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Defense policy analysis, commentary and discussion.
Washington Post veteran Robert Kaiser’s latest book, “Act of Congress: How America’s Essential Institution Works, and How It Doesn’t,” provides an insider’s view of the making of Congress’ response to the 2008 market crash, the Dodd-Frank Act.
He begins with a Sept. 18, 2008, meeting of congressional leaders, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke. Paulson asked Congress for $700 billion, arguing that another Great Depression was looming. Bernanke warned that Wall Street meltdowns are always followed by depressions in the rest of the economy. Main Street cannot be shielded from Wall Street, and Congress needed to act quickly, he warned.
Act it did, passing the Troubled Asset Relief Program in October of that year. The ink from President George W. Bush’s signature had barely dried when Treasury announced that it would not bother with the troubled assets part of TARP. Paulson chose instead to use the money to invest in troubled companies, an idea he specifically rejected when meeting with Congress.
TARP was meant to keep the ship afloat, with an overhaul coming later.
The longer-term legislation, the Dodd-Frank Act of 2010, began when President Barack Obama told House Financial Services Chairman Barney Frank that the administration would largely write the bill. The Massachusetts Democrat agreed. House Republicans played little role, as Frank and the House Democratic leadership were able to force the legislation through.
The Senate was a different story. Banking Chairman Christopher J. Dodd, D-Conn., worked hard to come to an agreement with Republicans. While the legislation passed the Senate mainly on party lines, Kaiser’s book makes clear that the biggest roadblock to securing GOP votes was the creation of the Consumer Financial Protection Bureau, a harbinger of the struggles over the CFPB and its leadership that endure today.
Meanwhile, the law’s “Volcker rule,” a ban on proprietary trading by banks, is confounding the regulators tasked with its implementation. Named after former Federal Reserve Chairman Paul Volcker, it seeks to prevent Federal Deposit Insurance Corporation-insured banks from taking risky bets. The line between banned proprietary trading and market-making, an essential function performed by banks to keeps markets liquid, however, is unclear.
The difficulties of restricting proprietary trading are made clear in the book’s account of the appearance of Goldman Sachs’ CEO before the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations. “The evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients and our communities,” according to the panel’s chairman, Michigan Democrat Carl Levin. At issue was whether Goldman sold products to clients and then bet the firm’s own money that these products would lose value, according to Kaiser. Goldman CEO Lloyd Blankfein responded that its proprietary trading account was irrelevant to market-making, and likely not of concern to its clients. One person’s proprietary trading, restricted by the Volcker rule, is another’s market-making.
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