Law School Hosts Conference on Dodd-Frank Act

“Competing Globally in the New Dodd-Frank Era: How Will US Markets and Institutions Reinvent Themselves?”
Lynn Safranek
Law School Office of Communications
December 27, 2011

The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, was designed to transform financial markets and add safeguards to derivatives trading that would prevent a financial collapse similar to the bank meltdown of 2008. The reforms introduced by Dodd-Frank were many, and though most have not yet been realized, financial institutions have scrambled to anticipate how the future markets will operate.

With that in mind, the University of Chicago Law School presented an invite-only conference on Nov. 16, 2011, that brought together leading financial industry and federal government experts to explore the transformation of the financial marketplace as companies begin adopting business strategies in response to Dodd-Frank. The event, titled “Competing Globally in the New Dodd-Frank Era: How Will US Markets and Institutions Reinvent Themselves?”, drew roughly 125 attorneys, financial industry veterans, and members of the press to the Gleacher Center for thought-provoking discussions. Ernst & Young, CME Group, and TeraExchange Group sponsored the conference, which was organized by Vital Venture Networks.

“Dodd-Frank is a huge piece of business legislation, probaby the biggest piece of business legislation since the Great Depression. Born out of the economic crisis of 2008, it has created a cottage industry for lawyers and business advisors, as well as policy makers,” Dean Michael H. Schill said in his introduction. “Perhaps because of its size and its scope it has generated uncertainty and its effects are unknown... At the macro level, it raises issues about the structure and design of our government; at the intermediate level, it makes us question the appropriate allocation of authority between government agencies; and at the micro level, it impacts the regulation of particular financial transactions.”

The Honorable Gary Gensler, Chairman of the US Commodity Futures Trading Commission, delivered the keynote address and answered questions in a session moderated by Austan Goolsbee, the Robert P. Swinn Professor of Economics and former Chairman of President Obama’s Council of Economic Advisors. In introducing Gensler, Goolsbee called him “the industry’s great hope and biggest nightmare–somebody who actually knew what was going on so he couldn’t have the wool pulled over his eyes.” As Chairman of the CFTC, Gensler is the foremost expert on regulation of the futures and option market, and he told the crowd that the rules coming from Dodd-Frank will add transparency and competitiveness to the market, as well as limit risk that is spread throughout the economy. Those factors were some of the leading causes of the 2008 financial crisis, he said.

“There are those who might like to roll back some of these reforms and put us back in the regulatory environment that preceded the crisis three years ago,” Gensler said. “But that regulatory system failed. It didn’t protect the American public. The only thing that bolstered the US economy and saved the financial system was the American taxpayer.”

The CFTC has been proposing rules to implement the Dodd-Frank Act, but Gensler said the agency will not have the strength to expand its mission and scope without adding significant resources. “Moving forward… even greater resources will be needed for the public’s protection,” Gensler said. “Without sufficient funding for the CFTC, the nation cannot be assured that this agency can oversee the swaps market and enforce the rules that promote transparency, lower risk, and protect against another crisis.”

The most important lessons from the financial crisis were how real people’s lives were affected when financial institutions fail and how many financial institutions only survived the 2008 crisis with the backing of the government and taxpayers, Gensler said.

“We must never forget the eight million lost jobs–the majority of which were lost by people who never used derivatives or even know what they are,” he said. “We must never forget what the nation went through three years ago, and we continue to recover from today. We must never forget the risks are still out there.”

Luigi Zingales, the Robert C. McCormack Professor of Entrepreneurship and Finance at the Booth School of Business, spoke in another session of the conference about problems that lead to government bailouts of “too big too fail” banks. Financial experts have an interest in advising leaders to bail out the troubled institutions, he said, and leaders will act to save banks out of an abundance of caution.

“If you are President of the United States or President of the Fed, you don’t want to take a chance,” Zingales said. “There’s huge pressure to intervene.” In the moment, he said, leaders have incentive to rescue banks and leave the consequences of their decision to the future. “The house is on fire, you don’t worry about who is responsible… we are going to first put out the fire and then worry about it. Of course, that day never comes and you put out the fire in a way that makes it impossible to get the arsonist,” Zingales said. To prevent another round of bank bailouts, he said the financial markets must be more resilient to shock.

Another issue raised by the bank bailouts is that banks now have incentive to become larger, and thus have been merging to gain political power, he said. Customers lose in this equation because the market becomes noncompetititve. While Congress has expressed desire to eliminate “too big to fail” by law, a no-rescue clause isn’t ideal because some bank bailouts could be beneficial, Zingales said.

The conference closed with a panel discussion moderated by Professor of Law M. Todd Henderson, ‘98, with financial industry leaders Walter Lukken, CEOof New York Portfolio Clearing and former Chairman of the CFTC; Christian Martin, CEO of TeraExchange; John Nicholas, Global Head of New Regulation and Compliance at Newedge; and Joseph Palumbo, Partner in Financial Services at Ernst & Young.

Henderson questioned the current regulatory structure. Does the regulatory structure in place (congress pass law that says, there’s a bunch of agencies, do studies and write rules, there’s overlap of agencies with fuzzy lines of distinction, does this make any sense and one reason for delay is thes are hard problems, another reason is there’s uncertainty and we’re learning, they’re understaffed, they need to get regulators talking and agrees, another is roadblocks thrown up by people who don’t want to move to clearinghouse). How would the panelists recommend restructring the regulatory appartus to make it more efficient?

“Before I left the CFTC, I actually advocated for eliminating both the CFTC and the SEC and forming one regulatory agency similar to how the Financial Services Authority in London and the UK is structured,” Lukken said. The Financial Services Authority, however, also failed to predict the financial crisis, so it may not be more beneficial than the United States’ current regulatory structures, he said. Still, there is much room for improvement with the CFTC and the SEC. “My view is there is a tremendous amount of wasted work and resources on fighting these battle lines between the two regulatory agencies,” Lukken said.

Though the evolution of Dodd-Frank will surely lead to more questions, those who gathered to learn from these industry experts gained great insight that will influence how their businesses operate. In bringing these groups together, the Law School fostered an understanding that the legal and financial worlds are linked in more ways than one might think.

Michael H. Schill
M. Todd Henderson