Retirement plans’ fortunes are tied to the financial markets — and how the federal government regulates them — and there has been no bigger development in that arena than the Dodd-Frank Wall Street Reform Act of 2010. The law made news Oct. 3, when presidential candidate Mitt Romney criticized Dodd-Frank’s “too big to fail” provision, calling it an “enormous” boon for large banks. During the presidential debate in Denver, Romney cited what he called the law’s unintended consequences, such as in “designat[ing] a number of banks as too big to fail … they’re effectively guaranteed by the federal government.” The comment made many viewers more curious about the law and its scope — and also allows an opportunity to provide more context to Romney’s statement.
But are they guaranteed against failure? One of the law’s architects argued the point a year ago, claiming that the Dodd-Frank Act has actually taken away the federal government’s authority to bail out large banks. That lawmaker, Rep. Barney Frank, D-Mass., spoke up again Oct. 5, calling Romney’s claim “completely false.”
“The law does exactly the opposite of what Mr. Romney says,” Frank said in a written statement. “The term ‘too big to fail’ applies to the situation that existed before the law passed. It was during the Bush administration that the Federal Reserve provided funds to AIG when it could not meet its obligations, and kept AIG from failing. The [Dodd-Frank Act] literally makes it impossible to provide such assistance going forward.”
The Dodd-Frank Act, signed into law July 21, 2010, was a direct outgrowth of the Great Recession that started in 2008. Spearheaded by then-Senate Banking Committee Chairman Christopher Dodd, D-Conn., during his last term in office and then-House Financial Services Committee Chairman Rep. Barney Frank, D-Mass., the law has 16 titles spanning 884 pages. It calls for hundreds of rulemaking actions by federal regulators.
One provision that must be refined through regulation — popularly called the “too big to fail” provision — gives regulators the authority to designate some banks and other financial services companies as “systemically important financial institutions,” or SIFIs, subject to a higher watermark for capital reserves and the requirement for them to plan in writing for their own unwinding — known as a “living will” for banks — in case of insolvency. But critics of the Dodd-Frank Act argue that the provision is tantamount to a bailout.
In 2011, Frank argued that by amending Section 13(3) of the Federal Reserve Act, Title 11 of the Dodd-Frank Act reins in the power of the Federal Reserve to rescue such institutions at the expense of taxpayers. The Federal Reserve Act now specifies that any emergency lending program must be for the “purpose of providing liquidity to the financial system, and not to aid a failing financial company” and that security for emergency loans is sufficient to protect taxpayers from losses.”
On July 14, 2011, Deputy Treasury Secretary Neal S. Wolin told a group of reporters that the Federal Deposit Insurance Corporation had put a series of mechanisms in place that would “make sure that [failed] firms are dismantled, that management is removed, that the cost will be borne in the first instance by the firm and shareholders or, if necessary, the broader financial community, but not by the American people.”
Not everyone bought the federal government’s arguments. Wolin’s and Frank’s comments had come in response to securities rating agency Standard & Poor’s decision to downgrade the creditworthiness of U.S. Treasury bonds on July 12, 2011, claiming that the Dodd-Frank Act had done little to end the era of financial institution bailouts at the expense of taxpayers.
Said the S&P opinion letter: “The U.S. government indeed has a long track record of supporting its large and systemically important financial institutions despite its stated preference for not doing so. [The Dodd-Frank Act] may limit this activity, but we believe the government may try to avoid contagion and a domino effect if a SIFI finds itself in a financial weakened position in a future crisis.”
Two days later, Frank dismissed the S&P opinion letter, calling it “a clear misreading of Title 11 of the [Dodd-Frank Act], which eliminates any possibility of a new round of measures designed to bail out any financial institution.”
For more information about investment management and retirement plans, see Thompson Publishing Group’s The 401(k) Handbook and Pension Plan Fix-it Handbook.