Reforming Wall Street, Protecting Main Street
Ten years ago, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act—the toughest set of financial reforms since the Great Depression. Hear from the people who helped make it happen about why it matters and how it affects us today.
When President Obama was inaugurated on January 20, 2009, the United States was in the middle of the worst economic crisis since the 1930s. Hundreds of thousands of people were losing their jobs each week, thousands of businesses were closing their doors, and we faced an economic collapse unlike any we’ve experienced since the Great Depression.
Immediately upon taking office, President Obama put in place a number of measures to stabilize the economy and get Americans back to work. But the financial crisis made clear just how much basic economic protections for the middle class had eroded over decades and the disproportionate effects felt by communities of color. The President was determined to enact a broader set of reforms that would help rebuild the economy on a stronger foundation, and expand opportunity for all Americans.
Passing that reform through Congress and into law was not easy – the same actors that brought about the crisis had little interest in making the system safer. It took over a year of extraordinary work by many people inside and outside the government, but on July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, a bill that restructured the American financial system and created the Consumer Financial Protection Bureau (CFPB).
For me and for so many others who were a part of President Obama’s administration, that work was deeply personal. I came from a community where people I knew were losing their homes due to the financial crisis. Serving as chief of staff at the CFPB was a way to do something that would directly impact their lives and futures.
Ten years later, as our country finds itself in the middle of another recession, it’s worth looking back at how President Obama approached the crisis he inherited. Sometimes the complexity of our financial system can mask the role it plays in our day-to-day lives. But through the financial crisis and resulting recession, we saw how the federal government’s failure to properly regulate seemingly obscure financial products and services like “subprime lending” or “over-the-counter derivatives” or “collateralized debt obligations” led so many to lose their homes and jobs as well as watch their savings evaporate.
As President Obama says, the reforms made during his presidency are not the end of the story. For too long, our economy has rewarded the rich and powerful while squeezing the poor and middle class. Too many Americans still cannot afford health care, access education, or secure affordable housing.
Taking on these enormous challenges isn’t easy. There will always be those who say it can’t get done, or who will stand in the way of change. But the passage of Dodd-Frank speaks to the potential for progress that can be achieved when we put in the work. It’s an example that we’ll showcase at the Obama Presidential Center Museum in Chicago, and inspires our ongoing efforts to train the next generation of leaders who will confront so many of the challenges that remain.
Wally Adeyemo, President, Obama Foundation & Former Chief of Staff, Consumer Financial Protection Bureau, reflects on the financial crisis:
That collapse of the financial system morphed into what seemed like, at the time, an unbelievable meltdown of the economy.”
—Austan Goolsbee, Former Chairman of the Council of Economic Advisors
Origins of the Crisis
Watch Senator Elizabeth Warren explain the origins of the 2008 financial crisis:
PRESIDENT OBAMA: The first thing to understand is the full context of how the financial crisis came about.
AUSTAN GOOLSBEE, Former Chairman of the Council of Economic Advisors: The story of Wall Street reform and why it was necessary, in a way, it starts all the way back in the 1930s. In the Great Depression, the United States created a whole regulatory structure of rules of the road that are going to apply to financial institutions. And they served us pretty well for decades.
But by the ‘80s and ‘90s, there were a lot of things about that structure that were kind of creaky and old. There’d been a lot of technological change in banks and in financial instruments, like the ATM machine and all kinds of stuff. So there was a huge effort to deregulate finance.
The problem was people didn’t spend very much time thinking about, “Well, what should go back in its place?” And those lessons of the Depression and the ‘30s were kind of lost to history.
SENATOR ELIZABETH WARREN: Basically, consumer credit became deregulated. And it took a little while, but the credit card companies were the first to figure it out, they said, “What? We could actually put out credit cards to people who don’t have a lot of money, but we can charge them so much interest and so much in fees that we will bring in lots and lots of money, even from people who were really living at the economic margins.” And, man, they put those credit cards out there and they made big bucks.
By the end of the 1990s, the mortgage companies had glanced over at the credit card guys and said, “Why can’t we make money the way they’re making money?” And so they took the simplest thing, the 30-year fixed rate mortgage and they made it real short—like you refinance it every two years and you have an interest rate that’s real low at the beginning, called a teaser rate, and then it jumps up, and we don’t actually find out if people can afford to pay for it.
