David Skeel - The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences

Contents

Copyright 2011 by David Skeel. All rights reserved.

Introduction 2011 by William D. Cohan. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Skeel, David, 1961

The new financial deal : understanding the Dodd-Frank act and its (unintended) consequences / David Skeel.

p. cm.

Includes bibliographical references and index.

ISBN 978-0-470-94275-8 (cloth); ISBN 978-1-118-01490-5 (ebk); ISBN 978-1-118-01491-2 (ebk); ISBN 978-1-118-01492-9 (ebk);

1. United States. Dodd-Frank Wall Street Reform and Consumer Protection Act. 2. Financial services industryLaw and legislationUnited States. 3. Financial institutionsLaw and legislationUnited States. I. Title.

KF969.58201A2 2010

346.73'08dc22

2010042162

For H.P., T.G., and B.B.

For H.P., T.G., and B.B.

Foreword

September 15, 2008, was a day of infamy for the global financial markets. The increasing financial stress precipitated by a free-fall subprime mortgage crisis, and fueled by excessive risk taking and greed, exploded. At approximately 2:00 a.m. of that day, at the virtual insistence of the U.S. Treasury, the Federal Reserve System, and the Securities and Exchange Commission, Lehman Brothers Holdings Inc., the fourth largest U.S. investment bank, with extensive international operations, filed a Chapter 11 bankruptcy case. This unleashed a tsunami that threatened to destroy the worldwide financial system. The bankruptcy of the Lehman enterprise has produced a plethora of articles, books, strange bedfellows, and all types of political intrigue and deal making.

David Skeel has entered the stage to succinctly focus sunlight on the events that occurred and resulted in the Dodd-Frank financial reform bill of 2010. David has undertaken a most difficult and sensitive task. To explain and critique a statute that has been the subject of intense public and private debate, media attention, and voluminous congressional hearings, replete with congressional competition for primacy of jurisdiction, requires a high degree of courage and intelligence. David has exhibited both.

The process that resulted in the Dodd-Frank reform has the makings of at least three challenging documentaries or films. The threat of financial reform galvanized a broad base of opposition. The financial community, which ironically may be charged with having been a primary culprit in causing the financial crisis that almost dismembered the global financial system, generally was unalterably opposed to any meaningful financial reform. It mounted an extensive and extremely costly lobbying effort that enlisted the extensive cooperation of the House minority leader, Congressman John Boehner, who worked closely with the lobbyists in the attempt to defeat financial reform.

The New Financial Deal comprehensively and skillfully navigates the circumstances that created an environment for financial reform. The book illuminates the strains, pressures, and vicissitudes of attempting to enact a remedial statute that may materially affect the way business is conducted. The book describes the new world of finance that had evolved during the first decade of the twenty-first century that included new forms of investments and securities, such as derivatives, which were barely understood because of their esoteric and opaque characteristics. They befuddled regulators, to the extent they were regulated at all, and enabled huge risk taking. Also, access to credit enabled excessive leverage that put investors and the economy at great risk.

The crushing circumstances of the financial disaster are vividly described in The New Financial Deal . The crosscurrents that arose in respect of the need for financial reform and the scope of any financial reform are presented with clarity. The New Financial Deal properly raises the issue of whether the Dodd-Frank reform and its failure to deal with global concerns will result in real, meaningful financial reform that will prevent another financial crisis similar to that of 2008. The answer is not crystal clear, as The New Financial Deal illustrates.

The New Financial Deal is mandatory reading for all those interested in the financial markets and the global economy. David Skeel is to be commended for casting sunlight, the best disinfectant, on the events preceding the enactment of the Dodd-Frank reform, its efficacy, and the potential consequences, intended and unintended.

Harvey R. Miller

Lead Bankruptcy Attorney for Lehman Brothers

Introduction

Just as surely as little boys on sleds follow a winter snowfallto paraphrase the Yale economist Arthur Okuna rip-roaring financial crisis is bound to result in a new swath of financial regulation.

Such, famously, was the case during the years following the stock market crash of 1929, when Congress passedand President Franklin Roosevelt signed into lawa slew of financial reforms designed both to reduce the rampant speculation and risk taking that infected the nations banking system and to increase the disclosure about companies seeking to sell their securities to public investors. The Securities Act of 1933 was the first federal law to regulate the sale of securities to investors, and required corporations to register their securities by filing a mountain of disclosure with the Securities and Exchange Commission (SEC), which was established the following year. (In the one-year interim period, the Federal Trade Commission approved the issuance of corporate securities.) The so-called 1933 Act required the SEC to approve an issuers registration statement before the securities could be sold to investors. By and large for the past 77 years, the system has worked well and prevented most egregious scams.