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Dodd-Frank financial reform law hasn't curtailed banks' profits

Banking executives argued vehemently against Dodd-Frank a year ago, saying it would erode earnings. But in the last two weeks, banks have reported billions of dollars in profits.

July 20, 2011|By Nathaniel Popper, Los Angeles Times
  • Wells Fargo, the nations third-largest bank, posted record earnings of $3.9 billion for the second quarter. Above, a customer exits a Wells Fargo branch in Los Angeles.
Wells Fargo, the nations third-largest bank, posted record earnings of… (Reed Saxon, Associated…)

Reporting from New York — Just a year ago, banking executives argued vehemently against the most sweeping overhaul of financial regulations since the Great Depression, saying the law enacted then would stifle innovation and erode profits.

But in the last two weeks, they have been reporting billions of dollars in profits — including a record quarter for Wells Fargo & Co. — with nary a word about how the so-called Dodd-Frank financial reform law was hindering them.

"Name me one significant thing that Dodd-Frank has done to alter the behavior of these banks," said Ted Kaufman, a former U.S. senator from Delaware who led the push for stronger financial regulations last year. "There isn't one."

On Tuesday, Wells Fargo, the nation's third-largest bank, posted record earnings of $3.9 billion for the second quarter. JPMorgan Chase & Co. reported last week that its revenue and profit were higher in the first half of this year than in the first six months last year, before Dodd-Frank was passed. Nor did the law seem to deter Goldman Sachs Group Inc., Bank of America Corp. and Citigroup Inc.

And the spots of weakness across Wall Street have been blamed on a fragile global economy and crisis-era lawsuits, not on new regulations.

Bank of America, for instance, posted its biggest-ever quarterly loss of $8.83 billion on Tuesday. But putting aside one-time charges, such as an $8.5-billion settlement with investors over low-quality mortgage-backed securities, the bank did better than expected.

"I don't hear the banks excessively complaining about the effects of Dodd-Frank," said Erik Oja, a bank analyst at Standard and Poor's. "It seems like the main thing is the economy, not regulation."

The primary purpose of the legislation that became the Dodd-Frank Wall Street Reform and Consumer Protection Act was to strengthen the financial system, not weaken the banks.

But the legislation also was viewed as an effort to curtail some of the most risky and shadowy activities of Wall Street firms, such as derivatives trading and highly leveraged financial bets.

The legislation was born out of public anger at Wall Street's role in inflating the real estate bubble and sparking the financial crisis that led to the global recession. The bill was described as a way to rein in the financial industry's freewheeling ways.

On the ropes, the industry and the analysts that cover it voiced their own views. Just weeks before the bill was passed, for instance, a banking analyst at Citigroup warned that the new rules could cause earnings to fall 23% at Goldman Sachs and 18% at JPMorgan.

Yet so far this year, Goldman's $3.8 billion in profit is down 7% from the same period last year, which the firm attributed Tuesday to bad economic conditions. Meanwhile, JPMorgan's profit has surged 37% to $11 billion in the first half of the year over the same period last year.

One of the most feared parts of the law was the so-called Volcker Rule, which barred banks from trading with their own money. Goldman Sachs shut down two trading desks in response, but has since said the effect on revenue was "not material." Similar actions were taken by most other investment banks without big reductions in revenues.

The full effect of Dodd Frank has not been felt yet partly because many rules are still being written by regulators. But even looking ahead, there are no expectations that the financial industry is in for fundamental change.

"It's a long road, and I think we'll still have a very good business when it's all said and done," JPMorgan Chief Executive Jamie Dimon told analysts last week.

Of course, JPMorgan and other banks have thrown their lobbying weight behind efforts to make sure the new rules are not too onerous.

The six largest banks spent $29.4 million on lobbying last year, according to firm disclosures — record spending for the group. They spent an additional $8 million in the first quarter this year, which puts them on track to break last year's record

Even before the bill was passed, bank lobbying helped defang some of the strictest proposed regulations, including rules that would have prevented banks from managing hedge funds and fees that would have been levied on the industry to pay for future bailouts.

The regulations have also been scaled back since President Obama signed the law last July 21 as attention shifted to regulators who have been writing the language of some 300 rules.

Banks have pressed regulators in countless meetings to lighten the rules, and they have found a natural ally in congressional Republicans, who have long been suspicious of government regulation.

"The industry has really thrown a lot of wrenches into the rule-making process, thanks to very aggressive lobbying," said James Cox, a professor of securities law at Duke University.

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