On July 21, the Dodd-Frank Act turned three years old.
But, unlike most three-year-olds who can walk and talk, this one hasn't gotten out of the crib yet...
You see, the Dodd-Frank Act was a promise to protect Americans from the excesses and ruthlessness of Wall Street. It was meant to streamline the regulatory process.
But three years later, we are still waiting for its full implementation.
In fact, as of last week, only 155 of 398 rules required by this law are considered final.
That's because instead of focusing on the systemic problems that caused the crisis, the pen to write the bill ended up in the hands of disconnected agencies and lobbyists.
Instead of fixing the serious problems of current law, Dodd-Frank failed to curtail Wall Street - just a few years after a major financial crisis.
At a time when Sen. Elizabeth Warren, D-MA, and Sen. John McCain, R-AZ, have pushed for a new Glass-Steagall Act to reduce risk, some voices like Treasury Secretary Jack Lew argue that the Dodd-Frank bill will alleviate the problems of Too Big to Fail, systemic risk, and cronyism.
But we know that such arguments are spurious at best.
The Problems with the Dodd-Frank Act
Former Sen. Chris Dodd and former Rep. Barney Frank have repeatedly argued that "not only is there no legal authority to use public money to keep a failing entity in business, the law forbids it."
Just two weeks ago, Frank appeared on CNBC to say that "Too Big to Fail" is a thing of the past, mainly because the public appetite for more bailouts is at an all-time low.
Here's the problem with both statements: there is no guarantee from this legislation.
You see, Dodd-Frank attempts to create rules to address a crisis after it happens - rather than fully prevent it ahead of time.
Yes, it places some tighter restrictions on capital requirements and derivative activities, which would make them less likely to fail in a crisis.
The law also provides the FDIC with new powers known as "resolution authority."
This new government power (since it needs more, right?) would allow the government to create a bridge company that enables firms to maintain functioning operations while liquidating other branches of the company.
But, there's a big issue here...
It's still unclear just how big an FDIC bridge company would need to be when we look at the size of the banks today.
Thomas Hoenig, vice chairman of the FDIC, recently wrote that JPMorgan Chase, Citibank and Bank of America are now the world's three largest banks. When combined with the assets of Wells Fargo, the four largest U.S. banks have enough to equal 97% of the 2012 U.S. gross domestic product.
So should one of these four banks begin to fail, it is unclear exactly what Congress would do.
Having one of the banks fail, in a spectacularly fast manner like in 2008, would require a choice - and even faster actions than before. Spinning off assets requires time and buyers, which was the reason that capital injections were necessary in the first place.
Crisis moves quickly, capital does as well, but decision-makers take their time and make sure they're not holding the bag of a crummy asset. As Lehman Brothers perished, purchasing toxic assets was abandoned.
Banks with that level of assets are "too big to fail," and unless banks are broken up or forced to separate commercial and investment banking operations, they will remain so.
Some might argue that breaking up the banks would increase risk due to the diversified nature of the current business.
But breaking them up would effectively force smaller operations to assume less aggressive risk strategies, all while operating under the knowledge that taxpayer bailouts are not a safety net.
The Volcker Rule Problem
There's another issue that makes Dodd-Frank ineffective...
One of the law's most controversial rules, which the banks have fought tooth-and-nail through lobbying efforts, is the Volcker Rule.
This rule, proposed by former Fed Chairman Paul Volcker, typically focuses on a ban of proprietary trading of deposits.
However, it is much broader than this, and centers on virtually all company activity that does not benefit the bank's customers.
But, it hasn't exactly worked as planned...
The Volcker Rule is hated on Wall Street, and has and will continue to be chipped at and ultimately removed again one day, much like the provisions of Glass-Steagall. Once Volcker became part of the Beltway dialogue, it was quickly watered down.
Banks have already received a number of exemptions, of course, exacerbated by intense lobbying.
In fact, the big banks have had significantly more meetings with federal regulators over the last three years than pro-financial reform groups. The Sunlight Foundation reported that Goldman Sachs has had 222 meetings with regulators, and JPMorgan a whopping 207.
But real enforcement of the Volcker Rule - if Congress is serious - is needed, and the payment of a small fine is hardly a major deterrent.
What To Do Now...
What is clear is that the banks do not intend to let Dodd-Frank or the new Glass-Steagall get in their way of plans for the future.
Loopholes remain in the derivatives markets, white-collar crime has few deterrents (heck, even Jeff Skilling just got 10 years off and they passed another watered-down law in Sarbanes-Oxley over men like him), and credit agencies are still owned by the banks.
The failures of Dodd-Frank are just one reason why we at Money Morning are stridently in support of increased action on tackling the banks and eliminating Too Big to Fail once and for all.
Are you with us?
As if this failure of Dodd-Frank isn't enough to make a mess of our financial system, check out what your next Fed chief might bring to the table...