The Devil, The Details & Dodd-Frank

As the massive financial-industry regulatory overhaul turns on year old, its impact remains to be seen- along with many of its rules

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If the Dodd-Frank Wall Street Reform and Consumer Protection Act were the Bible—which it exceeds in page count in certain printings—the opening sentence could read:

"In the beginning, Congress created a new financial world—and then left it up to various agencies to implement the earth, sky, animals, plants, oceans and laws of physics."

Dodd-Frank has been called the most sweeping overhaul of U.S. financial industry regulations since the New Deal-era reforms that created federal deposit insurance and the Securities Exchange Commission, among other safety belts. It's huge—2,319 pages in its final form.

The law mandates more transparency and regulation in the derivatives markets. It requires financial conglomerates to write "living wills" for an orderly settlement of their affairs—without taxpayer assistance—should they go under. It creates a new consumer financial protection agency in the Federal Reserve, among many other features.

The goal is to safeguard the financial system from a repeat of the meltdown of 2008, which originated in the housing bubble, led to the loss of 8 million jobs, and endures as the country's worst economic crisis since the Great Depression. President Obama signed Dodd-Frank into law nearly a year ago, on July 21, 2010, after it passed on essentially party-line votes in the Democratic-controlled Congress.

Year One of Dodd-Frank, however, has been more like Year Zero because federal agencies are still conducting studies and writing the rules that businesses will have to follow. According to a count by the international law firm Davis Polk, the overhaul requires regulators such as the Fed and SEC to write 243 rules, conduct 67 studies, and issue 22 periodic reports.

Until those rules are written and businesses try to live with them, it's impossible to render a verdict on Dodd-Frank, said a number of Notre Dame-affiliated professionals, politicians and professors contacted earlier this year. But that didn't stop them from predicting failure or success—and some unintended consequences—for certain provisions.

In the meantime, uncertainty reigns.

"If it creates a safer banking system, that's got to be good for everybody," said Mendoza College alum John C. Gerspach ('75), chief financial officer of Citigroup Inc. "But how does it actually get applied? How much of a heavy hand does it have? We'll have to see."

It turns out Gerspach is far from the only Notre Dame alum occupying a position of importance relative to Dodd-Frank (see a list on page 3).

In his half-year report on Dodd-Frank implementation in February, John Walsh ('73), acting comptroller of the currency, had the unenviable task of explaining to a Senate committee why a provision that bars banks from using credit ratings to assess risk might be unworkable. (Because no practical alternatives exist.) His office supervises more than 1,500 federally chartered commercial banks, and he serves as a director of the Federal Deposit Insurance Corporation.

William O'Brien ('92) is chief executive officer of Direct Edge, an all-electronic stock exchange that accounts for about 10 percent of all trading volume in the United States. Direct Edge and BATS Exchange vie for third in the U.S. equities exchange market after the NYSE and Nasdaq.

O'Brien worries that the SEC won't have the manpower to tackle all its new responsibilities along with its old ones. An austerity-minded Congress put some agencies' resources in jeopardy earlier this year during budget debate. But O'Brien was happy that Dodd-Frank delegated the rule-making authority to the subject-matter experts at the regulatory agency.

"The truth is, these are noble people doing noble things with good intent," he said. "What makes me optimistic is there has been a dialogue. They're listening to us."

Two of Notre Dame's four alumni in the House of Representatives—Peter King (JD '68), R-N.Y., and Joseph Donnelly (JD '81, '77), D-Ind.—serve on the House Financial Services Committee.

Donnelly said he's hopeful the reforms will work—and believes they would have worked had they been in place in the years leading up to the crash. Whatever doesn't work can be adjusted later, he said.

King expressed his view that Dodd-Frank takes "some positive steps," through increased oversight, accountability and consumer protection, but "creating a new federal bureaucracy" isn't the way to fend off future financial crises. He also said he was disappointed that the law ignored Fannie Mae and Freddie Mac, which he said were at the root of the financial crisis.

Notre Dame Finance Professor Robert Battalio was of the same mind, declaring, "I don't think the government can micromanage anything."

The managing director and chief operating officer of the Notre Dame Investment Office, Mark Krcmaric ('80), worries whether in trying to prevent a recurrence of 2008, Congress might have missed the opportunity to deal with the next crisis more effectively.

"Normally, that is the way regulatory responses work—fighting the last battle—because it's almost impossible to know what the next one is going to be," he said. He also thinks Congress should have made more of an effort to streamline and focus regulatory structures, as is more common internationally. Nothing in Dodd-Frank affects the Investment Office directly. But it affects the fund managers the office hires to invest Notre Dame's $6 billion-plus endowment, 14th-largest in U.S. higher education.

Matthew Cain, assistant professor of finance, said it will be "at least a year or two" before researchers can study the empirical impact of Dodd-Frank in the real world and begin publishing their analyses.

Gerspach, for one, can't afford to wait.

Contacted in February, the Citigroup CFO said his company already had teams of employees studying more than 30 areas of Dodd-Frank that could affect the way the company does business.

Citigroup is no stranger to the federal government shaping its destiny, having survived the meltdown only with the help of billions of dollars of government investment under the Troubled Asset Relief Program (TARP). Last year, the feds sold their remaining stock in the company for a profit of $12 billion.

Gerspach said Citi supports Dodd-Frank's aims, but now it faces a daunting amount of contingency planning.

He said lawmakers seemed to feel they were under a deadline to pass something last summer. It would have been better to tackle the issues one at a time, he said, rather than drawing up a master plan for a new financial world and then leaving so many details to be worked out.

He said Congress spent a year debating the bill and is now allowing another year and a half for the regulations to be written.

"So you've actually created an environment of two, two-and-a-half years of uncertainty. I'm not quite sure that's a good thing."

Some Domers And Faculty
Around Dodd-Frank

COLLEEN BAKER, Associate professor of law, Notre Dame Law School; concurrent assistant professor of finance, Mendoza College of Business

ROBERT BATTALIO, Notre Dame professor of finance

MATTHEW CAIN, Notre Dame assistant professor of finance

THOMAS COSIMANO, Notre Dame professor of finance

ZHI DA, Notre Dame assistant professor of finance

EDWARD J. DEMARCO ('82), Acting director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac and Federal Home Loan Banks.

REP. JOSEPH DONNELLY (JD '81, '77, )D-Ind., member of the House Financial Services Committee, formerly chaired by the Frank in Dodd-Frank, Rep. Barney Frank, D-Mass.

JOHN C. GERSPACH ('75), Chief financial officer of Citigroup Inc., one of the world's largest financial-services conglomerates with approximately 200 million customers in more than 100 countries.

JEREMY GRIFFIN (MSA '00), Notre Dame assistant professor of accountancy

REP. PETER KING (JD '68), R-N.Y., member of the House Financial Services Committee.

BRIAN T. MOYNIHAN (JD '84), President and chief executive officer of Bank of America Corporation, the largest bank holding company in the United States as measured
by assets.

WILLIAM O'BRIEN ('92), Chief executive officer of Direct Edge, an all-electronic stock exchange that accounts for about 10 percent of all trading volume in the United States.

PAUL SCHULTZ, Clark Professor of Finance, director of the Center for the Study of Financial Regulation, Notre Dame

JOHN WALSH ('73), Acting comptroller of the currency. His office supervises more than 1,500 federally chartered commercial banks, and he's a director of
the FDIC.