NEW YORK – Today, Senate Banking Committee Chairman Chris Dodd  (D-CT) delivered a keynote address at the Securities Industry and Financial Markets Association’s (SIFMA) 2010 Annual Meeting in New York City.  In his remarks, Senator Dodd explained how the Dodd-Frank Wall Street Reform and Consumer Protection Act will create a sound economic foundation by protecting consumers, ending too big to fail bailouts, creating an early warning system to detect the next financial crises before it can take down our economy, and bringing the $600 trillion derivatives market out of the shadows and into the open.

 

 

In the fall of 2008, the only thing keeping the United States from total financial collapse was a $700 billion emergency stabilization program and over a trillion dollars in loans, guarantees and direct assistance to the financial services industry by the Federal Reserve System and the FDIC. Government had to step in where private markets so miserably failed.  Heading into my third year as Chairman of the Senate Banking Committee, I understood just how tenuous our situation really was, and how badly we needed to fix the system.

So as we began the reform process, a process that ended up taking nearly two years, I was guided by four main goals.

First, I knew that America needed a regulatory structure that reflected the reality of 21st century financial services. Much of the framework governing our financial system was drawn up nearly a century ago, by people who never imagined the creation of computer systems that automatically trade thousands of stocks in a second, or the rise of global banks with trillion-dollar balance sheets.  Financial regulation had simply failed to keep pace with the innovations in the industry – the exploding growth of the OTC derivatives market and the rise of the shadow banking sector.   

 

Second, I wanted to make sure that, in the rush to regulate, we did not strangle the source of so much wealth and job creation for our country. Financial services are critically important for our domestic economy as well as our leadership around the world, so maintaining that balance was a top priority. 

“There’s a wonderful statue outside the Federal Trade Commission in Washington. entitled “Man Controlling Trade,” it depicts this muscular stallion being held back by a very powerful farmer. Looking at the statue, it’s not clear who’s winning – the horse or the farmer. I’ve often thought of that image, reflecting as it does so much of what we tried to do with financial services. You want a robust financial services sector that is out there being creative, being innovative, driving growth and powering the economy. But at the same time, you want to make sure that the horse doesn’t run away.

That tension, that back-and-forth between government and industry, will always exist. But I think what was happening, beginning long before 2007, was that the horse was out of control, that we did not have the right controls in place.

Third, we live in a global economy. I could regale you with any number of anecdotes about Greek treasury bonds or Icelandic savings accounts, but the truth is that all of you already know this to be true. So in creating new rules, I also wanted to encourage international harmonization. Otherwise, I knew we would end up with sovereign arbitrage, with the argument that “If you don’t deregulate here, we’ll go to London.” Of course, in London the threat is that they’ll go to New York, but the need for consistent international standards is clear. Without international cooperation, we risk having a race to the bottom, with companies shopping around for the country with the loosest regulations.

Last, but certainly not least, was the fundamental premise that consumer protection and economic growth are not in conflict. Failure to protect consumers can wreak havoc on the financial system. Bad loans drove individual borrowers into bankruptcy, but they also drove our largest financial institutions to the brink of collapse. They led to millions of foreclosures, cast a blight across countless neighborhoods, caused the loss of hundreds of thousands of jobs, and the evaporation of hundreds of billions, perhaps trillions, of dollars from the investment accounts of Americans from all walks of life.

There is no doubt: consumer protection should be on an equal footing with regulations protecting the safety and soundness of financial institutions.

Those were the goals I laid out in November 2008 – and while I’ll be the first to admit our bill isn’t perfect – I believe the bill accomplished everything we set out to do.  

First and foremost, the new architecture is bold.  We ended “too big to fail”.  Never again will we allow either an implicit or explicit guarantee that the federal government will bail out a financial institution because it’s become too large. Today, taxpayers, investors, creditors and executives alike know with certainty that, if a company puts itself in a position to fail, fail is exactly what it will do.

We increased transparency and accountability in our markets, bringing the $600 trillion derivatives market out of the shadows and into the open and the shadow banking system under meaningful regulation.

                                                                           

We increased investor protection by strengthening S.E.C. authority and efficiency and empowering shareholders.

