1.Dodd-Frank: What It Does and Why Its Flawed Hester Peirce Mercatus Center at George Mason University Senior Research Fellow March 6, 2013

2. Our Agenda qDiscuss Dodd-Franks objecMves qDiscuss why those objecMves were not met by Dodd-Frank qIdenMfy areas of Dodd-Frank that could give rise to new problems 3. DISCLAIMERS Given its breadth, there is no such thing as a Dodd-Frank expert. The text and pictures on the slides are not intended to provide a comprehensive summary of Dodd-Frank. Studies have shown that thinking about Dodd- Frank can be harmful to your health. 4. Timing Problem January 2011 July 21, 2010 2:49 PM Signing the Wall Street Reform and Consumer Protec7on Act 5. Key Dodd-Frank ObjecMves qEnd taxpayer-funded bailouts qMake nancial system more stable qEnd abusive pracMces that hurt consumers qRegulate in areas that have not been regulated a heavily as some believe they should be qEnable large nancial enMMes to be wound down 6. Key Dodd-Frank Failings qDid not reform the housing nance system qDid not end taxpayer-funded bailouts qEncourages nancial industry concentraMon qHarms consumers through higher prices and fewer opMons qRelies too heavily on regulaMon and undermines market discipline 7. Eliminated by Dodd-Frank Agencies and Oces Added by Dodd-Frank SEC Oce of Oce of Thri Bureau of Consumer SEC Investor Supervision Financial ProtecMon Ombudsman Advocate Financial Stability SEC Oce of CFTC Oce of Oversight Council Credit RaMngs Whistleblower SEC Oce of Minority & Oce of Financial Municipal Women Research SecuriMes Inclusion Os HUD Oce of Federal Insurance SEC Oce of Housing Oce Whistleblower Counseling 8. Speed Walking through Dodd-Frank In walking through the Mtles, keep an eye out for Condence in regulators ability to idenMfy and solve problems Wide discreMon and limited accountability for regulators Diversion of regulatory focus from key issues Costly new regulatory regimes 9. Title I What it Does Treas- CFTC SEC Fed FDIC Establishes the FSOC ury Establishes the OFR Ins. OCC FHFA NCUA CFPB Gives Fed power to impose Rep. enhanced prudenMal standards State State State OFR FIO Ins. Sec. Bank Why Its Flawed Financial Stability Oversight Council FSOC hasnt been transparent, hasnt coordinated, displaces regulators DesignaMng specic rms as TBTF IdenMfy Make dulls market discipline SIFIs/ IdenMfy Regulat Fed not t to regulate nonbanks FMUs/ risks -ory AcM- OFR is not accountable recs viMes 10. Title II What It Does Fed & FDIC (or SEC or FIO) Establishes an FDIC-run resoluMon make recommendaMon re alternaMve to bankruptcy a nancial company or subsidiary Why Its Flawed DeterminaMon by Secretary Instead of reforming the bankruptcy model, abandons it Company is noMed Vague criteria for selecMng companies makes many companies potenMal resoluMon targets. Review by Broad regulatory discreMon with only court: Limited limited judicial oversight in Mme and FDIC scope, Possibility for certain creditors to be favored appointed condenMal Possibility for companies to be as receiver propped up Limited Appeal 11. Title III What It Does Eliminates OTS Oce of Thri Raises deposit insurance to $250,000 Supervision Expands assessment base for deposit insurance to total consolidated assets Federal- State- Savings and minus tangible equity chartered chartered Loan Oces of Minority/Women Inclusion savings savings Holding associaMons associa- Companies Mons Why Its Flawed Deposit insurance dulls market disc- ipline, increases systemic instability Adds a new layer of bureaucracy at Fed OCC FDIC each nancial regulator 12. Title IV What It Does Hedge RegistraMon Hedge fund/private fund SEC Fund registraMon Adviser Raises threshold for adviser SEC SEC registraMon Private Prevents investors from counMng Equity RegistraMon their home towards accredited Fund investor threshold Adviser DeregistraMon Why Its Flawed Advisers SEC resources diverted to watch out with RegistraMon for wealthy investors $25-100 States New costs for private fund investors mill 13. Title