Simon, a 2011 Columbia Law School graduate who serves as policy counsel for the Judicial Crisis Network, argued that Dodd-Frank gives too much power to fallible regulators without providing real public accountability.
“Public bailouts won’t disappear with the waving of a legislative magic wand,” Simon said. “It’s a delusion that bureaucrats can eliminate ‘too big to fail.’ We lack the cognitive capacity to eliminate risk from the financial system.”
Tahyar, a partner and member of the Financial Institutions Group at Davis Polk as well as a Lecturer at Columbia Law School, countered that Dodd-Frank gives leaders important tools to help defuse financial crises.
“Dodd-Frank provides a toolkit of options,” she said. “Who got bailed out in 2008 at AIG and Citi? Shareholders were wiped out, but bondholders were the big winners. The toolkit is about getting the market to believe that next time creditors will take the hit, so they avoid taking risks that could bring down the system. Believe me, regulators would have been happy to have those tools in 2008.”
Simon and Tahyar clashed on one key aspect of Dodd-Frank, the Orderly Liquidation Authority (OLA), which empowers the Federal Deposit Insurance Corporation (FDIC) to carry out the liquidation and wind-up of a failing financial firm.
“The OLA gives regulators absolute power with no accountability,” Simon said. “Regulators are given what amounts to a blank check. The FDIC is not in a position to manage large, complex institutions. We need the rule of law, not the rule of discretion.”
“We can criticize, but what’s better – the ‘smart guys in the room’ solution or a bankruptcy judge?” she countered. “The rule of law is great, but what about the fear during a run? Leaders need more options during the next crisis, not fewer.”
Jackson, who served at the Department of the Treasury during the financial crisis, urged students to question both Tahyar and Simon on whether and how new regulations might make the next crisis different from the last.
“Whether we get this right will determine whether those who are making critical decisions during the next crisis have the tools they need to stabilize our system, return confidence to our markets, and prevent the kind of economic consequences we are only now recovering from,” Jackson said. “Because so many of you will be helping to make those decisions—and because all of us have a stake in the safety of our financial system—there are few debates more important to our future than this one.”