They designed this product, and they basically took it to communities of color, to African-American communities, and they knocked on the doors of homeowners, and said, “We got a deal for you. Trade in your old 30-year fixed mortgage that you’re a part way down the path of pain and take this fancy, shiny new mortgage, which has a much lower interest rate at the beginning, and you could refinance your house.” Lots of people did, and the consequence was they took on a lot of risk. The mortgage company said, “This is great.” And so they moved it from communities of color, to places all around the country.
PRESIDENT OBAMA: People had been encouraged to sign up for zero down mortgages, with these adjustable rates, a lot of times not understanding the risks they were taking, not understanding that their income didn’t really support the house they were buying, or that if they lost their job, or if somebody in their family got sick and they had an unanticipated expense, they could lose everything.
But it wasn’t unique to mortgages. In payday loan operations and people taking out loans for cars or using credit cards, a lot of people were getting systematically taken advantage of.
SENATOR WARREN: By the time we hit 2005, 2006, 2007, millions of Americans have gotten tangled up with these mortgages.
PRESIDENT OBAMA: We had seen over the years, a trend in which banks and other financial institutions were making huge bets on, oftentimes, shaky investment instruments. And one of the main things that they had done is to invest in these securities that were backed by subprime mortgages. The real estate market had become a bubble. People who really didn’t have the income to support some of the mortgages they were getting were still being fed mortgages. The risk of any single mortgage being defaulted was supposedly being dealt with by packaging them all, bundling them up, slicing them into these various securities, investment instruments, and then banks and others would buy them up.
Essentially, it was a big house of cards. What you started seeing in 2007 is that that house of cards started to crumble.
RICHARD CORDRAY, first Director of the Consumer Financial Protection Bureau: A lot of people were starting to lose their homes. Home values were plummeting in certain communities. The courts were starting to be stuffed full of foreclosure cases.
SENATOR WARREN: All of a sudden, all these mortgages that had been so valuable to Wall Street, so valuable to the banks, people looked at those and said, “We’re not sure they’re worth anything.” And that’s when the whole thing crashed.
PRESIDENT OBAMA: And in a panic, people started pulling back on lending. That had dire consequences, not just for people on Wall Street, but it had terrible consequences for everybody, because suddenly a small business couldn’t get a loan. Suddenly, employers couldn’t make payroll. And they started shedding jobs, which meant that people had an even harder time paying mortgages, even if they had been able to when they had a job. And so, you had this compounding failure.
AUSTAN GOOLSBEE: That collapse of the financial system morphed into what seemed like, at the time, an unbelievable meltdown of the economy. I mean, it was a frightening, horrifying time.
TIMOTHY GEITHNER, Former Secretary of the Treasury: There were two basic failures of the system before the crisis—that failure to maintain and preserve a set of conservative constraints on leverage and risk taking in the financial sector that had been eroded over the decades, that’s failure number one. But also, a system that left millions of people completely exposed with no adult supervision, no constraint, no effective enforcement, no effective regulation around a range of things we call consumer financial protection. You had a really colossal failure of supervision and consumer protection that left millions of people in a position where they had fallen victim to predation, fraud, and abuse.
RICHARD CORDRAY: The throes of the crisis really hit in October of 2008. So, almost immediately on the heels of this economic catastrophe beginning to unfold, we had the election of a new president.
AUSTAN GOOLSBEE: One of the things that was really notable was then-Senator Obama was way ahead of the curve in detecting the dangers of some of the deregulation and some of the aspects of the financial system before there was a crisis.
In early fall 2007 candidate Barack Obama goes to the NASDAQ in New York and he gives a speech about wall street reform, still a year away from the financial crisis. The speech had two messages: the first is, the middle class is hurting in this country. And wall street may be on an island, but wall street is not an island from the economy. If the middle class suffers, if people can’t pay their mortgages, it is going to come back to you in banks, in the stock market, and you will suffer. And then the second thing he said was, it doesn’t make you anti-market to be for tougher rules of the road. If you deregulate, we can get to a spot where people don’t trust each other. And if people don’t trust, they’re going to withdraw their money. And that is where crises come from.
