Former Senator Christopher Dodd, D-Conn., ushered the landmark financial reform legislation through the Senate as chairman of the Banking Committee in 2010 before retiring from his 30-year distinguished career in that chamber. He is now chairman and CEO of the Motion Picture Association of America.
Dodd delivered a rousing speech Tuesday at the Association of Certified Fraud Examiners’ annual conference in Orlando in which he defended the Dodd-Frank Act, named after him and former House Financial Services Committee Chairman Barney Frank, D-Mass. (see Dodd Defends Financial Reform Law and Whisleblowers) He later sat down for a short interview with Accounting Today in which he discussed which financial reforms are still most needed and his thoughts on the state of accounting standards.
What are the most essential financial reforms that didn’t get into the bill?
If I could have been king for a day, which you never are, I would have done things differently. I was chairing the committee and putting the bill together, but I had to be very cognizant of what the tipping points were. This is not an executive branch decision-making process. It’s collegial. Getting 60 percent of the Senate to agree to what you want to do on anything is hard. So I would have done some things differently. I would have had a single prudential regulator, and I would have incorporated the consumer protection within it so you would have had a complementary system between consumer protection and prudential regulation, which I think is essential.
I’ve never been convinced the Fed does a very good job of a supervisory function. Their job is obviously monetary and to be cheerleaders and so on. So the supervisory function I worry about. I think the regional bank system needs to be modernized substantially. It hasn’t been touched for a hundred years since 1914. For a lot of these guys, it’s a jobs program with the little empires that exist. I would have loved to see them do that.
I think the housing financing system needs to be modernized, Fannie and Freddie. There are those who don’t like any housing finance. I do. I think it’s a great wealth creator. More than anything else, it brings people out of poverty into the middle class because they’re able to acquire equity in residential property. It’s great for communities and neighborhoods and so forth. We didn’t come up with an answer for that. We tried, we thought about it. Frankly, there were a lot of people who didn’t want to do anything. Most people thought we ought to do something, but what that something was, good people sitting down with each other never could come up with a great answer as to what, a public utility or something else,
Rating agencies: I voted against the provisions, not because I disagreed with him. He was a good friend who offered it [Senator Al Franken, D-Minn.], but not all rating agencies are equal, and the idea that you’re going to have a spin the wheel and the agency that comes up will be the one that does corporation X or Y. Not all rating agencies are equal, not all corporations are the same, so matching up a nice rating agency that has no capacity to handle a larger entity, we have to come up with a better way of doing this and how you finance it.
So those are two or three things that we’ll have to deal with. Probably the bankruptcy laws will have to be addressed too. The unwinding process [for financial institutions] is complicated. I think what we did was pretty good, requiring funeral plans and so forth, and allowing a sort of rational unwinding process. Having just a bankruptcy given the tentacles and interconnectedness of large, important institutions, just letting them fail, you have the unintended consequences of bringing an awful lot down, Lehman Brothers being a case in point. Those are some of the things I can think of.
There’s been a lot of talk lately about the Volcker Rule, with Jamie Dimon’s testimony on Capitol Hill. A lot of people want to get that repealed or weakened, and there’s been a lot of lobbying with the SEC. What would happen if that occurred?
Begin with this proposition: an institution whose deposits are guaranteed by the federal government so if you screw it up, the taxpayers pay the penalty. What you do with those federally guaranteed deposits, the idea that you can start playing casino with that money is just fundamentally wrong. So let’s begin with that proposition. If anyone argues to the contrary, I don’t know where they’ve been. Now, are there areas in which an institution needs to hedge against and minimize risk to the institution, like interest rates? I think there are, and so we did it in the bill a different way. I mean, I would have been clear about activity. What they did come up with was what percentage of funds could be hedged. And people said, “How did you come up with 3 percent?” This is the way things were going. As I teasingly say, we had a big group of economists sitting around the table and they argued for days about this point. Some wanted zero funds, some wanted 10 percent, but I could get 60 votes for 3. I’d love to tell you we came up with some mathematical formulation, but I was going to lose the bill if I insisted on zero. I would have lost the bill if I had insisted on 10. But the pros and the cons could come to 3. That’s not exactly the most enlightened way to get to a number. I’ll be the first to acknowledge it. But the people who tell me otherwise never had to deal with 99 other people and 534 other people in Congress.
Do you have any thoughts about the accounting standards and where they stand now? They seem to be uncertain about whether they’re going to go with IFRS.
Well, you know, I think they’re doing better. FASB’s doing better. I was deeply involved in that. I’ve been vehemently opposed to having Congress set accounting standards. It frightens me. You want to leave that independent. Even when they make decisions, as they will from time to time, you’ll recall a few years ago, they made the decision about stock options. There were people, I understood what they were saying, but the idea that Congress, the Senate, was going to vote 51 to 49 to treat that differently without allowing the people who know what they’re doing to sit down and decide what the rules of the road ought to be. So I think we’re basically in a good place. I’ve been out of it for a couple of years, but one of the ideas that I thought had some merit with the rating agency was a FASB model. But the idea of a public entity, you can imagine the reaction that was getting in certain quarters, although the present system obviously doesn’t work very well in my view [with the rating agencies], where there’s no due diligence done. We thought about this a lot. We had hours and hours of discussion about, in the ideal world what would be the way to create a rating agency that would give some confidence that when something is rated a certain way, as a consumer of that product that you have a high degree of confidence it’s been analyzed well and independently to give it that moniker. The one that’s in the bill, we wrote it and said, “But if the regulators can come up with a better idea, do it.” So we left the door wide open for maybe some other people thinking about this to come up with a better idea.
This is something they could do in the regulations?
Oh yeah, a completely different approach because this made me crazy. I like the fact that people are thinking, but there was a failure to come up with it. I understand the emotion behind it, that as an institution you can’t purchase your rating agency in a sense. It’s going to be decided in more of an independent means, which is very attractive, but the problem is that not all agencies are alike. They differ. We all know about the big four, but there are a lot more out there.
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