Theu.s. Dodd Frank Wall Street Reform And Consumer Protection Act

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The pros and cons of many macroeconomic policies are frequently debated. In particular, the
Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed into law in July of 2010 sparked bitter controversy. Appropriately argued by American Banker’s Capitol Hill reporter Victoria Finkle, Dodd-Frank is viewed as either a “landmark law that reined in the biggest banks” or an “economy-crippling overreach that burdened small institutions.” The Act intends to tighten financial regulation in the U.S., hoping to prevent the repeat of another financial crisis. Impetus for Dodd-Frank stemmed from the bailout of financial institutions deemed “too big to fail” and the moral hazard it created. In 2008, intense pressure fell upon some of
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Mainly, Dodd-Frank equipped the Federal Deposit Insurance Corporation (FDIC) with Orderly Liquidation Authority (OLA) provisions, authorizing the FDIC to safely wind down large and complex financial firms that are failing. The OLA expects to minimize moral hazard and systemic risk. Another considerable aspect of Dodd-Frank is new rules calling for greater transparency in risky dealings of exotic financial instruments: derivatives. The aim was to take these transactions out of the shadows and make them visible to regulators and markets. Dodd-Frank also paved the way for monitoring the insurance industry by establishing a Federal Insurance Office in the Treasury. Altogether, these were useful steps and tools of Dodd-Frank. However, Economist Barry Eichengreen points out that vesting the Fed with additional regulatory power and responsibility for the stability of the financial system was a political nonstarter. The recently bailed out AIG was using money provided by the Fed to pay retention bonuses totaling up to $6.4 million to 73 of its leading employees. Aware of the bonus payments, the Fed claimed to be powerless in preventing them. Later, a darker fact revealed that AIG was allowed to pay off obligations to Goldman Sachs using Fed bailout funds. The Fed knew about these transactions, and even instructed AIG lawyers not to divulge to the Securities and Exchange Commission (SEC) internal memos authorizing said payments to Goldman Sachs.
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