Two weeks ago President NerObama met with bank regulators in the White House to tell them they'd better try to make something of the Dodd-Frank Act, or Congress might re-enact Glass-Steagall. Since that meeting, more stark evidence of the worthlessness of Dodd-Frank has emerged.
Bloomberg News' top story on Wednesday reports the decisive defeat by Wall Street of Commodity Futures Trading Corporation (CFTC) chairman Gary Gensler's attempts to place even the mildest "transparency" regulations on banks' derivatives operations. The article, "How the Bank Lobby Loosened U.S. Reins on Derivatives", reports the "final score" as calculated by Bloomberg researchers: Less than 20% of the global derivatives market will be regulated, limited, or affected in any way by Dodd-Frank.
At least 80% of the $1.4 quadrillion market is "exempt".
The story recounts how Gensler, who is now regularly out-voted by the three Wall Street-bought commissioners on his five-member commission (two of them Obama appointees), was given the Brooksley Born treatment in a July meeting with Treasury Secretary Lew and SEC head Mary Jo White. The issue was whether the United States would have any regulation of derivatives that U.S. banks generate "abroad" (read: London, Cayman Islands, Jersey Islands, etc.). The decision, which Gensler had to accept, was no. According to Bloomberg's sources "familiar with the meeting", Gensler wound up in an outburst that "he thought his adversary bankers were in the room", since Lew was making Wall Street's demands precisely.
At about the same time, the big claim that Dodd-Frank was going to make the Wall Street and European banks keep a piece of the subprime loans they are otherwise securitizing — the so-called risk retention or "skin in the game" rule — was thrown out. Supposedly, mortgages were going to be exempted from the "skin in the game" requirement only if they were "qualifying mortgages (QM)": with at least a 20% downpayment by the homebuyer, and a maximum 36% debt-service-to-income ratio. The banks wouldn't have it.
So now, any mortgage with no down payment and a 43% debt-service to income ratio is — exempt. This means virtually all mortgages are exempt, including the sub-primes.
In the words of SEC Commissioner Daniel Gallagher protesting this, "This QM designation, so to speak, is the new NRSRO [credit rating agency] triple-A rating." For sub-prime loans. Sounds familiar. American Banker, perhaps tongue-in-cheek, headlined that the decision was "a blow to Dodd-Frank's credibility."