BANGOR — Five years ago this summer, Congress enacted the Dodd-Frank Act, the most sweeping financial reforms since the Great Depression.

In a recent interview, former Sen. Chris Dodd, D-Conn., used qualifying language to express satisfaction with his signature piece of legislation, although he acknowledged his bill was not ideal.

Dodd-Frank has indeed made the financial markets safer than they were in 2008, but in the words of Nobel Prize-winning economist Joseph Stiglitz, it was still just a “cup half full.”

Numerous post-2008 concerns – the increased size of banks, their efforts to undermine regulation and their undue political influence in Congress – warrant further financial legislation to break up the biggest financial institutions.

Concerning size, “too big to fail” – when a financial institution holds so many assets that its failure would trigger another taxpayer bailout or otherwise cause catastrophic economic damage – has not been adequately addressed.

Today, three of the largest financial institutions– JPMorgan, Bank of America and Wells Fargo – are 80 percent larger than they were a year before taxpayers bailed them out. In fact, Dodd-Frank encouraged or forced certain banks to merge, thus greatly increasing their market power.

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Lehman Brothers, at the time of its bankruptcy which triggered the 2008 financial crisis, had $639 billion in assets. Today, JPMorgan – with $2.6 trillion in assets and 15 times more subsidiaries than Lehman – would be much harder to liquidate.

Further, banks have adeptly dodged existing regulation. Without establishment of clear, workable definitions and hard-nosed enforcement, Wall Street will exploit ambiguities in Dodd-Frank, such as those surrounding the law’s Volcker Rule.

This provision prevents a risky practice called proprietary trading – when banks trade on their own accounts rather than concentrate their resources to benefit clients. This can lead to egregious conflicts of interest, such as in 2008, when the megabanks used their own accounts to bet heavily that the housing bubble would burst, yet wrote bad mortgages for clients and sold securities to investors on the premise that housing prices would continue booming.

And despite Dodd-Frank’s prohibitive terms, this risky behavior can still easily take place. For example, a 2013 Senate probe found that JPMorgan engaged in high-risk proprietary trading under the guise of normal hedging in a differently named part of the bank. Yes – all it took for JPMorgan to continue excessive risk-taking was the simple moving of operations from one office corridor to another.

And unsurprisingly, the large banks still wield enormous political power in Washington, strong-arming not only Republicans, but also many Democrats, too (Google “Hillary Clinton top campaign donors”).

This is not rhetorical fear-mongering, either: In December 2014, Congress employed language written by Citibank itself to repeal a Dodd-Frank provision that restricted federally insured banks from writing derivatives – those risky financial products that led to AIG’s collapse and the largest taxpayer bailout in history.

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Worse yet, the provision was repealed without a single congressional hearing.

The answer?

First, Congress must pass the “21st Century Glass-Steagall Act.” Glass-Steagall – the 1933 centerpiece of Roosevelt-era banking reforms, which prevented a subsequent financial crash for the next half-century – separated “ordinary” commercial banks, which loan to citizens and businesses, from “gambling” investment banks, which purchase large amounts of securities and resell them to investors.

President Clinton signed legislation repealing Glass-Steagall in 1999, thus permitting the merging of commercial and investment banks. Banks subsequently gambled with ordinary citizens’ money and took on egregious conflict of interest via proprietary trading (again, leading to the 2008 collapse).

By restoring Glass-Steagall, traditional banking, free from the influence of risk-taking speculators which dominate many firms, will thrive and raise the middle class up with it. Proprietary trading will be eliminated, as banks will either loan or speculate, but not both.

Further, Glass-Steagall would de facto break up firms that both loan and speculate, such as JPMorgan, Citibank and Wells Fargo, all of which have assets over $1 trillion.

Aside from re-enacting Glass-Steagall, we need more stringent oversight from those responsible for preventing another Great Recession – the Federal Reserve and the Financial Stability Oversight Council among them.

Without taking some additional measures beyond what is in place, we may remember Dodd-Frank not as “a cup half full,” but as a failed attempt to protect homeowners, investors and the American economy at large.


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