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Financial Services

The Issue

Seven years after the financial collapse of 2008, the policy failures that it revealed still have not been resolved. The Dodd–Frank Wall Street Reform and Consumer Protection Act, hurriedly enacted in 2010, does little to address these failures and in many ways actually makes things worse. Many parts of the law, ranging from price controls on debit cards to the creation of a new bureaucracy for consumer financial “protection,” have little to do with the financial crisis. Even where the legislation addresses the relevant problem, it misses the mark.

No issue in financial policy is more critical or more vexing than “too big to fail”—the concept that some firms are so important to the financial system that the government must intervene with bailouts or other support rather than let them go through the bankruptcy process. Instead of eliminating this doctrine, the Dodd–Frank Act reinforces it. A far better approach would be to establish bankruptcy provisions that would minimize the impact on the economy should a critical private institution fail.

Perhaps Dodd–Frank’s greatest weakness is that it completely neglected to address Fannie Mae and Freddie Mac, the two government-created mortgage finance giants whose activities helped to create and exacerbate the 2008 financial crisis. Fannie Mae and Freddie Mac issued trillions of dollars in mortgage-backed securities and, responding in part to congressionally mandated purchase requirements, speculated in their own securities and those issued by others. Full recovery from the housing crisis will not be possible until both Fannie Mae and Freddie Mac are phased out and replaced by a private-sector housing finance system.

In contrast to these regulatory overreaches, the 2012 Jumpstart Our Business Startups (JOBS) Act reduced regulatory impediments to entrepreneurial capital formation. It reduced the regulatory burden on most newly public companies for their first five years as a public company. It allows private companies to use the Internet or newspapers to raise money from affluent investors and financial institutions. Effective June 2015, it expanded the ability of small issuers to raise up to $50 million in capital annually. And, it created a crowdfunding exemption, which will be effective in May 2016 now that the Securities and Exchange Commission (SEC) has issued final rules.


Eliminate Too Big to Fail. The authors of Dodd–Frank claimed to have eliminated the pernicious too-big-to-fail policy, but they actually may have strengthened it. The law designates the largest banks as “systemically important financial institutions” and requires regulators to designate other financial institutions that are systemically important. Although the stated goal is to apply special regulation to these entities, the practical effect is to signal that these firms will not be allowed to fail, which reinforces rather than repeals too big to fail.

A far better approach would be to make it easier for large institutions to fail without massive damage to the economy. Dodd–Frank, acknowledging this need, created an “orderly liquidation” process to ensure speedy takedowns of failing firms. However, the Dodd–Frank process is run by federal regulators and gives them almost unfettered discretion to dispose of assets as they see fit—an invitation to cronyism. This procedure should be replaced by a streamlined liquidation process under the bankruptcy laws that provide a judicial proceeding delimited by the rule of law.

Fully Repeal Dodd–Frank’s Title X. Title X of Dodd–Frank empowers the Consumer Financial Protection Bureau (CFPB) to regulate virtually every consumer financial product and service without direct oversight by Congress or the White House. The bureau is restructuring the mortgage market; devising restrictions on credit bureaus, education loans, overdraft policies, payday lenders, credit card plans, and prepaid cards; and amassing unverified complaints with which to assail creditors and bankers. Ample evidence shows that the bureau’s operations represent a radical departure from long-standing regulatory standards, and its inordinate control of consumer finance is constraining credit and harming the economy.

Limit the Consumer Financial Protection Bureau (CFPB). The nation’s newest agency ranks among the most powerful and unaccountable ever established. In the absence of full repeal of Title X, lawmakers should, at the very least, change the bureau’s current automatic funding mechanism (currently set by law as a fixed percentage of the Federal Reserve’s operating budget) and bring it under the appropriations process. Further, the CFPB’s powers should be limited and explicitly defined.

Eliminate Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac, the government-sponsored mortgage giants, should be shut down completely and permanently. Both entities distort the market by issuing mortgage-backed securities with subsidized government guarantees that the mortgages will be repaid. If such guarantees are necessary, they should be priced and issued by the private sector. Congress should take steps to liquidate Fannie and Freddie’s mortgage portfolio and to ensure that they are not simply replaced by a new government-sponsored agency.