V What It Does Department of Treasury Creates Federal Insurance Oce Makes changes to surplus line Federal Insurance Oce insurance and reinsurance regulaMon Why Its Flawed The FIO has largely unconstrained Monitor & Report ability to demand informaMon Recommend FIO hasnt released report SIFIs Consult and DesignaMng insurance companies as & Advise Coordinate systemic aggravates TBTF problem and introduces an inexperienced Con- regulator in the insurance space FSOC States gress 14. Title VI What It Does Expands Feds regulatory authority Fed Implements Volcker Rule FBO Why Its Flawed Inter- Bank / Secur- Too much power to the Fed Non-Thri iMes media bank Fed will be more invested in propping Holding Hold- te SIFIs up a lot of nancial enMMes Co ing Co Hold- Volcker Rule could make it dicult ing Co for banks to engage in legiMmate hedging and market-making Subsidiaries and Aliates acMviMes, and market liquidity could suer FuncMonal Regulators 15. Title VII What It Does Ex-Swap Assigns regulatory responsibility for changeDealer/Swap Dealer OTC derivaMves market to CFTC/SEC / SEF MSP/Finl Reshapes OTC derivaMves market by End User mandaMng reporMng, use of central clearinghouses, exchanges and regu- laMng dealer-customer interacMons Non -nl FCM End Swap Data Why Its Flawed User Repository Fragments derivaMves regulaMon Pub- SEC/ Imposes inapt regulatory scheme lic CFTC Harms end users Clearinghouses are systemic risk Clearinghouse ImplementaMon has been careless 16. Title VIII What It Does FSOC designates systemically Financial Stability Oversight Council important FMUs & payment, clearing, sehlement acMviMes Grants Fed, SEC & CFTC authority to prescribe risk-management standards for designated uMliMes and acMviMes Allows for expansion of Fed discount and borrowing privileges Systemically Financial Why Its Flawed important PCS Market UMliMes New class of TBTF enMMes acMviMes Expands government safety net Grants broad regulatory power over rms engaged in designated acMviMes Fed SEC/CFTC 17. Title IX New Broker/ SRO/ New What It Does Investor Dealer PCAOB Muni Creates new SEC bureaucracies Oces, Fiduciary Reforms Advisor Grants SEC new enforcement powers TesMng & Duty Regime Studies New corp gov/exec comp mandates Restrict New SEC Say-on- Proxy Removes credit raMngs from Mandat- enforce- Pay Access regulaMons, increases CRA regulaMon ory Arbi-ment Risk retenMon & other ABS regulaMon traMon powers Pay RaMo Comp. Claw- SEC Why Its Flawed Pay for Comm-backs Funding Perform. ihees Laundry list of changes, mostly unre- Disclos. lated to crisis or nancial companies Credit SecuriM- SEC Whistle-Re- Relevant reforms are poorly executed RaMng zaMon Organiz-blow- late Hurts small & Main Street companies Agency Reform aMonal er to Credit raMng agency reforms work at Reform Reform program Cris- cross-purposes is 18. Title X What It Does Fed Creates CFPB and gives it broad new Bureau of regulatory powers Consumer Durbin amendment, which directs Financial the Fed to cap fees banks can charge ProtecMon merchants for debit card transacMons Senate Nominates Conrms Why Its Flawed Pres- CFPBs structure lacks accountability Con- ident Director gress Likely to result in limiMng consumer nancial products and increasing Limited FSOC their prices Review Durbin amendment imposes market- Enforce- distorMng price controls Rules Guid- ment ance AcMons 19. Title XI What It Does Emergency Lending by Fed Limits Feds emergency lending authority Fed Requires congressional approval for FDIC emergency-guarantee Audit programs. GAO Report Increases Fed transparency Directs the GAO to audit the Feds Broad-Based Program nancial-crisis assistance programs Solvent Good Treas-Why Its Flawed Compan-collat-ury Ap- ies eral proval Should be conMnuous GAO Fed audits Transparency increases insucient given Feds increased regulatory Congress authority under Dodd-Frank 20. Title XII What It Does Authorizes Treasury to develop programs, including grants to banks, Treasury to improve low-/ moderate-income