Nearly one year after Congress passed financial changes to rein in the banking sector, more than two dozen of the legislation’s rules are behind schedule, and no end to the wrangling over details is in sight.
U.S. Treasury Secretary Timothy Geithner speaking at the International Monetary Conference in Atlanta, Georgia, on Monday.
The delays come as regulators extend public comment periods on the rules, and as some on Wall Street and in Congress resist the changes. One result may be that many new safeguards do not take hold in earnest before the next election, an outcome that could open the door for newly elected officials to back away from the overhaul.
The rules are mandated by the Dodd-Frank financial regulatory law and range from curbs on executive compensation to consumer banking protection provisions to more transparency in the trading of derivatives, those complex financial instruments that contributed to the 2008 financial crisis.
So far, 28 of the financial overhaul rule-making deadlines have been missed, according to Davis Polk, a law firm that is tracking the rules. Of the 385 new rules to be written, the law firm says, regulators have completed only 24 requirements; they were supposed to have taken 41 such actions by now.
“There’s an attempt to kill this through delay,” said Michael Greenberger, a law professor at the University of Maryland and a former official at the Commodity Futures Trading Commission, which is in charge of writing batches of the rules. “The difference between eight or nine months and 24 months could be cataclysmic here.”
The setbacks and resistance extend across many types of new rules, including ones to limit the debit card fees that banks can charge retailers and to require banks to retain more of the risk in certain home loans.
But the efforts were especially apparent at a hearing last month in Washington related to derivatives. Some of the most powerful players in the derivatives market — which is closely controlled by just a small group of banks — argued that the government should allow a slow pace of changes for rewriting derivatives contracts.
On Monday, the Treasury secretary, Timothy F. Geithner, spoke about the Dodd-Frank rules in a speech in Atlanta, warning that there were efforts by groups that oppose the reform to starve regulators of the resources they need to put new rules in place.
“Those in the U.S. financial community who are supporting these efforts to block resources and appointments are looking for leverage over the rules still being written,” Mr. Geithner said.
He specifically focused on derivatives rule-writing, where some financial groups have complained that European rules may differ from the new rules in the United States. He said he hoped regulators in Europe and Asia would create standardized rules to prevent a “race to the bottom.”
Regulators in the United States overseeing the process say it is difficult to tell how many of the concerns that financial executives and their lobbyists raise are valid and which ones are exaggerated.
“For us, it’s a question of figuring out the legitimate interests of folks who say, ‘Wait a minute, slow down’ because they really want us to get it right, and some of them who really have an ulterior motive of just running the clock out,” said Bart Chilton, one of the three Democratic commissioners of the commodities futures trading agency, which is overseeing most rule-writing for derivatives. “It’s going a lot slower than I had envisioned.”
More on the Financial Overhaul
Financial firms argue that slower deliberations may lead to smarter outcomes. Some lawmakers agree, and some voted in recent weeks in Congressional committees to delay derivatives rules at least a year. Many of those rules were to have been completed by the July anniversary of the Dodd-Frank bill.
Regulators have been swamped by public comments and asked for more funds and personnel to meet the demands. In April, the C.F.T.C. extended all of its derivative comment periods for a month.
“Right now there’s a tacit truce on the deadlines,” said Margaret E. Tahyar, a partner at Davis Polk, which represents financial institutions. “Really, it’s the right thing to have a little bit more time on this. There really hasn’t been anything like this ever before in terms of rule-makings.”
Perhaps nowhere are the stakes higher for the megabanks than with derivatives, which insure against many different risks in the economy. Some of the Dodd-Frank rules center on increasing security and transparency in this $600 trillion market. For instance, many are related to clearinghouses, which provide a central repository for money backing those wagers. Some of the changes threaten to cut into banks’ lucrative profit margins.
At the derivatives round table in May, bankers and other representatives of financial firms asked for substantial implementation periods on derivatives rules. For instance, Athanassios Diplas, of Deutsche Bank, said the bank would need 18 to 24 months “simply to sign documentation” related to the new rules because of “bandwidth” issues, according to a transcript from the event.
He said, “If you think about it even in man-hours or man-weeks or whatever, one client — an attorney can do 100 of these a week, which sounds pretty aggressive — we’re talking about 800 man-weeks.”
Stephen O’Connor, an executive from Morgan Stanley, came up with an even more lengthy estimate, saying his clients say it could take an entire day to renegotiate contracts and that could mean “100 man-years worth of effort.”
One Goldman Sachs banker, R. Martin Chavez, said that documents on valuing derivatives represented “a mind-bendingly difficult problem you could fill libraries with, with very boring Ph.D.’s on that topic.”
One panelist was quick to argue that the bankers were trying to stall the rules. James Cawley, the chief executive who runs an electronic trading operation called Javelin Capital Markets, jumped in, saying, “We don’t think we are putting men on the moon when it comes to documentation.”
"If you think about it even in man-hours or man-weeks or whatever, one client — an attorney can do 100 of these a week, which sounds pretty aggressive — we’re talking about 800 man-weeks."
Deutsche Bank , Morgan Stanley and Goldman did not make these bankers available for interviews.
Two of the commodities agency’s commissioners, Scott O’Malia, a Republican, and Gary Gensler, the Democratic chairman, attended the round table, with Mr. Gensler leaping out of the audience periodically to pose questions. Afterward, Mr. O’Malia said he disagreed with critics who say “this is a delay tactic.”
“The panelists made it very clear they need months, not years,” he said in a speech at the Heritage Foundation.
Mr. O’Malia called the agency’s extended comment period “a natural pause.” Mr. Gensler said in an interview that the extension was a good move but that “the American public is not protected until we finalize these rules.”
One way that banks can delay progress is by haggling within industry associations over small turns of phrase in legal agreements. The banks lately have been clashing with large customers, like hedge funds, in discussions of new paperwork needed for dealing with trade rejections, situations in which derivatives trades do not go through because of client financing problems. Late last month, JPMorgan Chase was supposed to host a meeting to discuss it, but lawyers for large banks canceled the meeting at the last minute. The banks, large customers say, drafted the documents in ways that favor the biggest banks because it would make it more difficult for customers to use a large number of banks for trading.
The issue of whether new documents or rules give advantages to just a handful of banks is particularly relevant because the Justice Department and the European Commission have been investigating this market for antitrust behavior.