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

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 955
Parts II and III of this Article briefly describe the consequences and
causes of the financial crisis that led up to the enactment of the Dodd-
Frank. As discussed in those sections, LCFIs were the primary
private-sector catalysts for the crisis, and they received the lion’s
share of support from government programs that were established
during the crisis to preserve financial stability. Public alarm over the
severity of the financial crisis and public outrage over government
bailouts of LCFIs produced a strong consensus in favor of financial
reform. That public consensus pushed Congress to enact Dodd-
Frank. As Part IV explains, governmental rescues of LCFIs
highlighted the economic distortions created by TBTF policies, as
well as the urgent need to reduce public subsidies created by those
policies.
In an article written a few months before Dodd-Frank was enacted,
I proposed five reforms that were designed to prevent excessive risk
taking by LCFIs and to shrink TBTF subsidies. My proposed reforms
would have (1) strengthened existing statutory restrictions on the
growth of LCFIs; (2) created a special resolution process to manage
the orderly liquidation or restructuring of SIFIs; (3) established a
consolidated supervisory regime and enhanced capital requirements
for SIFIs; (4) created a special insurance fund, pre-funded by riskbased
assessments paid by SIFIs, to cover the costs of resolving failed
SIFIs; and (5) rigorously insulated FDIC-insured banks that are
owned by LCFIs from the activities and risks of their nonbank
affiliates. 10
Part V of this Article compares the relevant provisions of Dodd-
Frank to my proposed reforms and evaluates whether the new statute
is likely to solve the TBTF problem. Dodd-Frank includes provisions
(similar to my proposals) that make potentially helpful improvements
in the regulation of large financial conglomerates. The statute
establishes a new umbrella oversight body (the Financial Stability
Oversight Council) that will designate SIFIs and make
recommendations for their regulation. The statute also authorizes the
FRB to apply enhanced supervisory requirements to SIFIs. Most
importantly, Dodd-Frank establishes a new systemic resolution
regime (the Orderly Liquidation Authority (OLA)) that should
provide a superior alternative to the choice of “bailout or bankruptcy”
that federal regulators confronted when they dealt with failing SIFIs
during the financial crisis.
10 See Wilmarth, supra note 6, at 747–79.