate information before taking a position, right? So I dutifully decided to investigate for myself what the Dodd-Frank legislation holds for America. From Google I was able to find the complete bill as approved and I down-loaded all 2.6 MG bytes. Psychologically I prepared myself for the long task of reading and trying to understand what the bill contained. I’m sorry to tell you that I failed miserably in my task. I’ve never seen so many words strung together and saying nothing that I could understand. So, I returned to Google and this time to my relief I found a summary of Dodd-Frank. Unfortunately, the summary was only marginally better than the original. Therefore, my friends, I am left with no choice except to share with you what Mr. Grey says about Dodd-Frank and hope you have better luck in collaborating his fears.

First let me tell you that Mr. Grey is the former White House counsel to President George H. W. Bush and, therefore, is probably well qualified to analyse  this piece of legislation. Here are some highlights from his article:

…for example, the resolution/seizure authority of Title II, ostensibly designed to end bailouts and “too big to fail” risks. The Treasury can petition federal district courts to seize not only banks that enjoy government support but any non-bank financial institution that the government thinks is in danger of default and could, in turn, pose a risk to U.S. financial stability. If the entity resists seizure, the petition proceedings go secret, with a federal district judge given 24 hours to decide “on a strictly confidential basis” whether to allow receivership.

The court can eliminate all judicial review simply by doing nothing for 24 hours, after which the petition is granted automatically and liquidation proceeds. Anyone who “recklessly discloses” information about the government’s seizure or the pending court proceedings faces criminal fines and five years’ imprisonment. As for judicial review of the liquidation itself, the statute says that “no court shall have jurisdiction over” many rights with respect to the seized entity’s assets (thus apparently eliminating many actions that would otherwise be permitted to seek compensation in the federal Court of Claims).

This means the U.S. Treasury and Federal Deposit Insurance Corp. are acting as a sometimes secret legislative appropriator, executive and judiciary all in one. Although there is little direct precedent, it is hard to believe that the Supreme Court would not throw out parts of this scheme as violations of either the Article III judicial powers, due process or even the First Amendment, assuming the justices do not find all of it a violation of the basic constitutional structure.

If that is not bad enough, look at these two councils that are part of the legislation:


The Consumer Financial Protection Bureau and the Financial Stability Oversight Council created by the legislation suffer similar defects. The director of the consumer bureau is independent of both the Federal Reserve, which houses and funds it, and the White House. Dodd-Frank precludes the House and Senate Appropriations Committees from reviewing the bureau’s budget. As for the judiciary, the courts must accept statutory interpretations written by the director, who can thus refashion, without any effective judicial, legislative or White House oversight, all of the country’s credit-related law, including the 18 or so federal consumer finance statutes that are administered by six agencies (some of which must also yield exclusive enforcement as well to the consumer bureau).

The stability council – composed of 10 representatives of the Treasury, the Fed and other regulators – has the authority to (1) determine which non-bank financial institutions are subject to Title II seizure and (2) control virtually all of the activities of any financial institution for almost any purpose on a two-thirds vote of its members. The courts are not authorized to review whether the council has correctly interpreted the statute, though there isn’t much statutory direction for the courts to interpret in any event.

So, if Mr. Grey’s analysis is correct, and I have no reason to believe otherwise, Dodd-Frank is one major power grab, which is prime for corruption, and most likely unconstitutional.

After what happened in 2008, it is not unreasonable for Congress to want to review and improve the government’s control over the financial institutions; but this is ridiculous. Rules should be clear and unambiguous not 2000 pages of legal jargon. Professor Laurence Kotlikoff proposed an idea well over a year ago for what he calls Lilited-Purpose Banking. It is beautifully simple and would put an end to bank failures for ever. If you’re not familiar with Limited-Purpose Banking here is a good place to start.

It appears that like ObamaCare and the Food Safety Modernization Act, the Dodd-Frank is another piece of major legislation that must be undone.

9 thoughts on “Dodd-Frank _ Good, Bad, or Ugly?

  1. They’re practically begging companies to move offshore, and the companies are obliging. Figures, coming from Dodd and Frank, both of whom should be in jail right now.

  2. Anyone paying even the slightest attention in the last four or so years should know that any legislation with the names Dodd and Frank attached to it, particularly regarding financial regulation, should have been dead on arrival.

    I am also a fan of Kotlikoff’s Limited Purpose Banking. It’s all about transparency. The problem is, Democrats love to talk about transparency, and scream about special interests on Wall Street swaying the Republicans, but the truth is that they love financial regulation as a politicized, opaque process giving them leverage to pull campaign contributions from Wall Street.

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