It was not well received at that moment. They were like, well, who does he think he is to tell us that we should be more mindful and we should have more regulation? But that message, that is what morphed into the crisis of 2008. Through talking to people all across the country, he had a sense that stuff was going wrong and we were going to need to readjust the rules of the road.
The crisis, it touched all parts of the American economy, but in a very unfair, savagely unequal way, which is what recessions do.”
—Tim Geithner, Former Secretary of the Treasury
An Inherited Crisis
AUSTAN GOOLSBEE: Obama comes into office in January of 2009. It’s full blown the biggest crisis in the economy that we’ve ever had in our lifetimes. And the financial system has teetered on the edge of collapse for multiple months. You don’t fully grasp how bad it is until the data start coming out December, January, February. We’re losing 800,000 jobs a month—numbers that nobody has ever seen before.
TIM GEITHNER: The crisis, it touched all parts of the American economy, but in a very unfair, savagely unequal way, which is what recessions do. The economy was shrinking at an annual rate of about eight percentage points—in real terms, catastrophic.
I remember the first phone call he had with the early members of the economic team. He was starting to discuss what the priorities of the administration would be, and how to think about strategy, what trade-offs would be involved, and what we focused on. I think I started and said, “Well, the main challenge you face is how to prevent this from turning into another great depression. That will define everything you can do. If you don’t succeed in that, nothing else is possible.”
And he cut me off with some irritation to say, “I’m not going to be defined by what I prevented. Of course, I understand that. But there are other things we’re going to have to do, too.”
The scale of that ambition even then, was his recognition, his judgment, that they were going to have to start to lay the foundation for a set of broader reforms, at the same time we were trying to finish the job of dealing with the economic crisis.
PRESIDENT OBAMA: in responding to the crisis we had to make sure that we didn’t just do one thing. We had a lot of things to do. Our first job was to stop the bleeding and kickstart the economy, which is why we immediately started a stimulus package called The Recovery Act—that put people to work, increased demand, provided tax cuts, started major construction projects, helped states with their budgets. We had to prevent the overall economy from collapsing and put people back to work. We had to restore an auto industry that was on the brink of collapse. We had to make sure that we were coordinating our work internationally.
All of this helped stabilize the real economy, but we still had to fix the financial system. And that was painful because what we ended up having to do was, in many ways, prop up banks that had been responsible for the crisis in the first place. The challenge was, if we didn’t do that and we let the banks collapse, then things would’ve gotten even worse and we likely would have gone into a depression.
TIM GEITHNER: We were not saving the financial system for the benefit of the financial system. Our objective, our obligation, our imperative, our responsibility was to save Americans from the consequences of a failing financial system. And you can’t protect people from the risk of mass unemployment, a decade of loss growth, the Great Depression—you can’t do that effectively unless you’re able to prevent the financial system from falling apart.
VALERIE JARRETT, Senior Advisor to President Obama: During the 2008 campaign, we had traveled the country and people shared their stories with President Obama. The same thing happened after he was elected through the letters that he would receive every day. And they would explain just how damaging the financial crisis was to them and how they were playing by the rules. They didn’t feel that there was anyone there looking out for them. And the people who didn’t play by the rules, who did take risks with other people’s money, were getting away with it.
He was determined to put rules of the road in place to ensure that that never happened again.
There were a series of systemic flaws in the financial system and how we regulated it, that we had to get fixed.”
Rescue and Reform
PRESIDENT OBAMA: There were a series of systemic flaws in the financial system and how we regulated it, that we had to get fixed. And we were determined that we might not be able to completely eliminate risk from the financial system, but we could do a lot more to ensure ongoing stability, and that was the goal of “Dodd-Frank.”
TIM GEITHNER: Part of the challenge was to figure out how to design a legislative strategy. Should he wait for the crisis to pass, to be definitively behind us? Should he wait until you can have a broad based consensus timed to reflect and look back at the lessons from the crisis? Or should you try to move more quickly, before the memory of the crisis faded and those forces against reform were able to regain strength?
He made the choice, appropriately, to go ahead, to recognize that you want to act when people still had that sense of trauma and fear, and a deep awareness of the cost of the failure of consumer financial protection and financial regulation.
