Dodd-Frank: Too Big to Work?

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- The specific aim of the Dodd-Frank legislation was to promote financial stability in three ways: (1) improve the accountability and transparency of financial institutions; (2) end "Too Big To Fail" (TBTF); and (3) protect consumers from abusive financial practices.

Dodd-Frank was, from the beginning, doomed to be just another device of regulatory strangulation.

With regard to improving accountability and transparency, the law created a whole new set of bureaucracies which will write new regulations (243 are required according to one law firm's research) that will only add to the overwhelming regulatory burdens already imposed on America's small and medium sized financial institutions.

Much of the nonsensical practices we see in the financial sector today, like having to be delinquent to get anybody's attention, or not being able to get your financial institution to modify your loan without a massive cash infusion because the loan is underwater, are already due to regulatory constraints. Just think of the unintended consequences of a whole new set of rules and regulations!

>> Dodd-Frank Still a Work in Progress

The act created a whole new set of regulatory agencies, including the Financial Stability Oversight Council, the Office of Financial Research, and the Bureau of Consumer Financial Protection. Realize that the major financial institutions had plenty of oversight prior to the financial meltdown. It's just that few saw the developing risk, and those who did were ignored. So, how will a whole new set of bureaucracies change this?

Rather than ending TBTF, the law has institutionalized it. Institutions should not be allowed to get so big so as to cause "systemic" issues if they have internal issues. In fact, there is a regulation that prohibits any bank from having more than 10% of U.S. total deposits. That went out the window in the '09 financial meltdown, and all of the TBTF institutions are now exempt from it.

Dodd-Frank has now carved TBTF into stone. We have a new, official category, called "Systemically Important Financial Institutions" (SIFIs). These simply are TBTF institutions. And while there may be some new rules and capital requirements on them, they are, by definition, TBTF. In another financial meltdown, while stock and bondholders may be more impacted than they were in '09, the taxpayer will still be on the hook when all of the capital is exhausted.

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