A Shift in the Wind:
How Dodd-Frank Influenced Policy, Process and People at the Federal Reserve and Treasury
Sarah Bloom Raskin, Former Deputy Secretary Treasury/Fed Governor
with Intro by Michael Masters, Co-Founder and Chair, Better Markets
Dodd-Frank Act 10th Anniversary Conference
Tuesday, July 21, 2020, 1-5 p.m.
TRANSCRIPT of Video
That was terrific, Ms. Bair. Thank you for sharing your experiences and insights on financial reform and the Dodd-Frank Act.
And now, it is my pleasure to introduce our next speaker: Sarah Bloom Raskin, who has had a long and distinguished career as a public servant. She has been an attorney, consumer advocate, regulator and senior government official.
When in 2014 she became the Deputy Secretary of the Treasury in President Obama’s administration, she made history as the highest-ranking woman in the history of the Treasury Department. For those of you who don’t know, it was founded a mere 225 years earlier in 1789.
As the second-in-command at Treasury, Deputy Secretary Raskin oversaw the various agencies of the entire department and promoted innovative policy solutions to advance prosperity, fairness and resiliency throughout the economy.
Prior to her service at Treasury, she was a governor of the Federal Reserve Board from 2010-2014. At the Fed, she conducted the nation’s monetary policy as a member of the Federal Open Market Committee, directly regulated banks, monitored threats to the nation’s financial stability and oversaw the nation’s payments systems. In addition, she focused on consumer protection and income inequality.
Prior to that, she served as Maryland’s Commissioner of Financial Regulation from 2007 to 2010, as the subprime mortgage bubble and financial crisis was exploding. She saw firsthand the importance of banking to Main Street families but also the dangers of predatory behavior. She focused on foreclosure scam artists, payday lenders and debt collection firms, among others. Her tenure provided her with a kitchen table, community-based understanding of the importance of finance and fairness to everyone working hard to achieve the American Dream.
Ms. Raskin is currently a Rubenstein Fellow at Duke University where she works closely with the Rethinking Regulation program and the Global Financial Markets Center to improve the public’s understanding of markets and regulation. She also has been a visitor at the Stanford Graduate School of Business’s Corporations and Society Initiative and a Distinguished Visiting Professor at the University of Maryland’s Cary School of Law. She chairs the board of i (x) Investments, a social impact investing firm, serves on the Board of the Vanguard Group and Funds, is a member of several advisory boards, and serves as a trustee of Amherst College and the Folger Shakespeare Library.
Ladies and Gentlemen: Please join me in welcoming Sarah Bloom Raskin.
Sarah Bloom Raskin
Well thank you, Mike, for that kind introduction and welcome to the virtual audience.
All the good people assembled on this anniversary day: it’s a pleasure to join you and add my perspective on Dodd-Frank and what happened after it was signed by President Obama and made its way to the regulatory agencies for implementation.
So, here’s how I’m going to do this. I’m going to provide a reminder, and I’m going to describe then three necessary shifts that were ushered in by Dodd-Frank. So, the reminder is the statute’s need to be implemented by agencies in order to work. Statutes need to be enforced by agencies in order to be trusted and meaningful; statutes are only as good as the manner in which they are executed.
This is true of most federal law, but it had a surpassing importance when it came to a statute as significant and far-ranging as Dodd-Frank. So, first, I want to give us all a big dose of the reminder of careful timely implementation and enforcement by agencies. Then I’ll describe three necessary shifts that Dodd-Frank ushered in.
First, Dodd-Frank expanded our notions of why financial guard rails matter. Out were the false choices that protections for consumers and for households and clear expectations for banks were detrimental to prosperity; in was the notion that prospect …. that sets appropriate expectations for financial firms.
The second necessary shift that I’ll describe is like this. Dodd-Frank attempted to foster preparedness and prevention as a way of reducing the costs of fighting economic crises and restoring prosperity. Dodd-Frank taught us that denial is more expensive than facing reality. And the third necessary shift of Dodd-Frank was its drawing into policymaking new voices and new perspectives leading to a galvanizing creativity in thinking about our structural problems and how best to address them.
So back to the reminder: the fact that a statute is only as good as its implementation by agencies. The financial crisis that led to the Great Recession revealed cracks in the world of finance. Cracks in the world of banks and financial institutions, and cracks in the world of the regulators who oversee financial practices. And these cracks in our financial system and in our regulatory structure allowed a terrible crisis to pour in—a crisis that drowned the economic well-being of homeowners and their families, wiped out their jobs and drained the value of their homes and their retirement assets.
Dodd-Frank was the legislative equivalent of a job of spackling, patch up, sanding down, polishing and painting. The structural weaknesses exposed in the financial crisis that were significant. We saw failures in financial firms’ internal controls, problems in new and derivative financial instruments, weaknesses in job security, breakdowns in consumer protections, basic dysfunction in housing markets, systemic defects in regulatory oversight, decrepit enforcement, broken guard rails for appropriate corporate behaviors, and erosion of household financial security brought about by decades of profound and growing income and wealth inequality and systemic racism.
