Make Wall Street Risk It All

By WILLIAM D. COHAN
NYT

Two years after the near collapse of capitalism, we certainly have our fill of financial reforms. The 2,200-page Dodd-Frank Act, which President Obama signed this summer, creates an Orwellian alphabet soup of new agencies, oversight boards and offices intended to protect us from ourselves.

The problem is that since the incentives on Wall Street have not been changed one iota by the new laws — nor are they likely to be changed by any of the soon-to-be-written regulations of federal agencies — we’re no better protected from bankers’ potentially reckless behavior than we were before the latest round of reforms.

It’s not that Dodd-Frank ignored Wall Street’s past excesses. The law will ensure that some, but not all, derivatives will have to be traded on exchanges and that some, but not all, of the banks’ proprietary trading will be curbed and that some, but not all, of their private-equity and hedge funds will be shuttered or spun off. Dodd-Frank is also supposed to curtail Wall Street’s penchant for creating conflicts of interest, although how the law is going to do that is far from clear.

“In the end, our financial system only works — our market is only free — when there are clear rules and basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system,” President Obama said when he signed the bill into law. That rhetoric is fine, but unfortunately Dodd-Frank will do nothing to change the rules on Wall Street.

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