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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

July 8, 2013 at 11:17 AM

Happy birthday, Dodd-Frank, toothless reform

Remember when AIG was saved by the government during the Panic of 2008, receiving a $180 billion bailout and essentially becoming nationalized? The insurer that enabled so much fraud by the banksters turned around and gave its top executives hundreds of millions of dollars in bonuses and retention pay. The public outrage, further stoked by revelations of how the Wall Street Boyz received outrageous compensation packages as a reward for taking risks that would tank the economy and cost taxpayers, caused a provision to be inserted into the Dodd-Frank bill. It required companies to disclose how much their chief executives made compared with other employees.

Like most of this giant “reform” bill, it remains to be enforced. It’s one of the simplest portions of the legislation, but the Securities and Exchange Commission still hasn’t brought it into force, as we mark the third anniversary of Dodd-Frank’s passage.

The problem, as the Washington Post reports, is a vast and successful pushback by corporate power. “What the agency did not count on was the resistance mounted by big business. A lobbying campaign waged by business executives and the nation’s most prominent corporate associations undercut the momentum and effectively brought the agency’s work on the rule to a standstill.”

Another casualty of lobbying by such groups as the U.S. Chamber of Commerce and the Business Roundtable would have given shareholders greater say on removing board directors and installing new ones. This was blocked by a federal appeals court in 2011, further intimidating the SEC. The business lobbyists say the paperwork on CEO pay is too onerous. Yet these same companies have no problem setting up vast departments to legally evade taxes. In any event, these modest changes to produce healthier corporate governance are stuck. (You can find the ratio-per-average-worker at the AFL-CIO’s Executive Paywatch).

As for the rest of Dodd-Frank, the law firm Davis Polk reports that 63 percent of the legislation’s rule-making deadlines have been missed; 37 percent of the legislation has become finalized rules. This counts the 279 rule-making requirements that should have been put into place by now. Less than 39 percent of the 398 total rules have been finalized. The Volcker Rule, which would have gone into effect last year and prohibited banks from gambling with their own funds (“proprietary trading”), is nearly dead. The Federal Reserve has been given new powers to step in and stop major systemic risk, but has shown little appetite to flesh this out. The same powerful financial sector whose lobbying ensured the complexity of Dodd-Frank has been extremely successful in defanging it and slowing implementation.

So in the aftermath of the worst financial disaster since the Great Depression, we didn’t get a 21st century Glass-Steagall, an update of the Depression-era legislation that protected us for decades until its gradual weakening and then final repeal in 1999. We didn’t stop the dangerous derivatives game. The Too Big To Fail banks got bigger. The banksters got away with it. As MIT economist Simon Johnson says, the big banks have “downside protection.” In other words, when things are going well, they get the upside as profits and compensation. When things crash, they know Uncle Sam will bail them out.

Are you strong enough to blow out those three candles, Dodd-Frank? If not, the lobbyists will do it for you with a wave of their hands.

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Comments | More in Banking | Topics: AIG, banking, CEO compensation

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