In the face of these converging structural weaknesses, Congress enacted comprehensive structural reform of the financial system, and the regulatory regime. Passage of Dodd-Frank was a crucial start at structural reform but it was just a start because of course it still needed to be implemented. To effectuate Congress’s vision set forth in the more than 1,000 pages of federal statute required significant inter-agency coordination of a nature unmatched in the legislative docket of the Obama administration—with the exception perhaps of the Affordable Care Act.
No sooner had the ink of President Obama’s pen dried on the legislation’s page then the clock of implementation began to run. The statute became property of the agencies that had to breathe air into all the statutory directives. Rules that had to be written by the Federal Reserve, the Securities and Exchange Commission, the Commodities Futures Trading Commission, the FDIC, the Comptroller of the Currency, the National Credit Union Administration. Stress tests had to be designed, constructed, communicated and performed. The contours of living wills had to be drawn up. A new agency had to be built—the Consumer Financial Protection Bureau—and parts of its foundation had to be carved out of the existing agencies.
An agency had to be eliminated, the Office of Thrift Supervision; exercises with global counterparts had to be arranged and performed. A new coordination mechanism had to be built, the Financial Stability Oversight Council, and expertise for systemic risk needed to be drawn into public service and nurtured. A centralized repository of financial information needed to be developed, the Office of Financial Research. The templates for revised reporting by banks needed to be developed. Rules with auditors needed descriptions. On-site examination manuals and expectations needed updates. Mortgage servicers needed to know the criteria by which they would be evaluated. Homeowners needed to know whether they would qualify for a modification of the terms of their mortgages, and that is all just a start. The list here is just suggestive and hardly comprehensive.
At one point in late 2010, the list at the Fed of items to be done pursuant to the new law was upwards of 900, and this was just one agency. The FDIC had its list, the OCC had its, Treasury tried to keep a master list, the CFTC had its list, the SEC had its. And these lists had keepers and managers and so-called czars and teams of people whose job it was to keep to the deadlines that the statute had imposed, coordinate also with the other agencies, assemble the appropriate internal expertise within the agencies, reach out to external expertise when necessary, and regularly report to Congress on whether the deadlines had been achieved and whether progress, provision by provision, was being made. This was part of the price we paid for decades of ignoring the cracks in our financial system.
The work to effectuate Dodd-Frank was massive and pulled from the people who were needed in this effort some of the best leadership I have ever witnessed to perform the repair and reform that Congress had directed. This extraordinary undertaking is what government means, and if it’s to be done well and reflect the will of Congress and the American people, it requires an investment in broad and deep talent.
Now to be fair, Dodd-Frank and its implementation for structural reform was in certain respects incomplete, late, flawed in some ways. There are provisions that to this day have not been implemented. We’ve also learned that the sustainability and resilience of the reforms depend on the experience and perspectives of the policy makers at the agencies. Dodd-Frank came under assault and re-assault, and many of the battles that Congress fought to bring it forth into law were re-fought in the agencies. And still, a full decade later it is worth our admiration and appreciation for what it ushered in.
First, the necessary shift that it introduced in terms of policy. Dodd-Frank expanded our notions of why financial guard rails matter. In the early days of the crisis at around the time of the Lehman Brothers’ failure, many Americans didn’t understand the causes of what had occurred. There was something esoteric about finance, about derivatives, about regulating banks, about mortgages, in fact, what banks even do, about how the stock market acts, and most certainly about what the Federal Reserve does in both good times and bad times.
Finance was an afterthought to most people’s lives and sense of well-being. What happened on Wall Street stayed on Wall Street if you asked any American in 2006. People interacted with their banks if they had one to get more mortgages and a checking account, but that was about it. There were obvious problems developing locally when mortgages morphed from being their usual fixed-vanilla selves into something with many new flavors with terms that became confusing and mind-numbing in their complexity. And when people of color became steered into particular types of these new flavors, essentially those with prepayment penalties and hidden higher costs, predatory practices and the riskiness of the mortgage market came to the fore.
But the possibility that predatory practices fueled by the behavior of the creators and holders of particular financial instruments could lead to a foreclosure crisis marked by job loss, home loss and prolonged economic downturn across the country and the world wasn’t being addressed. It was only after the dramatic days of the Lehman failure but before Dodd-Frank was signed into law that a growing sense among Americans developed that the economic collapse and costs associated with job losses and home losses and wealth losses was far more significant and personal and relevant than had previously been imagined. The performance of banks and financial firms mattered, oversight of banks mattered, consumer protections against predatory practices and debt traps and confusing terms mattered.
Losing homes and jobs hits people hard, and these losses became a hallmark of the financial crisis. In a way, the risks of finance run amok had been shifted to the shoulders of households that now had to bear the pain. And it was this moment too where we saw the emergence of Occupy Wall Street, too-big-to-fail, too-big-to-jail movements representative of the personal way in which the financial crisis was experienced by many Americans and movements with political consequences. Americans cared about banks and financial policy. They understood guard rails on bank behavior and the importance of swift enforcements against bad behaviors. Their understanding of banking had enlarged.