Reduce the Regulatory Impediments to Entrepreneurial Capital Formation. Congress should remove regulatory impediments that limit entrepreneurs’ access to the capital necessary to launch and grow new businesses. Congress should preserve the existing thresholds for private offerings and expand the ability of sophisticated investors to invest in private offerings, as well as establish venture exchanges. Current law allows large public companies to raise capital without having to deal with 50 different expensive and time-consuming state registration and qualification requirements. Congress should allow smaller public companies and other smaller companies with extensive federal disclosure requirements to also be free of this burden. Just as importantly, Congress should replace the current complex and arbitrary federal disclosure system with a reasonable, coherent, and scaled disclosure system that imposes increasing requirements as companies grow and have more shareholders with more capital at risk. Finally, it is time to create a micro-offering exemption allowing very small private companies to raise capital without having to comply with complex SEC rules.

Facts and Figures

  • Dodd–Frank’s 2,300 pages call for 243 rulemakings and 67 reports by federal agencies, according to a report by the Davis–Polk law firm, which regularly tracks the progress of Dodd–Frank’s implementation.
  • According to a report by Davis–Polk, as of January 2, 2014, a total of 280 Dodd–Frank deadlines had passed. Of these, 47 percent have been missed.
  • The Government Accountability Office released a study in early July 2011 saying that U.S. regulators do not yet know enough about Wall Street’s proprietary trading to police it effectively.

Selected Additional Resources

David R. Burton, “Building an Opportunity Economy: The State of Small Business and Entrepreneurship,” testimony before the Committee on Small Business, U.S. House of Representatives, March 4, 2015.

David R. Burton, “Don’t Crush the Ability of Entrepreneurs and Small Businesses to Raise Capital,” Heritage Foundation Backgrounder No. 2874, February 5, 2014.

David R. Burton, “Legislative Proposals to Enhance Capital Formation and Reduce Regulatory Burdens: Venture Exchanges,” testimony before the Capital Markets and Government Sponsored Enterprises Subcommittee, Committee on Financial Services, U.S. House of Representatives, May 13, 2015.

David R. Burton, “Proposals to Enhance Capital Formation for Small and Emerging Growth Companies,” testimony before the Capital Markets and Government Sponsored Enterprises Subcommittee, Committee on Financial Services, U.S. House of Representatives, April 11, 2014.

James L. Gattuso, “Breaking Up Big Banks: Right Question, Wrong Answer, Heritage Foundation Issue Brief No. 3906, April 10, 2013.

Diane Katz, “The CFPB in Action: Consumer Bureau Harms Those It Claims to Protect,” Heritage Foundation Backgrounder No. 2760, January 22, 2013.

Diane Katz, “Dodd–Frank at Year Three: Onerous and Costly,” Heritage Foundation Issue Brief No. 3993, July 19, 2013.

Diane Katz, “Reforming Consumer Financial Protection Bureau Necessary to Protect Consumers,” Heritage Foundation WebMemo No. 3216, April 7, 2011.

Norbert J. Michel, “The Fed’s Failure as a Lender of Last Resort: What to Do About It,” Heritage Foundation Backgrounder No. 2943, August 20, 2014.

Norbert J. Michel, “Financial Market Utilities: One More Dangerous Concept in Dodd–Frank,” Heritage Foundation Backgrounder No. 3005, March 20, 2015.

Norbert J. Michel, “Financial Stability Oversight Council and Asset Management Firms,” Heritage Foundation Issue Brief No. 4215, May 6, 2014.

Norbert J. Michel, “The Financial Stability Oversight Council: Helping to Enshrine ‘Too Big to Fail,’” Heritage Foundation Backgrounder No. 2900, April 1, 2014.

Norbert J. Michel, “Lehman Brothers Bankruptcy and the Financial Crisis: Lessons Learned,” Heritage Foundation Issue Brief No. 4044, September 12, 2013.

Norbert J. Michel, “Repealing Dodd–Frank and Ending ‘Too Big to Fail,’” Heritage Foundation Backgrounder No. 2973, November 3, 2014.