More than ten years after the 2008 Financial Crisis: The Dodd-Frank Act
During the 2008 Great Recession, only two of the top five investment banks on Wall Street (Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns) survived the financial crisis. Lehman Brothers’ bankruptcy pushed the entire financial market to its rock bottom. Other companies acquired Merrill Lynch and Bear Stearns; Morgan Stanley and Goldman Sachs converted to commercial banks to be safe (more strictly regulated, thus less risky). Countless investors went bankrupt, and workers lost their jobs. Besides the changes the banks made internally, the Democratic government issued the significant Dodd-Frank Act to prevent big banks from failing and wreaking havoc to the entire economy.
The Dodd-Frank Act was first proposed by former president Barack Obama, revised by Chris Dodd (former United States Senator) and Barney Frank (politician, board member of the New York-based Signature Bank). This Act puts the banks under the supervision of the Federal Reserve which more strictly regulates banks by requiring higher reserve, restricting lending to low credit entities, and requiring banks to pass an annual “stress test (a simulation in which banks look at their balance sheets and test if they have enough assets to survive a financial crisis .” However, the Dodd-Frank Act has faced ongoing challenges and criticism for overregulating the banks. For example, Goldman Sachs, Morgan Stanley, Wells Fargo, and various other banks have failed the “stress test” at some point because they did not have enough assets. Even these megabanks have trouble meeting standards of the Dodd-Frank Act, and the smaller banks thus struggle more. As a result, when the Federal Reserve on Goldman Sachs and Morgan Stanley failed the "stress test" in June 2018, the Fed was lenient on them and provided them with alternative solutions. The Fed agreed to give the Goldman Sachs and Morgan Stanley a passing grade if they could pay the investors an additional $13-15 billion to protect the investors. This action foreshadowed the Fed's support for potential deregulation in 2017.
In 2017, President Trump attempted to get rid of the Dodd-Frank Act, “claiming it was holding back lending and tying up business in red tape.” As a Republican president, Trump and many people believe that the Dodd-Frank Act is too strict and benefits the big banks at the expense of small businesses. However, his attempt caused protest in New York. Protestors were holding signs demanding to “keep (his) small hands off Dodd-Frank.” Moreover, the Democrats' opposition in Congress made the passing of the repeal bill impossible. As a result, the law was partially reformed to protect the smaller banks and exempt them from the “stress test.” The Dodd-Frank is deeply integrated into banks’ management systems and many international trade agreements. It’s a legacy Obama left us which Trump improved upon.
Edited by : Naomi Santiago
Reference:
https://www.fnlondon.com/articles/fed-gave-morgan-stanley-and-goldman-help-on-stress-tests-20180703
https://www.investors.com/politics/editorials/dodd-frank-refrom/
https://www.thebalance.com/dodd-frank-wall-street-reform-act-3305688
