CLE Materials for Panel #1 - George Washington University Law ...

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WILMARTH 4/1/2011 1:11 PM 952 OREGON LAW REVIEW [Vol. 89, 951 VI. 1. Dodd-Frank’s Orderly Liquidation Authority Does Not Preclude Full Protection of Favored Creditors of SIFIs ..................................................... 993 2. Dodd-Frank Does Not Prevent Federal Regulators from Using Other Sources of Funding to Protect Creditors of SIFIs ................................................... 1000 D. Dodd-Frank Does Not Require SIFIs to Pay Insurance Premiums to Pre-Fund the Orderly Liquidation Fund .......................................................... 1015 E. The Dodd-Frank Act Does Not Prevent Financial Holding Companies from Using Federal Safety Net Subsidies to Support Risky Nonbanking Activities ..... 1023 1. Dodd-Frank Does Not Prevent the Exploitation of Federal Safety Net Subsidies .................................. 1023 a. The Kanjorski Amendment .............................. 1024 b. The Volcker Rule.............................................. 1025 c. The Lincoln Amendment .................................. 1030 2. Banks Controlled by Financial Holding Companies Should Operate as “Narrow Banks” so That They Cannot Transfer Their Federal Safety Net Subsidies to Their Nonbank Affiliates ............ 1034 a. The First Tier of Traditional Banking Organizations .................................................... 1035 b. The Second Tier of Nontraditional Banking Organizations .................................................... 1037 (i) Congress Should Require a “Narrow Bank” Structure for Second-Tier Banks ..... 1038 (ii) Four Additional Rules Would Prevent Narrow Banks from Transferring the Benefits of Their Safety Net Subsidies to Their Affiliates ........................................... 1041 c. Responses to Critiques of the Narrow Bank Proposal ............................................................ 1047 Conclusion and Policy Implications .................................... 1052
WILMARTH 4/1/2011 1:11 PM 2011] The Dodd-Frank Act 953 If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved. 1 –Federal Reserve Board (FRB) Chairman Ben S. Bernanke Because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes.... There will be no more taxpayer-funded bailouts. Period. 2 –President Barack Obama The [Dodd-Frank Act] went from what is best to what could be passed. 3 –Former FRB Chairman Paul Volcker T I INTRODUCTION he recent financial crisis—widely viewed as “the worst financial crisis since the Great Depression” 4 —inflicted tremendous damage on financial markets and economies around the world. The * Professor of Law, George Washington University Law School. I would like to thank Interim Dean Gregory Maggs for a summer research grant that supported my work on this Article. I am also grateful for excellent research assistance provided by C. Scott Pollock, a member of our class of 2010; Sarah Trumble, a member of our class of 2013; and Germaine Leahy, Head of Reference for the Jacob Burns Law Library. I am indebted to Cheryl Block, John Buchman, John Day, Ross Delston, Anna Gelpern, Jeff Gordon, Kim Krawiec, Jeff Manns, Pat McCoy, Larry Mitchell, Heidi Schooner, and Cynthia Williams for helpful comments and conversations. Unless otherwise indicated, this Article includes developments through December 31, 2010. 1 Ben S. Bernanke, Chairman, Fed. Reserve Bd., Causes of the Recent Financial and Economic Crisis, Statement Before the Financial Crisis Inquiry Commission (Sept. 2, 2010), available at http://www.federalreserve.gov/newsevents/testimony/bernanke201009 02a.htm. 2 Stacy Kaper, Obama Signs Historic Regulatory Reform Bill into Law, AM. BANKER (July 21, 2010), http://www.americanbanker.com/news/obama-1022698-1.html (quoting statement made by President Obama upon signing the Dodd-Frank Wall Street Reform and Consumer Protection Act). 3 Louis Uchitelle, Volcker: Loud and Clear: Pushing for Stronger Reforms, and Regretting Decades of Silence, N.Y TIMES, July 11, 2010, at BU 1. 4 Angela Maddaloni & José-Luis Peydró, Bank Risk-Taking, Securitization, Supervision and Low Interest Rates: Evidence from the Euro Area and the U.S. Lending Standards 7 (European Cent. Bank, Working Paper No. 1248, 2010), available at http://ssrn.com /abstract=1679689; accord Arthur E. Wilmarth, Jr., The Dark Side of Universal Banking: Financial Conglomerates and the Origins of the Subprime Financial Crisis, 41 CONN. L. REV. 963, 966 n.3 (2009); Ben S. Bernanke, Chairman, U.S. Fed. Reserve, Remarks at the Swearing-In Ceremony, Washington, D.C. (Feb. 3, 2010), available at http://www.federal reserve.gov/newsevents/speech/bernanke20100203a.htm.
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