AUSTAN GOOLSBEE: “Wall street reform”—what could be more boring than that? It’s complicated. “Leverage ratios” and “liquidity requirements” and the Federal Reserve’s “authority.” But there was a brief moment during which it wasn’t boring. It actually was on people’s minds because they wanted wall street to be re-regulated, because we had just gone through the most traumatic event in the financial lives of almost every person in America. That moment when people were primed to care about that issue was critically important to its passing.
The way we got to the Wild West system we had in terms of regulating the financial system was precisely because ordinary people weren’t paying attention. And so the industry itself had largely written the rules of the road and they were, in some cases tasked with “self-regulation,” which clearly did not work. And so, the only thing that enabled putting in tougher rules of the road was the fact that ordinary Americans actually cared for some period of time about the details.
Even my mom in Abilene, Texas was calling me up and saying, “you stick it to them—the leverage ratios should be higher.” I was like, “Whoa, wait, wait, wait, where are you reading this?” But there was a brief moment where the regulation and restrictions that were going to be put on banks were important. And that was kind of the only moment where you could actually pass Wall Street reform.
SENATOR WARREN: The big question was, “What will be in Dodd-Frank?”
TIM GEITHNER: The ultimate goal of Wall Street Reform was to make the financial system more stable so the people would be less vulnerable to the risk of collapse of the system. Dodd-Frank had two main objectives. One was to improve and strengthen, fundamentally reshape the protections we provide consumers against fraud and abuse. And to do that, the President proposed building on an idea from Elizabeth Warren, to establish an independent agency with the authority and the accountability for that very important challenge.
The second objective was to try to create a more stable financial system less vulnerable to crisis—meaning less able to take risk, less able to get around the constraints you put on banks. And so the second really important thing the Wall Street Reform act did was to put in place a much tougher set of constraints on risk taking, applied more broadly across the financial system.
Barney Frank, who was then the chairman of the House Banking, House Financial Service Committee, and Christopher Dodd, who was then the Chairman of the Senate Banking Committee, were the principal architects of the legislation and were the President’s and our principle counterparts in negotiating a strategy. The President decided that we would give Congress an initial proposal in the form of comprehensive legislative language, laying out what we thought were the fundamental foundations of reform, as a way to start the process. But we knew at that point that the House and ultimately the Senate would have to figure out a way to build a consensus in those two bodies that would produce legislation.
VALERIE JARRETT: The big banks spent a fortune lobbying against Dodd-Frank. They tried everything they could do to convince the folks in Congress, “oh, we learned, we won’t do it again.” But why on earth should we take their word for it when we saw what happened to the consumers who lost, the homeowners who lost, the people who lost their jobs?
TIM GEITHNER: To legislate in the United States effectively on most things, you need 60 votes in the U.S. Senate. To be able to pass Wall Street Reform, we needed to reach across party lines. You couldn’t do it only with Democrats, even if Democrats had been completely unified, and they were not.
I remember I went to see Mitch McConnell, who was then the minority leader in the Senate. And he was very direct. He said to me, “We don’t like most of what you guys are doing. We’re going to fight you on all of it, as we’ve been doing. It’s going to work for us. There’s one exception, which is financial reform. We’ve got a few people on our side that want to be for that. I don’t know yet, whether you’re going to get any of them.” Ultimately there were very few.
That’s a measure of the challenge, even though, again, this is the worst financial crisis in generations.
VALERIE JARRETT: We spent an enormous amount of time looking for bipartisan support. There were lengthy hearings. There were people from all sides that had the opportunity to come and testify.
SENATOR WARREN: There was a lot of back and forth about the consumer agency because the lobbyists for the credit card companies and the mortgage lenders, that was their biggest sticking point. They said, “No matter what, never, never, never, no, no, no. We know there’ll be some financial reforms, but no Consumer Financial Protection Bureau.”
So there were a lot of folks in the middle of negotiations over this saying, “Yeah, let’s let that one go.” But what I always heard was that it was President Obama who said, “No, we’re going to make sure we get a consumer agency—we’ve had enough of families getting cheated.” And he insisted it stay in there.
WALLY ADEYEMO: It took over a year between when the president proposed Wall Street Reform and the bill actually reached his desk, because a lot of people were trying to stop reform from happening.
In the end, the bill was over 800 pages long. It included hundreds of new regulations to reorder the financial system and created the Consumer Financial Protection Bureau.
