Words You’ll Hear: Dodd-Frank

LAKSHMI SINGH, HOST:

We’re going to head back to the U.S. now for Words You’ll Hear. That’s where we try to understand stories in the news by parsing words connected to it. Today, the words are Dodd-Frank. That’s the 2010 law that gave Wall Street new rules of the road to prevent another recession.

Last week, the House passed a Republican bill rolling back large parts of Dodd-Frank. While that bill isn’t expected to go far in the Senate, the move could build momentum for other changes. To find out more, we reached Raj Date. He’s a former deputy director of the U.S. Consumer Financial Protection Bureau and, now, runs a small investment firm called Fenway Summer. I began by asking him to remind us what Dodd-Frank does.

RAJ DATE: Let me just clear up the first confusion that people might have. Like, what is a Dodd, and what is a Frank? It’s the name of the big Wall Street reform package, named after the head of the Senate Banking Committee at the time and the head of the House Financial Services Committee at the time, Chris Dodd and Barney Frank. If you think back – and, hopefully, people can still remember – the sort of calamitous financial crisis that faced the United States – and, indeed, the world – back in 2007, 2008, 2009. Unemployment doubled. Millions of people lost their homes.

It was bad on pretty much every way in which you would evaluate the performance of the financial system. We had terrible decisions that were made. We had firms that were close to bankruptcy and insolvency as a result. We had a system that allowed one firm’s problems to metastasize and affect other firms. And then, finally, we had regulators that seemed to be one or two steps behind every step of the way. And so what Dodd-Frank essentially tried to do is take a universal approach to changing Wall Street and banking regulation that would fix each of those problems.

SINGH: So what’s your take on the House bill to undo parts of Dodd-Frank?

DATE: Number one, it suffers from mischaracterizing the impact of Dodd-Frank. The bank systems bigger, it’s more profitable, better capitalized. Oh, and by the way, consumers have better credit scores than they ever have. Household balance sheets have improved. Unemployment is low. So it rests on a series of premises that are not exactly true. And then, it systematically dismantles some of the most important bulwarks put in place by Dodd-Frank.

So, for example, Dodd-Frank sought to create standards to prevent really bad decisions from being made. Well, the Consumer Financial Protection Bureau is something that was meant to look out for actual households and actual consumers and protect them from some of the most scandalously terrible ideas in the pre-crisis mortgage market. Well, this bill, the Choice Act, eviscerates the authority of the Consumer Financial Protection Bureau. Dodd-Frank was meant to create more resilient banks through things like stress tests and the so-called Volcker Rule. The Choice Act eviscerates those things.

SINGH: The debate that’s underway on the fate of Dodd-Frank – as an average person, what do I stand to lose, and what do I stand to gain under any changes that occur to Dodd-Frank under this House bill or any potential compromise?

DATE: So the biggest thing that households have to lose is to have a very large, very important financial sector to once again get completely unmoored from what are sensible ways to structure products and offer them to customers. Remember at ground zero of the financial crisis, were individual mortgages made to individual households that never had a prayer of being repaid. These should be worried, as average households, about whether or not that set of practices and that kind of thinking left unrestricted will return.

The best thing to gain is if we can reintroduce sensible risk taking into a bank sector that, in some areas, appears to have withdrawn from it. By that, I mean, the banking system is meant to take risks. When you make a loan to a small business – we’re investors in platforms that make loans to small businesses – that’s risky. Small businesses are – what’s the word? – small. And it’s – they are not especially resilient to recessions. But you should want them to be able to borrow money to be able to build their franchises to be able to hire people to be able to put more work into the communities in which they serve.

SINGH: That’s Raj Date. He’s the former deputy director of the U.S. Consumer Financial Protection Bureau. He joined us in studio. Raj, thank you so much.


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