From Too Big to Fail to Tough Enough to Endure: Obama Vindicated on Banking Reform

On July 21, 2010, President Obama signed the Dodd-Frank Act into law, ushering in the most significant financial industry re-regulation since FDR.

I have to believe that whoever said "Success is the best revenge" had to have been right, because the alternative is too cynical. (And as clear-headed visionary once said, cynicism is a sad kind of wisdom.)

If that is true, then President Obama has just exacted the ultimate revenge on the Teabagger-Occupy coalition of naysayers when it comes to rebuilding a financial system that was in the most devastating ruins since the Great Depression when he entered office. The Federal Reserve has released the results of financial institution stress tests meant to determine if the largest banks can withstand another global recession on the scale of worse than the Great Recession, and the judgment, for the first time since the Fed began these tests, is that they can.

What does that mean, exactly? It means that every one of the 31 institutions subjected to the test by the Federal Resrve, as of the fourth quarter of 2014, would be able to survive a global economic disaster beginning last year and lasting into 2016 and at the worst of  which US unemployment tops 10%, housing prices drop by 25%, GDP shrinks severely while inflation shoots up and DOW loses over 10,000 points to hover around 7,500.

To understand it in a bit more depth and how exactly we got here, a little background is required.

A nice catchphrase, "Too Big to Fail", brought together strange bedfellows to oppose the financial rescue of 2009 and the Dodd Frank Financial Reform Act of 2010 that serves among President Obama's defining achievements second only to health care reform.

The right wing dingbats - the Tea Party - focused on the fail part, as in arguing that these financial institutions be allowed to fail rather than rescued by taxpayers - which would have completely crumbled the global financial system and the Great Recession would have felt like a summer breeze compared to what would follow - while the Left wing lunatics ("Occupy Wall Street") zeroed in on the too big part insisting that no solution other than nationalizing and breaking up the banks while frogmarching their executives (one assumes to be accomplished by some hidden frequency constant rhythm of presidential podium pounding) would do. Beyond rhetorical bloviating though, neither side's ideologues seemed to much care to actually accomplish something.

But we got lucky - boy did we get lucky - with leadership that I am uncertain we Americans deserved but without a doubt sorely needed.

After the president and his administration thoroughly lapped the ideological extremes with their sheer competency managing the financial rescue, the Dodd-Frank bill charted a course that would both pass Congress and impose strong regulations on the financial industry to ensure two things: one, consumers would be protected from becoming easy pray to muddy financial products (created the Consumer Financial Protection Bureau), and two, make sure that the financial institutions most critical to the system's survival would no longer get to play Russian Roulette secure in the knowledge that taxpayers will bail them out when their gambles inevitably fail (after making a lot of money for people who move numbers around on paper, of course).

To achieve this second part without daydreaming up fancy unicorn votes in Congress to break up banks, the Dodd-Frank Act required the Federal Reserve to put all banks and bank holding companies with assets over $50 billion through a stress test. The law requires that the stress test (you can read all the technical details here if you have the background), in laymen's terms, determine whether these institutions had enough capital - compared to their assets weighed against risk - to survive and continue to lend in a severe American and global economic recession at at least the scale of the Great Recession without a taxpayer bailout. The law gives regulators powers to, in the worst case, shut down banks that don't comply.

By codifying and giving the power to conduct this test to the Feds rather than a Congressional committee or an executive department, the law ensured that future presidents and congresses would not be able to play politics with the math - not without directly repealing the law at least.

Bringing the reform's long road full circle, this week's report from the Fed, as discussed above, confirms that for the first time since these tests started, every one of the 31 institutions tested has passed the test. The chart below from Bloomberg helps explain which bank stood where, if you are hungry for a technical summary.

Credit: Bloomberg News.

That is an astonishing thing. This underscores how far we have come from the Bush economic disaster that began to manifest itself in the crash of 2008. The system is now actually not simply stronger but strong enough to endure another storm. The passing grades for the largest financial institutions in some of the toughest stress tests tell us that the most significant financial re-regulation since FDR has been an unqualified success.

Are the banks still big? Yes. We have heard endlessly from ideologues on the Left and the Right about how big the banks are. But if we are to let facts be our guiding light, there is no choice but to admit that thanks to this president's and Congressional Democrats' hard work in passing and implementing Dodd-Frank and yes, thanks to the Fed's exemplary performance, our too-big-to-fail banks have been forced to become tough enough to endure.

Forced. That's an important word to keep in mind. The banks did not do this willingly. They wanted no part of Dodd-Frank, and they wanted to simply be given taxpayer funds with a thank-you note and no accountability. It was Democrats who made sure they had to be accountable, and it was Barack Obama who made sure they paid the taxpayers back, with interest. To this day, the financial lobby is clamoring for Congress to weaken and dismantle Dodd-Frank, belying the Tea Party-Occupy jointly maunfactured myth of a president weak on financial reform.

To be sure, the results of another round of stress tests are due out next week to determine which banks will get the green light from the Fed to make greater distribution to stakeholders. But the reality that where we stand today is an epic achievement the possibility of which has been thoroughly dimissed by the Left-Right coalition of windbags can no longer be avoided.

Which returns us to the adage I began this article with: Success is the best revenge. Both major parts of this president's Wall Street reform - consumer protection, and now making sure strategically important banks can endure in severe economic stress - have now proven budding and critical successes. If you believe in math, that is.

No president has dealt with as much obstructionism from his political foes or as much derision from those claiming to be his "base", and yet, President Obama continues to prove himself a fierce pragmatist focused on leaving America a better, stronger place than he found it at the start of his time in office. Against that backdrop of howler monkeys with no interests beyond their ideological checkboxes, no president - at least none in living memory - has been so successful in proving the cynics wrong.

America is better off for it.



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