Pros And Cons Of Dodd Frank Reform
The Dodd-Frank Reform
The financial crisis of 2008 created one of the most uncertain times in the United States’ economy history. Not only did it affect thousands of businesses, but also consumer’s confidence dropped to levels not seen since the great depression. After the failure to address the issues created by the banks, the economy took a turn for the worse. The only way to move the economy forward was to bailout those banks and businesses that were essential to the US economy. Using taxpayer’s money, the bailouts of hundreds of banks and other companies took place in order to save the US economy. In order to prevent the occurrence of these events, in 2010 Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act, intended to reduce the risks in the United States financial system, will be further discussed in this paper, as well as what caused the collapse of the economy, how the bailout was implemented, how it affects the accounting profession, and the pros and cons. …show more content…
Before 2006
Prior to 2006, the US economy was in excellent condition.
The financial markets were in great shape and the housing market was booming. Two of the mentioned drivers of the economy were also the main drivers during the downturn. Financials institution were giving out substantial number of mortgage loans, thus creating “fake” money. This way major banks were able to project a healthy financial image, while in fact trillions of dollars were accounting for more than half of the money created by the banks. The housing and commercial market were creating a significant gap between the actual money in possession of the banks. As a result, the housing market prices were increasing at a faster rate than wages were, resulting in people who had bought a house at a price they could not afford, were now defaulting on their loans. Once they realized what exactly was going on, they could not prevent what was bound to happen, and that was the beginning of the 2008 financial
crisis.
Causes of the financial crisis
One of the main drivers of the crisis was the “loose” monetary policy. Like mentioned before the banks were offering mortgage loans to consumers who could not afford them. These big banks found no risk in doing this since the monetary policy gave them a surety that in case of a crisis the Fed would rescue them. If we take a sample size of the banks that were bailout in the financial crisis such as Washington Mutual, Wachovia, Bear Stearns, Freddie, and Fannie, we can conclude that all these banks had tie to the residential and commercial market. Another weak policy that was implemented was the ability given to the depository institutions to judgmentally choose their own regulators. Regulators had the power to stop risky underwriting, but they refuse to exercise their power since institutions were choosing weak regulators. Another and perhaps one of the most relevant and quoted terms of the financial crisis was that banks were “too big to fail”. The big issue was that the banks knew that this was true. They were the main driver of the US economy and in case of crisis, the Fed would come running to save them. The branching of interstate bank created financial institutions that accounted for most of the transactions conducted in the financial markets. These non-regulated section made it possible for banks to keep expanding and growing their financial position. One of the “too big to fail” that deserves to be studied in order to understand the root of the financial crisis is the Lehman Brothers.
The Lehman Brother was a prosperous company that survived several financial crisis and world wars, however it was not able to survive the financial crisis of 2008. The company was one of the largest investment banking in the industry with over 25,000 employees all over the world. When the company declared bankruptcy they had approximately 610 billion dollars in debts and only 639 billion dollars in assets. In terms of assets, this bankruptcy was the biggest one in the history of the financial world. This bankruptcy significantly contributed to the financial crisis. Even though extreme measures were taken to try and keep the company afloat, the company was not able to survive and many blamed the US government for letting them fail while others were bailed out. There were many who opposed to the big banks being bailed out and many who supported, just as supporters and the opposition of the Dodd-Frank Act.
The Reform In summary the Dodd-Frank Act implemented changes that mainly supervises and oversees the operation of financial institutions. It has the ability to create new agency responsible for enforcing the passed laws. The reform created the financial stability oversight council to oversee the financial institutions. This agency has several duties and purposes. Some of its purposes it to identify and prevent risks that might affect the US economy. That includes risks that have been identified and are a growing concern. Some of its duties include collection information from financial institutions in order to assess the threat to the US financial system. The act also created securitization measures to ensure the liquidity and transferability of assets. Some of this reform protects investors by demanding that due diligence be done by the securitizer and the report given to the investor. Some of the elements of Title VII refer to regulation on derivatives and market participants. Some of the rules included in this title is to enforce to the registration of swap dealers and MSPs Major Swap Participants). Another power that has been implemented as a result of the reform, is the Financial Stability Oversight Council and Orderly Liquidation Authority. This agency has the duty to oversee and inspect the operations of the major firms, whose failure can have a significant impact on the US economy and the consumer. If gives them the power to break up and even liquidate firms that become too weak. The main and perhaps the most disputable power is the right to break up big banks, if they believe it possess a great risk. Another agency is the CFPB (Consumer Financial Protection Bureau). This agency prevents companies from scamming consumers and forcing them into getting into mortgage without the proper knowledge and the terms of the deal. This agency prevents the brokers from earning bigger commissions on loans with higher interest rates and fees. This agency also oversees the portion of consumer lending, which includes credit and debit card. Similarly to the rules of the mortgages, credit agencies must state their information in a simple to understand manner to the consumer in order for the regular person to make an informative decision when entering into accredit card agreement.
