Dodd-Frank Theoretically Unplugged
Torres, David L., SAM Advanced Management Journal
Passed in 2010 to fix the causes of the 2007-09 financial crises, the so-called Dodd-Frank Act contains more than 290 new regulations--with more on the way--and will create 13 new agencies. This article dissects the "levels of action" surrounding the legislation and ongoing crafting of regulations using a theoretical framework that includes structural/ functionalism, communicative action, and progeny. Much use is made of Parsons 'AGIL model of four critical components for social system survival; adaption (working through economic dynamics), goals (accomplished through political systems), integration (working through laws, judicial decisions regarding desired/undesired behavior), and latent pattern maintenance (reflected in family, education, culture). These four concepts as applied to the actual legislative tasks illuminate the challenges confronting the full-scale implementation of this massive Act.
The financial crisis of 2007-2009 has led to the promulgation of new regulations that target systemic risk associated with commercial and investment banking as well as consumer protection in financial products. The most massive of these, the Wall Street Reform and Consumer Protection Act of 2010 (also known as the Dodd-Frank Act) is "more than twice the length of three previous regulatory bills--the Securities Act of 1933, the Securities Exchange Act of 1934 and Sarbanes-Oxley--combined" (Boggs, Foxman, and Nahill, 2011). Massive in size as well as expected impact, the Dodd-Frank Act aims to curb "two big to fail;" reorganize the regulation of banks and financial institutions; afford better protection for investors; and, introduce new rules for the protection of consumers (Kern, 2010). Included in the bill are "more than 290 new regulations and 13 new agencies (Mader, 2011)." The Congressional Budget Office estimates that up to $2.9 trillion may be spent over the next five years, with approximately 2,600 new positions added at regulatory agencies (Boggs et al., 2011).
To accomplish its goals, Dodd-Frank will reorganize existing regulatory agencies and add new oversight bodies and committees. The most important new agencies are the Consumer Financial Protection Bureau (CFPB), the Office of Financial Research (OFR), and the Financial Stability Oversight Council (FSOC). Upcoming regulations, such as the Volcker Rule for separating commercial from investment banking, "Say in Pay" provisions for Executive Compensation, and "skin in the game" mandates for risky securities, have created much uncertainty in the marketplace. Indeed, with only a fraction of the new rules in place, financial institutions and banks must abide by those rules already in place and anticipate the remainder, with final rules rolling out in the next few months.
This paper will 1) offer a schematic view of the new organizational system put in place by the Act, 2) describe how the new configuration will address myriad problems perceived as regulations based on contributors to instability in the market, and 3) offer a theoretical view that provides insight on why crafting the Act is experiencing much turbulence as it gets closer to completion. I use a very general theoretical approach. By "general," I mean not delving into theoretical nuances and debates, but rather taking understood premises from classical theory to arrive at a suitable model for analysis of the legal, social, political, and organizational dynamics surrounding the legislation.
More specifically, this paper uses general arguments from structural functionalism, communicative action, structuration, and related theories to offer an integrative perspective on the myriad levels of action that surround the legislative process. I intend to show that, while the goals of the Act have been relatively well articulated, the crafting of regulatory rules deserves special analytical attention because social, political, legal, and economic dynamics surrounding the making of the Act lack congruence. …