AUSTAN GOOLSBEE: Wall Street Reform, like many major policy changes in the country, includes a lot of different things. I will highlight three critically important things that it did. One, it created the Consumer Financial Protection Bureau to try to protect consumers from fraud and financial shenanigans. It regulated banks, forcing them to hold more capital as a safety net when times go wrong and forcing them to be on better behavior so that they don’t engage in the kind of things that had created the very financial crisis that gave birth to this reform. And third, it finally started putting serious regulations on derivatives and other financial instruments that had been at the center of the crisis.
This was the first time in about a half century that a brand new government agency was being created from scratch.”
—Richard Cordray, First Director of the Consumer Financial Protection Bureau
A NEW AGENCY FOR CONSUMERS
SENATOR WARREN: After the president had signed Dodd-Frank into law, I was invited to the White House to talk with the president about how to set up this agency. So, I go into the Oval Office and he reaches out and takes both my hands, and he says, “Elizabeth, I just want to know one thing about this agency. Is it strong enough to get the job done?”
And I said, “Yes, Mr. President, it is.” He was worried about a problem we’d had [about having] not been able to get exactly what we wanted around the auto dealers [in the final Dodd-Frank legislation]. I said, “Mr. President, we’ve got 95 percent of what we asked for. This will completely change consumer credit markets.”
Every time I talked with the president about the consumer agency, it was so clear that he really cared about helping people. That was his number one priority. He wanted to know, not just that we had an agency, it was, “Would it make the difference that we needed? Would families be safer? Would they actually have the chance to take out a home mortgage, to take out a credit card, to take out loans, student loans, without being cheated? And if somebody did cheat them, would we have an agency that would come in on their side and help them out on this?” And that’s what CFPB was all about.
RICHARD CORDRAY: I remember the interview I had with him in the Oval Office when he was deciding whether to nominate me to be the director, and he talked very personally about the kinds of problems he’d seen in Illinois: problems with homeowners, problems with people who didn’t understand some of the terms of their credit cards and had gotten in trouble. He wanted to be sure that he and I saw eye to eye about the need to be aggressive about protecting consumers.
WALLY ADEYEMO: There was really no playbook when we started building the Consumer Financial Protection Bureau. When those of us who ended up there early on started thinking about what this place would look like, we were guided by a few things. One was the article written by then-Professor Warren, conceiving of the agency. Another was the legislation that had been passed by Congress. And the third was the president’s guidance in terms of creating an agency that was in service of the people, that would look different and feel different than any other government agency.
RICHARD CORDRAY: This was the first time in about a half century that a brand new government agency of any size or importance was being created from scratch. This was really a startup starting from nothing. When I arrived at the Bureau, we had fewer than 50 employees. We were building an agency, and also creating a different kind of mission than had been seen before in any financial regulation at the federal level. To understand and hear the voices of consumers, make sure the law was being enforced—that consumer laws and rules were in place that would protect people in the mortgage, credit card, student loan, and auto loan markets.
SENATOR WARREN: Financial products can be really complex, and trying to explain them, frankly, can be pretty boring. But the consequence of that is it means people can get cheated and never even know it happened to them. All they know is things didn’t work out and the payments went up and they lost their home. All they know is they’ve been paying on that credit card bill forever, and they seem to own more money now than the amount they owed at the beginning. The importance of the CFPB was to put a cop on the beat and to make sure that when people are engaged in financial transactions, that the information is clear and easy to see.
RICHARD CORDRAY: There’s a couple of stories that I tell. One was a young man named Ari, who had left home to join the Army, and like so many young service members, was out on his own, managing his finances for the first time, with a guaranteed paycheck from the U.S. government, and so a ripe target for predatory lenders. He got himself into an auto loan that took 70 percent of his take-home pay. It was automatically debited from his U.S. government paycheck. That was a condition for getting the loan—which is not legal, but he didn’t know any better, and it really ruined his finances.
He was deployed, his father took over his finances, but he had signed the paperwork, and so he brought the complaint to the CFPB. We found that 50,000 other service members had been treated similarly and we took an enforcement action that fixed the terms of the contract for all 50,000, got millions of dollars back, and ultimately fixed this program so that they could not automatically debit those kinds of debts from the service member’s paycheck.
