Next week, Sens. Brown and Vitter will start the real work on their TBTF legislation, buoyed by Friday’s formidable attack on big banks first from the Levin Permanent Investigations Subcommittee and, then, by Richard Fisher, president of the Federal Reserve Bank of Dallas. Each of these TBTF critiques – different though they are in what they demand – is premised on the fundamental belief that TBTF is as it was before Dodd-Frank. Chairman Bernanke offered a bit of a defense for the law when he came last month before Congress, but it wasn’t exactly stirring and it surely hasn’t proved convincing. Unless regulators do two things – talk tough and walk fast – Dodd-Frank’s valiant effort to end TBTF will have been in vain. Worse, markets will be still riskier because the more established the view that TBTF is as before, the more investors think they can take huge risks because they bet with taxpayers’ money and the harder the fall when they find out it’s theirs.
The challenge Chairman Bernanke faced in defending Dodd-Frank is one I get a lot: arguing that OLA will meaningfully resolve giant firms without a bail-out forces one to prove a prediction. This, of course, can’t be done. OLA is both incomplete and untested, making it difficult at best to defend it as a red-blooded remedy to behemoth banks backed by TBTF. Instead, one has to talk doubters through the confluence of complex provisions in Dodd-Frank – principally Titles I, II and XI – to show how they combine both to govern SIFIs and ensure they can be shut down without taxpayer support. Even if one can get a listener to bear with this discourse, there’s one more challenge: the reasonable retort that, while my description of Dodd-Frank might be right, the market doesn’t believe it and thus it doesn’t matter.
For Dodd-Frank to become a credible remedy to TBTF, we need the aforesaid talk and walk. Regulators need to up their game and make clear – very clear – that they have confidence in Dodd-Frank. If they don’t, let’s hear it now and fix it fast. If, as they say, they do have confidence in the law, then they need to speak up and – sorry guys – spend a bit of their scarce political capital on this critical point.
And, to the walk. Regulators need to make the framework credible by finalizing it. Yes, I know it’s hard. But, come on – it’s almost three years since the President signed this into law. Without credible build-out of OLA, final systemic standards and – most important – clear indications that living wills are meaningful guides to banks that must be restructured, the public is right to worry that TBTF remains in fact despite what some say they read in the law book.