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

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 1011
viewed as an implicit admission of Basel II’s inadequacy. 251 After
reviewing a preliminary version of the Basel III proposals, a
prominent U.K. financial commentator observed, “We can say with
conviction now that Basel II failed.” 252
Third, the past shortcomings of capital-based rules are part of a
broader phenomenon of supervisory failure. Regulators did not stop
large banks from pursuing hazardous (and in many cases fatal)
strategies during the 1980s, including rapid growth with heavy
concentrations in high-risk assets and excessive reliance on volatile,
short-term liabilities. During the 1980s, regulators proved to be
unwilling or unable to stop risky behavior as long as banks continued
to report profits. 253 Similarly, although the full story is yet to be told,
there is wide agreement that federal banking and securities regulators
repeatedly failed to restrain excessive risk taking by LCFIs during the
decade leading up to the financial crisis. 254
Fourth, repeated regulatory failures during past financial crises
reflect a “political economy of regulation” 255 in which regulators face
significant political and practical challenges that undermine their
efforts to discipline LCFIs. A full discussion of those challenges is
beyond the scope of this Article. For present purposes, it is sufficient
to note that analysts have pointed to strong evidence of “capture” of
financial regulatory agencies by LCFIs during the two decades
leading up to the financial crisis, due to factors such as (1) large
political contributions made by LCFIs, (2) an intellectual and policy
environment favoring deregulation, and (3) a continuous interchange
of senior personnel between the largest financial institutions and the
top echelons of the financial regulatory agencies. 256 Commentators
251 See, e.g., Reforming Banking: Base Camp Basel, supra note 244; Yalman Onaran et
al., The Global Battle over New Rules for Banks, BLOOMBERG BUSINESSWEEK, May 31–
June 6, 2010, at 41.
252 Onaran et al., supra note 251, at 42 (quoting Charles Goodhart).
253 FED.DEPOSIT INS.CORP., supra note 245, at 39–46, 245–47, 373–78.
254 See JOHNSON &KWAK, supra note 137, at 120–50; McCoy et al., supra note 14, at
1343–66; see also Coffee, supra note 239, at 17–18 (stating that “[a]greement is virtually
universal that lax regulation by all the financial regulators played a significant role in the
2008 financial crisis”).
255 Gordon & Muller, supra note 200, at 26.
256 JOHNSON &KWAK, supra note 137, at 82–109, 118–21, 133–50; see also Deniz
Igan et al., A Fistful of Dollars: Lobbying and the Financial Crisis (Int’l Monetary Fund,
Working Paper 09/287, 2009), available at http://ssrn.com/abstract=1531520; ROBERT
WEISSMAN &JAMES DONAHUE, ESSENTIAL INFO. &CONSUMER EDUC. FOUND., SOLD
OUT: HOW WALL STREET AND WASHINGTON BETRAYED AMERICA (2009), available at
http://www.wallstreetwatch.org/reports/sold _out.pdf.