The 848-page financial firewall

The second-biggest legislative battle of Obama’s term was fought over the sprawling Dodd-Frank Act. Consumers have more protection, yet the nation’s five largest banks are larger than ever, with assets equal to 56 percent of the U.S. economy.

By Sheelah Kolhatkar and Karen Weise

The Dodd-Frank Wall Street Reform and Consumer Protection Act, aimed at improving the stability of the financial system, became law on July 21, 2010. It’s worked, but it’s also left holes some argue have made the system more vulnerable. Too Big To Fail banks live on, potentially more threatening to the financial system than ever. “Banks are way larger now than they were going into the crisis,” says Cornelius Hurley, director of the Center for Finance, Law & Policy at Boston University. “Despite hundreds of pages of law and thousands of pages of regulations, the system itself is not any safer, to the extent that it’s at the mercy of six clearly too-big-to-fail banks.” Dodd-Frank is maddeningly complex, and many of the key rules haven’t even been finalized. On the positive side, regulators are more aware of the threat of systemic risk, consumers have an agency looking out for their interests, and banks are better capitalized and more limited in the risks they can take. Dodd-Frank is a step forward, not a giant leap. Says Michael Greenberger, a former director at the Commodity Futures Trading Commission: “The scheme may not be perfect, but there is a lot in there that ends irresponsible, undercapitalized bets.”

TOO BIG TO FAIL

TITLE I

SECTIONS 101 - 176

The Fed and a new body, the Financial Stability Oversight Council, now keep tabs on big banks and can force them to increase capital reserves.

page 48

EXAMINING COMPANIES

The Fed will oversee large nonbank financial firms such as insurers and commodities brokers.

LIVING WILLS

TITLE II

SECTIONS 201 - 217

Big banks must have a plan for winding down should they fail. The nine largest banks submitted their first “living wills” in early July 2012.

page 145

OFFICE OF THRIFT SUPERVISION

This lax regulator of thrifts and holding companies like AIG was disbanded. Its duties are now split among other agencies.

page 195

HEDGE FUND REGISTRATION

Large hedge and private equity funds must detail their assets and trading strategies to the SEC.

page 205

INSURERS

The law created a federal overseer for insurance companies. It has no enforcement power and has been ignored.

THE VOLCKER RULE

TITLE VI

SECTION 619

This 12-page provision is perhaps the most controversial. Banks will no longer be allowed to make lucrative, speculative bets with their own money. What’s “speculative”? Washington and Wall Street are fighting that out.

DERIVATIVES

TITLES VII & VIII

SECTIONS 701 - 814

The rules that will force many derivatives to be traded more transparently via clearinghouses are still being written. Investors will have to post collateral to make sure they can live up to their end of the deal.

page 327

SWAPS

The biggest derivatives dealers will need to report their trades.

page 347

COMMODITIES BETS

The law curbs speculative trades on oil, gold, and 26 other commodities. A federal judge recently rejected the rule. The Commodity Futures Trading Commission plans to appeal.

page 492

FINGERPRINTS

Compliance officers at derivatives firms must be fingerprinted.

page 515

SKIN IN THE GAME

If banks make risky mortgages, they can no longer bundle them and sell them all off to investors. They must keep some on their books.

CONSUMER WATCHDOG

TITLE X

SECTIONS 1001 - 1100H

Dodd-Frank created the Consumer Financial Protection Bureau, which polices how financial firms market and sell student loans, mortgages, and checking accounts. Its first enforcement actions forced credit-card companies to pay at least $526 million in fines and refunds to customers.

page 605

CONSUMER COMPLAINTS

The Consumer Financial Protection Bureau created a public database where consumers can air their grievances against banks. It has received nearly 13,000 submissions.

page 693

SWIPE FEES The amount that banks can charge merchants for processing debit-card transactions is capped at an average of 12¢ per swipe.

XIV

MORTGAGES

TITLE XIV

SECTIONS 1400 - 1498

Regulators are drafting home mortgage rules that require more rigorous underwriting standards and higher down payments — and eliminate many penalties for refinancing or early repayment of loans.

page 767

MORTGAGE UNDERWRITING

Lenders will have to evaluate borrowers’ ability to repay mortgages before making loans. They did not have to do this before. Details have yet to be ironed out.

page 832

BAD DRYWALL

HUD must study the effect sulphurous Chinese drywall had on home values and foreclosures. It’s one of 87 studies required by the bill.

page 843

EXTRACTION INDUSTRY

Mining companies must reveal health and safety violations for every mine.

Page 848

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