The Heritage Foundation
Our Vision

Building an America where freedom, opportunity, prosperity, and civil society flourish.

Financial Services

The Issue

The financial near-collapse of 2008 had many causes, some of them extremely complex. They ranged from misguided govern­ment housing policies to the global savings glut to the failure of banks to manage lending decisions adequately. The crisis caused the larg­est federal government intervention in the private markets in history, complete with de facto nationalization of some companies.

The predictable congressional overreaction resulted in the Dodd–Frank Wall Street Reform and Consumer Protection Act, signed in July 2010. Without any central focus or plan, the law deals with such issues as reducing risk in the financial system, creating a new consumer protection agency with virtually unlimited powers, and completely reorganizing the derivatives and futures markets. Unfortunately, many of its provisions were more reactions to events than well-planned reforms, and they often impose massive new regulatory burdens without achieving their goals.

One of Dodd–Frank’s greatest weaknesses is its complete failure to address Fannie Mae and Freddie Mac, two government-created mortgage finance giants whose activities helped to create and worsen the 2008 financial crisis. Fannie Mae and Freddie Mac issued trillions of dollars in mortgage-backed securities and, responding in part to congressionally mandated purchase requirements, speculated in their own securities and those issued by others. Full recovery from the housing crisis will not happen until both Fannie Mae and Freddie Mac are phased out and replaced by a real private-sector housing finance sector.


Recommendations

  1. Repeal the harmful elements of Dodd–Frank. While most of Dodd–Frank is an attempt to micromanage the financial services industry, certain parts of it are worse than others. The next Congress should repeal the many parts of the bill that do little other than create unnecessary and unrealistic regulatory regimes. These include flawed efforts to restructure the derivatives industry, language that creates a dangerous Qualified Residential Mortgage rule that could freeze thousands of Americans out of the best mortgages, attempts to impose price caps on debit card fees, and overly interventionist language that could allow regulators to restructure or close financial services companies in the name of reducing risk to the financial system.
  2. Limit the powers of the Consumer Financial Protection Agency (CFPA) and change its funding mechanism. Dodd–Frank created the CFPA, a new federal agency with the almost unlimited ability to regulate financial products sold to consumers. In addition to having vast and undefined powers, the CFPA was carefully structured to be outside of congressional oversight and funding reviews. The agency will hurt consumers far more than it will help them by reducing the number and kind of products available to consumers and making it more expensive for companies to offer new products—costs that will be passed on to the very people the CFPA is supposed to benefit.Full repeal of the law creating this agency would be best. At the least, lawmakers should change the bureau’s current automatic funding mechanism (a fixed percentage of the Federal Reserve’s operating budget) and bring it under the usual appropriations process. Further, the CFPB’s powers should be limited and explicitly defined.
  3. Work toward the swift but safe elimination of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac—the government-sponsored mortgage giants—must be shut down completely and permanently. Both entities distort the market by issuing mortgage-backed securities with subsidized government guarantees that the mortgages will be repaid. If such guarantees are necessary, they should be priced and issued by the private sector. Using specific steps, both entities can be closed carefully and methodically without further upsetting the delicate housing market—and without making the situation worse.

Facts & Figures

  • Dodd–Frank’s 2,300 pages include 259 mandated rulemakings, 188 suggested rulemakings, 63 reports, and 59 studies, and the bill represents the greatest expansion of financial regulation since the 1930s.
  • The U.S. Government Accountability Office estimates that it will cost $2.9 billion over the next five years to implement Dodd–Frank. The broader economic costs are likely much larger. According to the Tower Group, financial firms spent about $1.1 billion in 2011 just on technology to comply with Dodd–Frank regulations—and much more in other compliance costs.
  • The Government Accountability Office released a study in early July 2011 saying that the U.S. regulators do not yet know enough about Wall Street’s proprietary trading to police it effectively.
  • So far, taxpayers have spent over $150 billion to bail out Fannie Mae and Freddie Mac, and the eventual cost could climb to as much as $350 billion.
  • Rather than reducing systemic risk in the financial system, legislative and regulatory efforts since 2008 have actually had the opposite effect. By helping to increase concentration in the financial sector, these misguided efforts have increased risk. The market confirms this account. Pre-crisis, the top 10 banks in the U.S. held 55 percent of total assets in the sector; today, they hold 77 percent. More assets in the hands of fewer banks means that the failure of one would have a larger adverse impact on the economy.

Selected Additional Resources

Heritage Experts on Financial Services


  • James Gattuso

    Senior Research Fellow in Regulatory Policy


  • Diane Katz

    Research Fellow in Regulatory Policy


  • David John

    Senior Research Fellow in Retirement Security and Financial Institutions

Regulatory Excess

  • The 2010 Dodd–Frank financial regulation in the largest expansion of federal regulatory power over financial institutions in 75 years.

  • The 2,319-page law requires regulators to adopt some 400 new rules for the financial sector.

  • The cost to the taxpayer of writing these rules has been estimated at $1.5 billion.

  • Based on filings with the SEC, the law may cost the financial sector over $22 billion in additional expenses or lost revenue.

  • Despite its broad reach, the law failed to address Fannie Mae or Freddie Mac, whose activities were a significant part of the financial crisis.

Download Issues 2012 Request a Hard Copy