Richard Kovacevich, the former CEO of Wells Fargo, and Bill Isaac, a former chairman of the Federal Deposit Insurance Corp, said on Wednesday that the 2010 Dodd-Frank Act will do little to prevent another economic collapse.
“I will tell you that this crisis we went through, financial crisis, did not have to happen,” Isaac said, adding that regulators at the time had the authority to deal with institutions who participated in risky behavior, CNBC reports. “The only issue is, do you have the political will to take action?”
Kovacevich expressed similar sentiment regarding the financial crisis and regulators’ responsibility.
“There were five safety valves that usually kept things under control that all failed,” Kovacevich said, making reference to credit ratings agencies, the Securities and Exchange Commission, Fannie and Freddie Mac, and bank and state regulators, according to CNBC.
Kovacevich also criticized credit rating agencies’ decision to issue high ratings to unhealthy securities.
“It is inconceivable if you know anything about the mortgage business,” Kovacevich said, CNBC reports.
Additionally, Kovacevich said Fannie and Freddie guaranteed many of the subprime mortgages, while state regulators were responsible for overseeing mortgage brokers, who committed “absolute fraud” by originating subprime mortgages without any documentation.
Isaac echoed that assessment, saying that the SEC “is at fault” and that “they made a number of egregious mistakes,” adding that the blame also lies with the Office of the Comptroller of the Currency, the Federal Reserve and Basel capital accords, according to CNBC.
Kovacevich said that regulatory safeguards have not been successful in regulating the risk behaviors of financial institutions, adding that banks will continue to collapse and “nothing in Dodd-Frank” would have been able to prevent the crisis, nor will it be able to prevent a future crisis.
Kovacevich added that Dodd-Frank is a $180 billion bill to be paid by taxpayers to save Fannie and Freddie and that banks will only get larger under Dodd-Frank. He also said that capital will not prevent a future crisis.
“Where you have to have the discipline is on the bondholder,” Kovacevich said, CNBC reports. “The bondholders don’t have any upside, so they’re the ones that keep the risk down.”
Isaac said that some banks should be required “to add capital and reserves like crazy when they’re making money, when times are good” instead of issuing big bonuses and paying out dividends.
“We need sensible reform and it begins with the regulators,” Isaac said, according to CNBC. “We do need to have a much stronger, simpler regulatory system.”