Similarly to the Sarbanes-Oxley Act, there are some who oppose thee introduction of this act, citing that it would slow down the economy and in some cases make it worse. Management pay is not successfully controlled by the Reform, in spite of the fact that it gives shareholders a say on pay and it subordinates official pay for organizations in receivership to everything except cases of normal stockholders. They say the reform neglects to deny operation of hedge funds and private equity by banks unless they utilize more than 3 percent of the institution’s assets. Hedge funds have extensively taken advantage of this loophole. Also the act does not separate banks that represent a risk to our economy in light of their substantial size. In any case, it makes an modest modification to the "too big to fail" issue with the big banks, by affirming that banks can't achieve acquisitions that outcome in their owning 10 percent or a greater amount of aggregate U.S. money related resources protected by the FDIC. There is additionally a restriction on acquisitions that result in one bank owning 10 percent or a greater amount of aggregate US budgetary foundation liabilities.
The leverage of ratios will not properly addressed by the reform. In any case, controllers will have restricted power to request sufficient bank capital, and the demonstration likewise gives that banks resources of $50 billion or progressively and substantial nonbank money related organizations can be required to reinforce their capital on the off chance that they are esteemed to represent a risk to the monetary framework. Additionally, in regards to consumer lending, no regulations are forced by the follow up using a credit card rating offices to address the issue of banks looking at the low ratings on debt securities that they themselves underwrite.
Lastly, some argue that the Act doesn't treat the Freddie Mac and Fannie Mae issue, these mortgage providers offer consumer with low interests and a small down payment, thus critiqued extensively.
Conclusion While these acts have been beneficial to some and risky to other, these act are not complete. Every year there will be something new that will be amended or added since the financial worlds evolves on a daily basis and just as it advances, others are looking to take advantage of loopholes and ways to commit fraud. The main issue is creating an environment where investors and families trust the US economy and even when things turn bad, they can believe in a system that works, and a system that has overcome several recession, and have always returned stronger than before. As one would expect, it is difficult to addresser every major issue in a reform act, but what we must never stop doing, is learning from the mistakes we make every day. As an accountant, the accounting profession changes daily, and it is a learning experience throughout life. New reforms will be introduced and old ones will be amended. The question is if we are utilizing and implanting the best practices, and learning from the mistakes and red flags that we previously missed.
The financial crisis of 2008 created one of the most uncertain times in the United States’ economy history. Not only did it affect thousands of businesses, but also consumer’s confidence dropped to levels not seen since the great depression. After the failure to address the issues created by the banks, the economy took a turn for the worse. The only way to move the economy forward was to bailout those banks and businesses that were essential to the US economy. Using taxpayer’s money, the bailouts of hundreds of banks and other companies took place in order to save the US economy. In order to prevent the occurrence of these events, in 2010 Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act, intended to reduce the risks in the United States financial system, will be further discussed in this paper, as well as what caused the collapse of the economy, how the bailout was implemented, how it affects the accounting profession, and the pros and cons. …show more content…
Before 2006
Prior to 2006, the US economy was in excellent condition.
The financial markets were in great shape and the housing market was booming. Two of the mentioned drivers of the economy were also the main drivers during the downturn. Financials institution were giving out substantial number of mortgage loans, thus creating “fake” money. This way major banks were able to project a healthy financial image, while in fact trillions of dollars were accounting for more than half of the money created by the banks. The housing and commercial market were creating a significant gap between the actual money in possession of the banks. As a result, the housing market prices were increasing at a faster rate than wages were, resulting in people who had bought a house at a price they could not afford, were now defaulting on their loans. Once they realized what exactly was going on, they could not prevent what was bound to happen, and that was the beginning of the 2008 financial
crisis.
Causes of the financial crisis
One of the main drivers of the crisis was the “loose” monetary policy. Like mentioned before the banks were offering mortgage loans to consumers who could not afford them. These big banks found no risk in doing this since the monetary policy gave them a surety that in case of a crisis the Fed would rescue them. If we take a sample size of the banks that were bailout in the financial crisis such as Washington Mutual, Wachovia, Bear Stearns, Freddie, and Fannie, we can conclude that all these banks had tie to the residential and commercial market. Another weak policy that was implemented was the ability given to the depository institutions to judgmentally choose their own regulators. Regulators had the power to stop risky underwriting, but they refuse to exercise their power since institutions were choosing weak regulators. Another and perhaps one of the most relevant and quoted terms of the financial crisis was that banks were “too big to fail”. The big issue was that the banks knew that this was true. They were the main driver of the US economy and in case of crisis, the Fed would come running to save them. The branching of interstate bank created financial institutions that accounted for most of the transactions conducted in the financial markets. These non-regulated section made it possible for banks to keep expanding and growing their financial position. One of the “too big to fail” that deserves to be studied in order to understand the root of the financial crisis is the Lehman Brothers.