individuals access to credit Allows for government backed reserves for CDFI loans Insured depositories Why Its Flawed CDFIs Facilitates direct government State, local, tribal govt enMMes subsidizaMon of banking services and Joint ventures underpricing of credit Small Dollar Loans Consumers 21. Title XIII What It Does Requires proceeds from sales of GSE obligaMons and securiMes and le- over sMmulus funds to go to Treasury Reduces size of TARP TARP Requires FHFA to submit report to $700 Billion Congress on its plans with respect to housing nance Why Its Flawed TARP Masks Dodd-Franks true cost $475 Didnt fully end TARP Billion Does lihle to address GSEs 22. Title XIV What It Does Ability to Pay Establishes Qualied Mortgage Requires mortgages to be consistent Requirements for Mortgages Safe Harbor with borrowers ability to repay, understandable, and not unfair, Requirements/ decepMve, or abusive Rules for High Cost Mortgages RestricMons for Mortgage Establishes qualied mortgage Originators New mortgage-market requirements Mortgage Servicing Mortgage Appraisal Emergency housing aid programs Requirements Requirements Why Its Flawed Fails to x housing nance ProhibiMon of Certain Mortgage Taxpayer Assistance Increases cost of mortgages Terms for Homeowners One-size-ts-all mortgage market Gives regulators power to pick HUD Oce of Housing Counseling mortgage products for consumers 23. Title XV What It Does NEW SEC DISCLOSURE REQUIREMENTS Requires new disclosures by resource Resource ExtracMon Issuers must extracMon companies disclose payments to foreign governments for commercial Requires companies to publicly development of oil, natural gas, disclose their use of and procedures minerals relate to conict minerals Requires SEC disclosure of mine SEC reporMng companies for which safety violaMons conict minerals are necessary to funcMonality or producMon must try to determine origin of minerals Why Its Flawed & le conict minerals report Requires SEC to regulate beyond its experMse and distracts SEC SEC reporMng companies that own Misuse of SEC disclosure mines must report mine safety Costly, anMcompeMMve requirements violaMons 24. Title XVI Title XVI What It Does Exempts parMcular derivaMves from secMon 1256 tax treatment TAX Why Its Flawed Could have meaningful revenue implicaMons for the United States, DERIVATIVES although the nature and magnitude of those implicaMons remains unclear REVENUES 25. Whats on the Agenda for 2013? Many Dodd-Frank rulemakings underway Changes to mortgage market as CFPB rules take eect and QRM rule is nalized DesignaMons of SIFIs ConMnued pressure for end user reform in derivaMves as margin and other rules for swaps go nal Final Volcker Rule 26. Challenges Facing Dodd-Frank Agencies Sheer volume of rulemaking obligaMons Balancing Dodd-Frank rulemaking with other rulemaking obligaMons and day-to-day operaMonal funcMons Puqng regulaMons in place that comply with the statute, but are workable Legal challenges based on ConsMtuMonal deciencies, procedural aws, economic analysis Validity of CFPB Director Cordrays recess appointment and consequent challenges to CFPB rules 27. What Should Keep An Eye On ConcentraMon of nancial system Regulatory inundaMon and regulaMons serving as barriers to entry Eect on investors, consumers, small enMMes Broad regulatory discreMon, lihle accountability Lihle economic analysis by economic regulators and no aggregate economic analysis Early precedents by new agencies Eect on economic growth 28. CFTC Dodd-Frank Rulemaking by Quarter 35 30 25 20 15 10 5 0 Source: Commodity Futures Trading Commission Final Rules Produced by: Robert Greene, Mercatus Center at George Mason University Proposed Rules Advanced NoMces of Proposed Rulemaking 29. Informal Rulemaking Also Must Be Taken Into Account Example: 73 CFTC Guidance Documents in 2012 9 8 7 Number of Guidance Documents 6 5 4 3 12 2 1 60 Source: Commodity Futures Trading Commission Produced by: Robert Greene, Mercatus Center at George Mason University