David Skeel, a law professor at the University of Pennsylvania Law School, said in his new book that the controversial Dodd-Frank Act may cause more problems than the law aims to solve.
Though Skeel said in his book, “The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences,” that Dodd-Frank’s provisions aimed at regulating the derivatives industry were “an unequivocal advance,” he pointed to potential problems in the legislation, including “government partnership with the largest financial institutions” and “ad hoc interventions by regulators rather than a more predictable, rule-based response to crises,” National Review Online reports.
Skeel said that Treasury Secretary Timothy Geithner has adopted the policies to be used in future regulation, adding that Geithner, as president of the New York Federal Reserve, helped to craft the response to the 2008 financial crisis. He also said that Dodd-Frank provided regulators with the powers that they perhaps felt they lacked when Lehman Brothers collapsed in 2008.
The collapse of Lehman Brothers, which preceded the $700 billion TARP legislation, caused massive stock market losses and widespread losses in the economy. Skeel pointed to the bailout of Bear Stearns in March 2008 as the core mistake made by regulators during the financial crisis.
Bear Stearns’ bailout established expectations that the government, including the U.S. Treasury and Federal Reserve, would bail out each large, failing financial institution. The government then bailed out Fannie Mae and Freddie Mac in August 2008, according to National Review Online.
Additionally, Skeel said that Lehman Brothers would have sold itself out of bankruptcy if the firm’s top executives had not expected regulators to bail the firm out. Skeel said that Dodd-Frank sets similar expectations, enabling “too-big-to-fail” institutions to borrow money at low rates.