The Lehman Brother was a prosperous company that survived several financial crisis and world wars, however it was not able to survive the financial crisis of 2008. The company was one of the largest investment banking in the industry with over 25,000 employees all over the world. When the company declared bankruptcy they had approximately 610 billion dollars in debts and only 639 billion dollars in assets. In terms of assets, this bankruptcy was the biggest one in the history of the financial world. This bankruptcy significantly contributed to the financial crisis. Even though extreme measures were taken to try and keep the company afloat, the company was not able to survive and many blamed the US government for letting them fail while others were bailed out. There were many who opposed to the big banks being bailed out and many who supported, just as supporters and the opposition of the Dodd-Frank Act.
The Reform In summary the Dodd-Frank Act implemented changes that mainly supervises and oversees the operation of financial institutions. It has the ability to create new agency responsible for enforcing the passed laws. The reform created the financial stability oversight council to oversee the financial institutions. This agency has several duties and purposes. Some of its purposes it to identify and prevent risks that might affect the US economy. That includes risks that have been identified and are a growing concern. Some of its duties include collection information from financial institutions in order to assess the threat to the US financial system. The act also created securitization measures to ensure the liquidity and transferability of assets. Some of this reform protects investors by demanding that due diligence be done by the securitizer and the report given to the investor. Some of the elements of Title VII refer to regulation on derivatives and market participants. Some of the rules included in this title is to enforce to the registration of swap dealers and MSPs Major Swap Participants). Another power that has been implemented as a result of the reform, is the Financial Stability Oversight Council and Orderly Liquidation Authority. This agency has the duty to oversee and inspect the operations of the major firms, whose failure can have a significant impact on the US economy and the consumer. If gives them the power to break up and even liquidate firms that become too weak. The main and perhaps the most disputable power is the right to break up big banks, if they believe it possess a great risk. Another agency is the CFPB (Consumer Financial Protection Bureau). This agency prevents companies from scamming consumers and forcing them into getting into mortgage without the proper knowledge and the terms of the deal. This agency prevents the brokers from earning bigger commissions on loans with higher interest rates and fees. This agency also oversees the portion of consumer lending, which includes credit and debit card. Similarly to the rules of the mortgages, credit agencies must state their information in a simple to understand manner to the consumer in order for the regular person to make an informative decision when entering into accredit card agreement.
Similarly to the Sarbanes-Oxley Act, there are some who oppose thee introduction of this act, citing that it would slow down the economy and in some cases make it worse. Management pay is not successfully controlled by the Reform, in spite of the fact that it gives shareholders a say on pay and it subordinates official pay for organizations in receivership to everything except cases of normal stockholders. They say the reform neglects to deny operation of hedge funds and private equity by banks unless they utilize more than 3 percent of the institution’s assets. Hedge funds have extensively taken advantage of this loophole. Also the act does not separate banks that represent a risk to our economy in light of their substantial size. In any case, it makes an modest modification to the "too big to fail" issue with the big banks, by affirming that banks can't achieve acquisitions that outcome in their owning 10 percent or a greater amount of aggregate U.S. money related resources protected by the FDIC. There is additionally a restriction on acquisitions that result in one bank owning 10 percent or a greater amount of aggregate US budgetary foundation liabilities.
The leverage of ratios will not properly addressed by the reform. In any case, controllers will have restricted power to request sufficient bank capital, and the demonstration likewise gives that banks resources of $50 billion or progressively and substantial nonbank money related organizations can be required to reinforce their capital on the off chance that they are esteemed to represent a risk to the monetary framework. Additionally, in regards to consumer lending, no regulations are forced by the follow up using a credit card rating offices to address the issue of banks looking at the low ratings on debt securities that they themselves underwrite.
Lastly, some argue that the Act doesn't treat the Freddie Mac and Fannie Mae issue, these mortgage providers offer consumer with low interests and a small down payment, thus critiqued extensively.
Conclusion While these acts have been beneficial to some and risky to other, these act are not complete. Every year there will be something new that will be amended or added since the financial worlds evolves on a daily basis and just as it advances, others are looking to take advantage of loopholes and ways to commit fraud. The main issue is creating an environment where investors and families trust the US economy and even when things turn bad, they can believe in a system that works, and a system that has overcome several recession, and have always returned stronger than before. As one would expect, it is difficult to addresser every major issue in a reform act, but what we must never stop doing, is learning from the mistakes we make every day. As an accountant, the accounting profession changes daily, and it is a learning experience throughout life. New reforms will be introduced and old ones will be amended. The question is if we are utilizing and implanting the best practices, and learning from the mistakes and red flags that we previously missed.