The primary purpose of the Dodd-Frank Act was to prevent real reform of the financial system.  It was very successful at that.

But did Dodd-Frank at least make the the financial system safer?

Absolutely not!

Regular readers know the necessary condition for a financial crisis is a critical mass of opacity in the financial system.  Our financial system today has more opacity than it did prior to the start of the 2007 Financial Crisis.  So it is pretty clear, the financial system is not safer regardless of what the financial regulators say.

Did Dodd-Frank create a lot of sound and fury signifying nothing?

Yes!!  Absolutely.

The passage of the Dodd-Frank Act generated tremendous political theatre.  There were the banks proclaiming how draconian the Act was even as their lobbyists were writing it.  There were the politicians fighting with each other to see who could undermine any reasonable reform that might actually have made it into the Act.

For example, a couple of senators had the temerity to suggest rating firms had a conflict of interest.  Their conflict is built right into their business model.  They get paid for ratings and they demonstrated in the run-up to the financial crisis they were willing to assign high ratings to any piece of junk Wall Street generated in order to capture the rating fee. So the senators said something needed to be done to address this conflict.

Their solution was to have the government randomly assign which rating firms were to rate any security.  This ended Wall Street’s ability to pick and choose the firms willing to assign a high rating.

Was this included in Dodd-Frank?  Of course not!

Instead, the SEC was given the authority to deal with the issue.  And the SEC’s solution was the rating firms could offer an unsolicited rating for any security.

Did the rating firms provide these unsolicited ratings?

Of course not!  They focused on deals where they were getting paid.

As I said, the Dodd-Frank Act blocked real reform.  But this isn’t surprising as the Committee to Save the Banks (Paulson, Bernanke, Geithner) understood real reform would end the Too Big to Fail banks they wanted to save.

By the way, transparency ends the reliance on conflicted rating firms.  When all market participants have access to the information needed to know what they own, experts at evaluating each type of security emerge.  Investors can turn to these experts rather than rely on rating firms.