The Motley Fool Previous Page

3 Reasons Dodd-Frank Is Doomed

Jeremy Bowman
February 20, 2012

As the Dow reaches levels it hasn't seen since the spring of 2008, it may seem that the market has finally recovered from the nightmarish financial crisis. Unemployment remains high and housing is stuck in neutral, but overall the economy is looking up.

Unfortunately, little has changed underneath the surface. The too-big-to-fail banks have only consolidated and become bigger. The Securities and Exchange Commission is hopelessly playing catch-up, and the banks continue to resist regulation, as we've seen from their comments on the Volcker Rule.

The Dodd-Frank Act was supposed to fix this, but, I'm afraid, it's doomed. Here's why:

Toothless enforcement
By granting big banks exemptions to the laws it's supposed to be enforcing, the SEC has made a habit of encouraging bad behavior. According to a report by The New York Times, the commission gave waivers allowing banks to fast-track securities sales and protect them from certain types of lawsuits nearly 350 times in the last decade.

JP Morgan Chase (NYSE: JPM  ) , for example, settled six fraud cases over the last 13 years, but has received at least 22 waivers. Bank of America (NYSE: BAC  ) along with its crisis acquisition, Merrill Lynch, settled 15 fraud cases and got at least 39 waivers. Even Goldman Sachs (NYSE: GS  ) maintained those privileges despite paying a $550 million settlement for misleading subprime mortgage investors. Of the major banks only Citigroup (NYSE: C  ) has had significant privileges revoked.

Former SEC Chairman David Ruder said that without the waivers, those firms would have trouble staying in business. Equally confounding is the SEC's habit of granting waivers to repeat offenders that had settled previous charges by agreeing not to break the very laws that the government agency was now accusing them of breaking once again.

Lack of funding
Despite appearing to have ceded whatever power it had to enforce securities laws, the SEC has complained of being underfunded and understaffed. That's part of the reason, it claims, it chooses to settle cases rather than take them to court. The agency's cries are not unwarranted: In this year's budget, the Republican-controlled appropriations committee attempted to lop $222.5 million off its request, trimming the total to its 2011 allotment of $1.19 billion. The final budget passed at a compromise figure of $1.32 billion, which supports 1,299 full-time equivalent positions in its enforcement division. For comparison, the New York Police Department has an annual budget of $3.9 billion and employs 36,000 full-time officers.

Though the Republicans cited cost control as one of their reasons for slashing the commission's budget, the SEC actually acts as a profit center for the government, generating income from transaction fees and fines, which goes back to the Treasury after the agency's budget has been met. In 2011, the SEC wrested more than $2.8 billion in fines from lawbreakers.

Endless complexity<