Dodd-Frank, Consumers Win Big, Mark Williams Writes in Boston Herald

in Faculty, Finance, News
November 19th, 2012

Mark-WilliamsOn November 13, Boston University’s Mark Williams published his latest opinion piece in the Boston Herald. Williams is a master lecturer in finance at the School of Management, an expert on risk management, former Federal Reserve examiner, and author of the book Uncontrolled Risk: The Lessons of Lehman Brothers.

Dodd-Frank and consumers win big

Backstopped by President Obama’s re-election, the Elizabeth Warren U.S. Senate win in Massachusetts is a deal changer for the future of the Dodd-Frank Act.

Prior to Election Day, the financial reform law was threatened by death by a thousand cuts. Big banks, already lobbying furiously to weaken the act’s regulations, were spending millions to support Republican allies like Senator Scott Brown who vowed to render Dodd-Frank toothless. What a difference a day makes.

Along with Obama’s win, the solid defeat of Brown and the election of Warren—who helped create the consumer protection agency spawned by Dodd-Frank—reaffirm the effort to impose tighter regulation over the nation’s largest banks whose collective risk-taking helped spark the 2008 economic crisis.

Banks increasingly control the health of our economy. In the last three decades the U.S. economy has become financialized, building ever-growing profits for the “haves” within the banking system. Today the assets of the top five U.S. banks have increased fourfold and represent over 60 percent of GDP, largely through aggressive risk taking.

“The win by Warren will fortify the future of Dodd-Frank and eventually force big banks to retreat to more traditional banking practices—making loans and taking in deposits—which can usher in greater long-term economic stability.”

Warren will be tough on banks and banks fear it (note that bank stocks took a hit the day after Election Day). Big banks now will be kept in the spotlight and will need to scale down their level of risk taking. Corresponding profits tied to higher bank risk taking will also fall. Big banks will be forced to return to the boring business of banking and the “Too Big to Fail” problem can begin to get solved.

From the start of the campaign, Warren made it clear she was not a friend of big banks. Her election is a clear mandate to keep bankers in check and insure that our economy grows in a stable and safe manner. And sorely needed jobs will be created when banks begin lending and behaving in a responsible manner.

Warren’s election means a vocal watchdog will be holding big banks to a higher standard of conduct. Meantime, those large, FDIC-insured banks—including JPMorganChase, Bank of America, Citibank, and Wells Fargo—will be prohibited through the Dodd-Frank Act’s Volcker Rule from engaging in risky trading practices.

Bottom line, the win by Warren will fortify the future of Dodd-Frank and eventually force big banks to retreat to more traditional banking practices—making loans and taking in deposits—which can usher in greater long-term economic stability.

Consumers will be the big winners when the terms “trust, honesty, and integrity” again can be uttered in the same sentence as “banking.”

See this opinion piece online at the Boston Herald.