Now We Are All Reformers by Datasite

A View of Financial Reform by Marshall Sonenshine by Datasite

Today, an understanding of Dodd-Frank and the broader subject of financial reform is as essential to the finance professional as is an understanding of credit markets, equity markets, corporate strategy, corporate tax policy, and a myriad of other issues that are the context in which business takes place. We deal people depend on financial reform working to re-establish a sound financial market every bit as much as we depend on other macro issues that drive markets. We need banks to lend. We need corporations to invest. We need derivatives to be properly priced. We need confidence to be restored. We can and must debate how to have all these essential attributes of a properly functioning market, but after the Financial Crisis of 2008, few among us seriously debate the need for some kind of reform. Few among us would rely on palliatives like "what happened can only happen once in a century." The workaday M&A practitioner, in addition to financial institutions leaders, derivatives traders and risk managers and other finance professionals need to know about Dodd-Frank. As we value predictability in financial markets, we need some kind of reform to take hold successfully, whatever our individual position is on particular provisions or policies within Dodd-Frank.

A new era of financial reform began officially on June 30, 2010 with the passage by the United States Congress of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Weighing in at over 2,000 statutory pages the Act has been called everything from real reform to Regulation Lite. Several prominent experts have praised it while others have criticized it, including one who dismissed it as the worst piece of legislation in United States history. In the main, Dodd-Frank will not solve in one stroke all the problems that rendered reform so urgently needed, no legislation can. In all events Dodd-Frank on its terms is, like all legislation, a balancing of competing demands and agendas in American society and one that often frames broad policies and principles but quite intentionally leaves numerous issues to federal government study and to an often intentionally protracted period of regulatory rule making.

The Act was broadly presaged by the Obama Administration's June 2009 policy paper on financial reform, which set an agenda dedicated to several key principles addressed in the law that Congress would pass a year later.

The Paradox of Financial and Economic Expertise

To have a balanced appraisal of Dodd-Frank, it helps to have a balanced appraisal of the Financial Crisis and the nature of financial regulation. Here one runs directly into a paradox about finance and economics: experts tend to have divergent views, and their views are often upended by crises. Worse still, Dodd-Frank pre implementation is a legislative Rorschach test on which experts immediately have had vastly divergent reactions. We all lived through what happened in the two years of triage since the crisis began - the Bailouts, the AIG and Lehman disasters, the sea changes in national politics, the election of the most reform minded President in a generation, the Stimulus, Dodd-Frank and now the see-sawing of the body politic as America braces itself for life post crisis. If you are uncertain of where you stand on Dodd-Frank, be comforted by the fact that there is no consensus among leading thinkers on Dodd-Frank either.

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