Dodd-Frank Rollback 'Completely Ignores' How Financial System Works, Author Says

May 23, 2018

President Trump said on Twitter on Wednesday that he’s going to sign into law “big changes” to the Dodd-Frank banking regulations put in place after the financial crisis.

The bill passed the House late Tuesday, with supporters saying it would make it easier for midsize and regional banks to lend. It already passed the Senate in March.

Opponents of the move warn rolling back financial regulations could pave the way for a repeat of 2008. Here & Now‘s Jeremy Hobson speaks with financial journalist Diana Henriques (@dianabhenriques), author of the books “The Wizard of Lies” and “A First-Class Catastrophe.”

Interview Highlights

On the significance of this rollback

“I think it’s very significant, more for the philosophical point that it’s making than its practical applications — although those are important, too. What worries me about this is it completely ignores the way our financial system actually works. No bank is an island in today’s world, regardless of its size. Midsize banks sell their loans upstream. They form syndicates that take on bigger risks. They provide critical lines of credit to big local industries that are big employers, so they’re connected to the larger economy in dozens of ways we may not even see until the dominoes start to fall. So establishing an exemption, as this action does, from Dodd-Frank rules, based on some arbitrary capital level, like one side of $250 billion versus the other side, it’s just silly.

“You look back at the 2008 crisis, one of the key elements of risk were tiny little mortgage companies that weren’t regulated by anybody. You look back at the ’87 crisis, there was an options-clearing firm in Chicago. Nobody in their right mind would have ever identified it as a potential fatal domino. And yet when a run hit that firm, it nearly brought down the options markets completely. We have a very bad track record at predicting which firm will prove to be systemically important in a crisis.”

On the fact that so many Democrats voted with Republicans to repeal some of Dodd-Frank

“I hope that that reflects an understanding that there are some aspects of Dodd-Frank that are less workable, that need to be re-examined and that if we had some kind of bipartisan consensus, could be re-engineered to be more workable. But it may also just focus more on the political realities of a midterm election year, than any larger understanding of what the risks are in the financial system.

“It’s very worrisome to me how rapidly we have forgotten both how hard the times were after the 2008 crisis, and how close to a true breakdown in the financial system we came. I guess Democrats are as prone to that amnesia as Republicans are.”

On her book about the 1987 stock market crash, and whether her knowledge about that crash makes her fearful for the future

“That’s a very good question, and yes, the answer is it does worry me. If we look back at the 1987 crash, we can see that the hidden connections within the banking and the larger financial industry made it impossible for regulators to anticipate where a crisis would break out, and when it broke out, where it would spread. In the 2008 crisis, a single money market fund, which broke the buck — a $60 billion fund, way below the $250 billion exemption level [Congress is] setting here — triggered a run on the nation’s money market industry, trillions of dollars. So as I said, we’re not very good at anticipating where risks will arise and how quickly they will spread and in what direction. So I think this rollback endeavor is misguided, and I think it ignores history, and that’s what worries me about it most.”

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