The New Financial Deal

The good, the bad, and the scary of Washington's attempt to reform Wall Street

The Dodd-Frank Wall Street Reform and Consumer Protection Act is Washington's response to America's call for a new regulatory framework for the twenty-first century.

In The New Financial Deal, author David Skeel offers an in-depth look at the new financial reforms and questions whether they will bring more effective regulation of contemporary finance or simply cement the partnership between government and the largest banks.

• Details the goals of the legislation, and reveals that how they are handled could dangerously distort American finance, making it more politically charged, less vibrant, and further removed from basic rule of law principles
• Provides an inside account of the legislative process
• Outlines the key components of the new law

To understand what American financial life is likely to look like in five, ten, or twenty years, and how regulators will respond to the next crisis, we need to understand Dodd-Frank. The New Financial Deal provides that understanding, breaking down both what Dodd-Frank says and what it all means.

Foreword ix

Introduction xi

A Few Major Characters xv

Chapter 1 The Corporatist Turn in American Regulation 1

The Path to Enactment 3

The Two Goals of the Dodd-Frank Act 4

A Brief Tour of Other Reforms 6

Two Themes That Emerge 8

Fannie Mae Effect 11

Covering Their Tracks 12

Is There Anything to Like? 14

Part I Relearning the Financial Crisis

Chapter 2 The Lehman Myth 19

The Stock Narrative 20

Lehman in Context 23

Lehman’s Road to Bankruptcy 26

Lehman in Bankruptcy 29

Bear Stearns Counterfactual 31

Road to Chrysler 33

Chrysler Bankruptcy 35

General Motors “Sale” 38

From Myths to Legislative Reality 39

Part II The 2010 Financial Reforms

Chapter 3 Geithner, Dodd, Frank, and the Legislative Grinder 43

The Players 44

TARP and the Housing Crisis 47

Road to an East Room Signing 49

Channeling Brandeis: The Volcker Rule 54

The Goldman Moment 56

Chapter 4 Derivatives Reform: Clearinghouses and the Plain-Vanilla Derivative 59

Basic Framework 61

Derivatives and the New Finance 63

The Stout Alternative 66

New Clearinghouses and Exchanges 68

Regulatory Dilemmas of Clearinghouses 69

Disclosure and Data Collection 74

Making It Work? 75

Chapter 5 Banking Reform: Breaking Up Was Too Hard to Do 77

Basic Framework 78

New Designator and Designatees 79

Will the New Capital Standards Work? 82

Contingent Capital Alternative 84

Volcker Rule 85

What Do the Brandeisian Concessions Mean? 91

Office of Minority and Women Inclusion 93

Institutionalizing the Government-Bank Partnership 94

A Happier Story? 95

Repo Land Mine 96

Chapter 6 Unsafe at Any Rate 99

Basic Framework 100

Who is Elizabeth Warren? 102

Toasters and Credit Cards 105

The New Consumer Bureau 106

Mortgage Broker and Securitization Rules 109

Consequences: What to Expect from the New Bureau 111

What It Means for the Government-Bank Partnership 114

Chapter 7 Banking on the FDIC (Resolution Authority I) 117

Does the FDIC Play the Same Role in Both Regimes? 118

How (and How Well) Does FDIC Resolution Work? 122

Moving Beyond the FDIC Analogy 126

Chapter 8 Bailouts, Bankruptcy, or Better? (Resolution Authority II) 129

Basic Framework 130

The Trouble with Bailouts 132

Who Will Invoke Dodd-Frank Resolution, and When? 135

Triggering the New Framework 137

Controlling Systemic Risk 142

Third Objective: Haircuts 145

All Liquidation, All the Time? 148

Part III The Future

Chapter 9 Essential Fixes and the New Financial Order 155

What Works and What Doesn’t 156

Staying Derivatives in Bankruptcy 158

ISDA and Its Discontent 163

Other Bankruptcy Reforms for Financial Institutions 168

Plugging the Chrysler Hole in Bankruptcy 170

Bankruptcy to the Rescue 173

Chapter 10 An International Solution? 175

Basic Framework 176

Problems of Cross-Border Cases 177

Scholarly Silver Bullets 181

Dodd-Frank’s Contribution to Cross-Border Issues 182

New Living Wills 185

A Simple Treaty Might Do 186

Risk of a Clearinghouse Crisis 188

Reinvigorating the Rule of Law 189

Conclusion 191

Notes 195

Bibliography 205

Acknowledgments 211

About the Author 212

Index 213

DAVID SKEEL is the S. Samuel Arsht Professor at the University of Pennsylvania Law School. He is author of Icarus in the Boardroom: The Fundamental Flaws in Corporate America and Where They Came From; Debt's Dominion: A History of Bankruptcy Law in America; and numerous articles on bankruptcy, corporate law, and other topics. His commentary has appeared in the New York Times, Wall Street Journal, Weekly Standard, Books & Culture, and elsewhere.

After watching the government bail out Bear Stearns and AIG in 2008, and pump well over one hundred billion dollars into Citigroup, Bank of America, and the other largest banks the same year, Americans realized that the existing regulatory framework did not work. The Dodd-Frank Act, which President Obama signed into law in July 2010, was Washington's answer. The legislation created an entirely new set of rules for both the instruments and the institutions of contemporary finance. Although the reforms were desperately needed, they were drafted by the same people who designed the bailouts of 2008, and it shows.

In The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences, David Skeel explains where the legislation came from, tracing its assumptions back to the 2008 crisis and offering an inside account of the key moments in the legislative process. He analyzes each of the main components of the Dodd-Frank Act, explaining how they will work and showing that the new regulatory framework depends on precisely the qualities that Americans found so offensive about the bailouts of 2008: special treatment of the largest financial institutions and ad hoc intervention in the event of trouble. Skeel's assessment is not entirely pessimistic, however. He argues that a few features of the Dodd-Frank Act are genuine improvements, such as its regulation of financial derivatives, and he outlines several simple bankruptcy reforms that would curb the worst excesses of the new partnership between the government and the largest financial institutions.

The New Financial Deal
UNDERSTANDING THE DODD-FRANK ACT AND ITS (UNINTENDED) CONSEQUENCES

After watching the government bail out Bear Stearns and AIG in 2008, and pump well over one hundred billion dollars into Citigroup, Bank of America, and the other largest banks the same year, Americans realized that the existing regulatory framework did not work. The Dodd-Frank Act, which President Obama signed into law in July 2010, was Washington's answer. The legislation created an entirely new set of rules for both the instruments and the institutions of contemporary finance. Although the reforms were desperately needed, they were drafted by the same people who designed the bailouts of 2008, and it shows.

In The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences, David Skeel explains where the legislation came from, tracing its assumptions back to the 2008 crisis and offering an inside account of the key moments in the legislative process. He analyzes each of the main components of the Dodd-Frank Act, explaining how they will work and showing that the new regulatory framework depends on precisely the qualities that Americans found so offensive about the bailouts of 2008: special treatment of the largest financial institutions and ad hoc intervention in the event of trouble. Skeel's assessment is not entirely pessimistic, however. He argues that a few features of the Dodd-Frank Act are genuine improvements, such as its regulation of financial derivatives, and he outlines several simple bankruptcy reforms that would curb the worst excesses of the new partnership between the government and the largest financial institutions.