We were very devoted to our mission. It made a huge difference to have the full backing of the president. What that also meant was that he had pushed all his cabinet members to work closely with us, to help us develop into an effective watchdog, which is what he always called us, a “watchdog” agency.
All of those things mattered enormously to our success, and it just felt very good to know that we were a priority, that the work we were doing, which is all about the middle class in America, was a priority for the president and that he had our back.
Our work is never finished.”
More Work Remains
TIM GEITHNER: A key thing about the President was his ability to not just focus a huge amount of attention and be willing to spend a lot of capital on the really hard, messy, dirty, unpopular job of fixing a financial crisis. But also, to take the long-view and recognize that even while the fires of the crisis were burning, we had to put in place a set of reforms and safeguards that would reduce the risk of it happening again.
Another, I think, defining thing about the approach he brought to the crisis and to how to design Wall Street Reform, was a recognition that the principal objective is to create an economy where individual Americans are less vulnerable—not just to predation and abuse and fraud, but are less vulnerable to their own fortunes. Their jobs, their homes, their livelihoods, their retirement savings are less vulnerable to the failures of financial regulation and the damage that can come from a broken financial system.
He had that basic recognition, which is that everything that matters to a person’s economic security requires a set of protections that can make them less vulnerable to fires that they had nothing to do with. And that approach, guided by the interest of the individual, was essential to how we approached the design of strategy, not just in the crisis, but in the design of Wall Street Reform.
WALLY ADEYEMO: When you look back at Wall Street Reform, especially today, as we’re facing another economic crisis, the most important lesson that I walk away with is that change requires leadership. President Obama was committed to not only stopping and ending the financial crisis, but ensuring that we put in place reforms to prevent it from happening again. And our path to solving the current crisis requires leaders, not only at the federal level or the State level or the local level, but individual leadership from people in their communities.
That is what the Obama Foundation is here to do. To help inspire, empower, and connect people, to change the world and to make the world that they live in better for future generations.
Ultimately, the story of Wall Street Reform and the Obama presidency, will be told as part of the Obama Presidential Center in a way that allows people to not only see the work that President Obama and his team did, but also see themselves in it. And to walk away being able to think through how they can go back and be leaders in their communities, to make change happen in a way that may look different than Wall Street Reform, but will be as significant to the people who live in their communities.
LOUISE BERNARD, Director, Obama Presidential Center Museum: The story that we’re telling at the Obama Presidential Center will include the story of the nation’s first African American president and the story of the Obama administration across two terms, but the accomplishments and the challenges of that moment are also deeply embedded in a broader history. It’s the history of progressive movements and milestones, it’s the history of Chicago, it’s the history of grassroots organizing.
It’s also really telling a story about leadership. How government works, how decision making is made in a coherent, thoughtful, sustainable way. That the work of the Obama administration was always part of “the long game,” as President Obama has framed it. There’s a way in which people will be able to make the connections between the past, the present, and whatever that future moment is when they come to the museum.
PRESIDENT OBAMA: One lesson, I think, for anybody who’s aspiring to leadership, is recognizing that oftentimes events choose you, you don’t choose events. And one of the things that I benefited from greatly in managing this crisis was that we had a collection of extraordinarily smart, dedicated and committed people, who were willing to make great personal sacrifices and work together and tamp down some of their egos and really focus on the problem.
But there’s also a broader lesson that I think speaks to our time as much as it did a decade ago, and that is that our work is never finished. Part of the reason that you had a crisis in 2007 and 2008 was because there had been underlying trends that had been taking place for decades and producing growing inequality overall in our system.
What you’re doing is essentially, hopefully, trying to take those two steps forward, understanding that there may be a couple of steps back on occasion. And that’s why when I talk to people and they say, “Well, why is it that if Dodd-Frank was so great, we still have all this inequality?” Well, because the financial system alone is not going to fix inequality. It is not only legitimate, but necessary to understand, that any work we do is going to be incomplete, but it’s a step in the direction of a more just society, and a more perfect union, that we have to continue to strive for.
That’s one of the reasons why at the Foundation, our focus is not just on any one single issue, but it’s on developing the skills and the talent of young people who are working on a whole host of issues. Because their work’s never done. And hopefully the skills, training, and insights that they develop, and the experiences they have, and the challenges they confront, that will then give them the tools they need not only to succeed, but also then pass it on to the next generation.