By Covering Business April 13, 2012
By Nizar Manek
Columbia Journalism School ‘12
In the wake of the financial crisis, proponents of regulatory reform argued the collapse of large financial institutions had exposed the failure of their boards and supervisors to oversee the risks they were taking. At the time, Congress was sympathetic to that argument and eventually voted to tighten federal oversight by passing the Dodd-Frank Act.
Although it is too early to tell whether the Dodd-Frank Act has left the nation’s financial system safer, the law has drawn plenty of fire. Its critics argue that the new rules have done little to mitigate the threat of a systemic crisis and in some cases could create new risk.
For instance, one of the Dodd-Frank Act’s new rules could mandate that large financial institutions draft living wills, essentially emergency plans for a speedy and unexpected bankruptcy. The goal would be to extract as much value from a failing company as possible and to cushion the blow of its collapse to financial markets.
Critics of the living will rule say it is difficult to prepare such plans without knowing which areas of the institution were failing and that they would make little difference in determining whether a troubled company would have to borrow money from the government.
“Though the ultimate endpoint is to give taxpayers 100 cents on the dollar, it would be styled as a bailout,” Jeffrey Gordon, a corporate law professor at the Columbia Law School, said at a public lecture this week at Columbia Law School. “In effect, [the companies] would have to borrow money from the Treasury.”
Another rule of the Dodd-Frank Act would create a new office of financial research tasked with amassing a dataset large and comprehensive enough to predict cataclysmic financial events.
Peter Fisher, senior managing director of Black Rock and a board member at the UK Financial Services Authority, called the project a “noble calling” but a “huge challenge to pull off.” He added that it was unlikely regulators would be able to use a dataset like that to any real end. “I think the challenge is how you make data like that more useful,” he said.
Mr. Fisher also questioned the value of another Dodd-Frank reform: a central clearing party, a buyer to all sellers and a seller to all buyers that would protect counterparties in over-the-counter markets. “If we just throw these things into clearinghouses and the clearinghouses aren’t robust and don’t have the right kind of margining, we’re making this riskier, not less risky,” he said. “We’re creating concentration points for all this risk. We’re not dampening down the risk.”
