The latest edition of The American Scholar, a Phi Beta Kappa publication, features South Carolina law professor William J. Quirk’s lengthy examination of the “too big to fail” phenomenon. Among his more interesting topics involves the government’s ability to regulate the big banks.
Can the big banks be regulated? Are they too big a dog to discipline? The Dodd-Frank law’s 2,319 pages are based on the theory that more regulation will prevent a repeat of the crisis. This seems unlikely: before the crisis, banking was the most regulated business in the country. The crisis was a massive regulatory failure. SEC regulators could not catch Bernie Madoff even after they had been tipped off any number of times. The problem with Dodd-Frank is that an ambiguous statute will be followed by extensive regulation drafting, which will be followed by extensive litigation. Two years after enactment, much of the law has, by design, not yet been implemented. The Volcker rule is supposed to prohibit a bank’s purchase of securities and derivatives for its own account, but it allows such purchases if they are intended to “mitigate” the “risk” of what the bank already owns. The distinction, which depends on motivation, will be hard to draw in the real world. The exception may swallow the rule. The gambling activities that caused JPMorgan’s multibillion-dollar losses this year are probably legal under Dodd-Frank.
Dodd-Frank is less a law than a general guide. It calls for 398 regulations, which are still being drafted. The banks, if the regulations do not suit them, will litigate. In view of the statute’s complexity and detail, the banks should do well. The regulatory approach gives every advantage to banks with well-funded lobbyists and lawyers. Jamie Dimon told the Senate on June 13 that of the more than 100 government regulators permanently on duty at the offices of JPMorgan, none had noticed the derivatives trades that led to its $5.8 billion loss. Dodd-Frank adds complexity to a system that needs simplicity. Both regulators and the courts need simple rules to enforce.
The notion of simple rules is one that’s likely to appeal to Richard Epstein, and the notion that government ought to scale back its regulation in all respects is an argument the John Locke Foundation has been making for years.