Policing banks: The feds' big fail
Obamacare isn't the only piece of landmark legislation that some members of Congress have been diligently working to delay.
Five years after the financial system collapsed under a pile of risky debt, federal regulators have implemented fewer than half the rules ordered up to prevent another banking meltdown.
The latest efforts unfolded this week, when the House voted to delay key provisions of the sweeping Dodd-Frank regulations meant to prevent another financial crisis like the one that led to the Great Recession. One of those rules is supposed to regulate investment advice; the other would restrict banks' trading in certain derivatives.
The votes to delay the rules are just the latest roadblocks in a three-year slog of negotiations and political horse trading between Congress, federal regulators and the multiple corners of the financial industry that has slowed efforts to create more than 400 detailed rules called for in the 824-page law. Some say it has slowed more than just the rule-making; they contend that it has impeded economic growth and business expansion.
"Everyone that's affected is weighing in, and they're all kind of overwhelmed by the process," said Wayne Abernathy, head of financial institutions policy and regulatory affairs at the American Bankers Association.
Worse, say critics, even when the rules are finally written, none of the thousands of pages of new regulations would prevent the collapse of one of America's handful of giant banks.
"The legislation completely missed the target," said Cornelius Hurley, director of Boston University's Center for Finance, Law & Policy. "'Too big to fail' has not been eliminated."
To be sure, some pieces of the sprawling reform bill have been implemented and are providing effective safeguards. The Consumer Financial Protection Bureau, an entirely new agency, is up and running. New rules ban most of the mortgage products and practices that contributed to the meltdown.
Trading in financial derivatives—the secret sauce that poisoned the well of global credit—has been moved out in the open through clearinghouses that insist traders put up a cash cushion in case their risky bets go bad.
The financial system also has become somewhat safer as some of the global market forces that lead to the Panic of 2008 have largely dissipated. The housing bubble has burst and begun recovering, the torrent of bad mortgages has washed out of the system, and banks are holding more capital and less risky paper on their books.
"Today we have modern financial markets that are the best in the world: the broadest, deepest, most efficient capital markets in the world," former Treasury Secretary Hank Paulson told CNBC earlier this week. "The banks are safer. They're better capitalized. They're better regulated."
But more than three years after Dodd-Frank was enacted, only 40 percent of the rules required under Dodd-Frank have been finalized, another 30 percent have been proposed, and another 30 percent have not yet been proposed, according to Davis Polk & Wardwell, a law firm that is tracking the Dodd-Frank rulemaking progress.
From the beginning, the debate over how to create new regulations to prevent another financial meltdown was one of the most contentious of the past decade, pitting reform-minded Democrats against free market Republicans aided by an army of lobbyists on all sides.
The resulting bill—named for former Democratic Rep. Barney Frank and former Democratic Sen. Christopher Dodd—was a sprawling, kitchen sink of proposed regulations, signed by President Barack Obama in July, 2010, that contained nearly 400 proposed rules, in 16 separate sections, governing everything from bank bailouts to consumer credit.
"Both of us would like to have this done by now," Dodd told CNBC on Tuesday. But "if you asked me it's going to take six, eight months longer, but they're going to get a better outcome. I'll take the better outcome every time."
It remains to be seen what that outcome will look like—or even how long it will take.
One of the most critical rules called for in Dodd-Frank, for example, has also turned out to be the one of those most deeply mired in the approval process. The so-called Volcker rule, named after former Federal Reserve Chairman Paul Volcker, would effectively ban banks from making risky bets with depositors' money.
Adapting that simple, Depression-era concept to the complexities of modern, global finance has turned out to be a lot harder than its proponents envisioned. That's a big reason the final rule is taking so long, said the ABA's Abernathy.
Even if there was a wider consensus on what the new rules should say, the process would still take years, say experts in financial regulations. That's because the law seeks to rewrite decades of existing regulations for multiple industries, forming a complex web of interconnected rules.
"For every new rule that's written, there are probably two or three old rules that have to be conformed or changed," said Gabriel Rosenberg, an attorney at Davis Polk who advises banks on Dodd-Frank reform. "It's a hugely monumental task. And if you look at the deadlines Congress set, it's pretty clear they underestimated the size of the task ahead."
The process has also bogged down because there is no one agency tasked with overseeing and coordinating the process—somewhat like trying to build a house without a general contractor. Early versions of the law gave that role to the Treasury Department. That authority didn't survive the final version of the law, which created the Financial Stability Oversight Council with representatives from multiple agencies.
(Read more: Big banks don't need to be split up: Sandy Weill)
"We have five regulators all fighting with themselves on how to write the rules," said Paulson. "The other reason (for the delays) is our nation is so polarized that it's very difficult in Congress to make the technical corrections you need to make it work. But it will get done."
Some in the banking industry complain that the glacial pace of rule-making has also frozen a lot of basic lending and investment and that, in turn, has hampered the broader economic recovery.
But Frank says that bankers facing uncertainty about the new rules will have second thoughts about practices that might soon run afoul of the new rules.
"It wouldn't be in the interest of any financial institution to start doing something now, some line of business that might be risky and that soon may be illegal," he said on CNBC. "I think the fact that these rules are pending has frozen a lot of the bad activity."
In the meantime, bankers—and many of their customers—who are still operating under the old rules have become leery about setting up new lines of business that might soon run afoul of new regulations, said Rosenberg.
That might not be such a bad thing, said Boston University's Hurley.
"The fact is we have bigger, more complicated banks," he said. "And whenever anyone one of them stubs their toe everyone's sphincter freezes up and they say 'Oh my God!' is this going to the big one?"
CORRECTION: An earlier version of this story misstated the breakdown of the deadlines for rulemaking.
—By CNBC's John Schoen. Follow him on Twitter