And we established an early warning system, with the Financial Stability Oversight Council and the new Office of Financial Research as its centerpiece, so that we will not have to learn that a financial institution, product or practice is unsafe only after it has already undermined the stability of our economy.

 

Second, to ensure that financial innovation can thrive but not run amok, the Dodd-Frank Act lets the regulators with their expertise – and not the Congress – fill in the details, giving them the flexibility to adapt regulations to changing times.

 

With Dodd-Frank, the US has fulfilled our commitment to the G20 nations to reform our regulatory system in the wake of the crisis. We have set an international example, adhering to the principles the G20 nations adopted soon after the crisis.  The European Union is now in the process of enacting reforms that follow our lead - in mandating clearing of OTC derivatives, in establishing an EU-wide systemic risk council, and in enhancing the quality and quantity of bank capital through Basel III. 

And finally, we established an independent consumer financial protection agency, to provide Americans with the clear and accurate information they need to make good financial decisions, as well as with the security that comes with knowing that someone is watching out for their interests and their interests alone.

But the work is not complete. All Congress can do is establish a comprehensive framework and a clear path forward.  And that is what we have done.  The rest is up to the regulators, and to many of the people in this room.

 

Let me say to you, it is critically important that your industry value long-term viability over next quarter’s earnings statement. Financial innovation is only truly valuable when it brings efficiency and liquidity to markets, not when it merely adds complexity and hides risk. The government’s duty is to set the parameters and remain vigilant watchdogs; your duty is to act responsibly within those parameters.

And those parameters are taking shape.  It has scarcely been three months since the President signed the Wall Street Reform and Consumer Protection Act into law, but I am pleased to report that the process of implementation is moving swiftly and efficiently. The regulators are making progress every day, promulgating rules, and taking their deadlines seriously. The next Congress has the responsibility to hold regular oversight hearings and keep the regulators on their toes – in my experience the knowledge that you’ll have to testify is excellent motivation to stay on top of your game.

 

And I obviously believe it’s important to preserve the integrity of the law, and not to repeal key parts of it as some have threatened, to preserve the confidence large majorities of Americans have expressed in the reforms, and the certainty which many within the financial sector have sought. 

Elizabeth Warren is doing some very good work as special advisor to Treasury Secretary Geithner, standing up the Consumer Financial Protection Bureau. She is already showing exactly the kind of innovative thinking that a 21st century agency will need – like using social networks and data mining to identify problems before they turn into crises. That said, the Bureau needs a permanent director, and I hope to see a nomination from the President soon.  I emphasize “soon” because the task is so large and the opposition so determined.

The Office of Financial Research, which I mentioned earlier, also needs a strong and independent director. In August, along with six other members of the Senate Banking Committee, I sent a letter to President Obama urging him to nominate a director with the requisite experience to launch such an important new office, as well as the prominence to attract the top-notch economists, statisticians and researchers to make the office successful.

The OFR’s role is to advise the Financial Stability Oversight Council – which we created because the financial crisis taught us that systemic problems cut across the traditional boundaries between regulators.  The ongoing foreclosure crisis is a perfect example of the need for inter-agency cooperation – it is a problem with no single cause, no simple solution, and touches on issues and companies within the purview of many different regulators. I am holding a hearing on the complex issues surrounding foreclosures next week, but Congressional oversight only goes so far. The Financial Stability Oversight Council should convene soon to consider the foreclosure crisis and coordinate a swift and effective response. Millions of Americans are suffering, and they deserve to know their government is responding to their needs.

 

Today I have said a lot about new rules and new regulations. But the financial crisis was not just a failure of regulation. It was a failure of responsibility. Too many people put short-term profits over long-term stability. Too many people obeyed the letter of the law while taking advantage of loopholes to game the system. No system of rules will ever be perfect, and laws alone cannot prevent every problem. We cannot legislate wisdom, and we cannot legislate morality.  Ultimately, sound risk management;  long-term perspective; informed business decision-making; more responsible governance; tough, clear-eyed oversight of managers by Boards;  and the other reforms necessary to sustain our capital markets are up to everyone in this room and beyond who serve as the core of our financial services sector.

Thank you, and I’ll take some questions.

 

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