There was a shift in the wind. Before Dodd-Frank, federal financial regulation was an activity that might not have mattered to the well-being of most Americans. After Dodd-Frank, there was a greater appreciation for the ways in which there were direct consequences between regulatory safeguards and economic well-being. Specific regulatory safeguards could affect your ability to pay your mortgage, your ability to hold your job, your ability to keep your house. Dodd-Frank launched financial regulation in a direction that encompassed a broader understanding of public effects–effects on household confidence, well-being anxiety and community prosperity. Dodd-Frank thrust policymakers into understanding that the economy is only as good as its homeowners and consumers are. That economic growth and justice depend on the confidence that consumers have in oversight and swift and even-handed enforcement, and then without confidence, there’s no business investment, no innovation, no consumer demand, no justice, no prosperity.
As Dodd-Frank came to be implemented, dependence on housing as a form of wealth when labor compensation is flat, and dwindling became more understood. Income and wealth inequality became better understood. The costs in waiting for a crisis as compared to the cost of being prepared. The role that racial discrimination plays in holding back inclusive economic prosperity. All became matters more fully understood. And so emerged, the everyone economy. Dodd-Frank was the start at bringing us a vision of the everyone economy, a place where there is a much vaster appreciation of the ingredients of the importance of an economy that works for more than the few. Not only did the ingredients of economic success become more fundamentally appreciated, but the need for preparedness became understood. This was the second necessary shift ushered in by Dodd-Frank.
The costs of the financial crisis were enormous, and had the relevant policymakers been better prepared to address risks that had emerged in the decade prior to the crisis, then perhaps these costs—the job losses, the home losses, the loss in economic opportunity—could have been minimized. The tools and rules devised by Dodd-Frank were attempts to foster a thinking ahead on the risk horizon, an attempt to be better prepared, to have the hole in the roof fixed before the entire roof caved in. Think of the stress test requirement as an example of a proactive tool that was meant to keep banks well capitalized and appropriately buffered against a shock of the financial crash’s magnitude.
Think of the requirement of ability to pay—an intuitively appealing notion that banks use when extending loans to borrowers—but also meant as a preparatory tool that could mitigate against the effect of shocks. This theme of preparation, supported by the experience of having witnessed denial as an expensive proposition, carried over in the institutional habits of coordination that Dodd-Frank required. While before Dodd-Frank, the fragmented nature of regulatory oversight created the problem that systemic risk could emerge in the cracks between the agency’s formal jurisdictional limits. After Dodd-Frank, there was a greater premium and necessity put on interagency coordination.
Most rules that Dodd-Frank required be written had to be joint: meaning that the agencies like the Fed and the SEC needed to coordinate to talk to each other regularly. At the same time that agencies had to talk to each other in order to get the rules required by the law out in time, there was a recognition that better processes could be developed by creating a forum—a regular forum for the discussion of emerging risks. This recognition was in part the reason for the creation of the Financial Stability Oversight Council—the body of federal financial agency heads shared by the Secretary of the Treasury that would meet regularly face-to-face in an effort to identify and mitigate emerging risks that could be developing in the cracks between their agency’s formal jurisdictions.
So, Dodd-Frank required coordination, a necessary step forward from the days of agency isolation, and these requirements grew into habits, good habits, that encouraged the early sharing of developments and information. Finally, let me say and end, by describing the third necessary shift that Dodd-Frank galvanized, and that was and is the energizing of a group of new people with new ideas that connected finance to society. The explosion of these ideas and the new people from various fields not just economics and math but sociology and political science and philosophy. There were new people that began studying and explaining under what conditions finance enhances societal well-being. There were activists and think tanks that fostered these inquiries, and teachers who began to incorporate these ideas into their courses.
All of this thought and illumination were an important and sometimes underappreciated institutional legacy of Dodd-Frank. More people with more varied backgrounds wanted to work on the implementation efforts at the Federal Reserve and Treasury and the agencies. And some of them had been touched by the financial crisis or lived in communities that had. Like a magnet, the structural fixes that the statute required pulled into public service people who wanted to participate on the ground effort. People wanted to apply their particular kinds of expertise and perspective to the collaborative and exciting efforts that were shaping the way the economy was being reformed, restructured and ultimately reimagined.
A shift in the wind had happened. After Dodd-Frank was signed, changes occurred in the policies, the processes, and the people that infused discussions about structural weaknesses in need of repair. Embedded into the project that Dodd-Frank represented was a sense that government was a force for good, a force to be trusted, a force where imaginative and new thinking could rise to the occasion to create something better and stronger, an economy that perhaps could work for all. And on this, the 10th anniversary of Dodd-Frank, poised as we are in the midst of another crisis and being clear-eyed too about the incompleteness of a necessary project of repair that Dodd-Frank represents, there seems almost nothing better at this moment than being given the chance to savor and appreciate the bounty that this statute gave us.
Thank you for your interest and thank you to Better Markets and of course the George Washington University Law School for hosting this event.