What is Dodd-Frank? | CNBC Explains

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0:03It’s 2009… and people are furious.

0:07The world is trying to dig itself out of the worst global recession since World War 2.

0:12Millions have lost their jobs. Banks are folding like a pack of cards. And there’s a new

0:17U.S. President in town trying to figure out what to do about it all.

0:21You see, all this pain can be traced back to banks and more specifically, the risky

0:25behaviors that triggered the subprime mortgage and global financial crisis.

0:30That’s where the Dodd Frank Wall Street Reform and Consumer Protection Act - more

0:35commonly known as Dodd Frank – comes in.

0:38The law was first proposed by the Obama administration in June 2009 – and after a series of revisions

0:44from Senator Chris Dodd and Representative Barney Frank (yes, that’s where the name

0:49comes from) – President Obama signed it into law in 2010 with almost no Republican

0:55support.

0:56So what’s inside Dodd Frank – and how is it supposed to prevent something like the

0:59financial crisis from happening again?

1:02Well, it’s a long and complex piece of legislation – we’re talking hundreds of pages long

1:07- that brought about the most significant changes to financial regulation in the U.S.

1:12since the reform that followed the Great Depression.

1:15So how is Dodd-Frank supposed to protect you and me? We’ve brought in a few experts to

1:20explain.

1:25Dodd-Frank created a new council made up of bigwigs from the Treasury Secretary, Fed,

1:28SEC and more… Its goal is to keep banks, hedge funds and companies from becoming “too

1:35big to fail.” It does that by making firms keep more money on hand and they even have

1:40the power to break up companies that are a ‘grave threat’ to financial stability.

1:48Agencies like Moody’s and Standard & Poor’s evaluate how risky an individual, company

1:53or even government is to lend to. So in theory, a bad rating warns investors that these debtors

1:59may not pay back their loan. But during the financial crisis we learned a lot of risky

2:03debt was being given good ratings. Now these agencies are monitored- and unreliable ratings

2:09could mean they lose their standing.

2:12The Fed’s emergency loans during the financial crisis raised a lot of eyebrows, which is

2:20why Dodd-Frank gave the government new power to audit these loans. Now the government has

2:24authority to audit the Fed again in the future, and all emergency loans must be approved by

2:30the Treasury.

2:32There are many types of derivatives - ones that help keep the economy stable and ones

2:38that did the complete opposite. One of the more controversial of these is the credit

2:43default swap.

2:44Here’s how it works. Say you’re giving a company a big loan. It’s a great deal

2:49if you get all that money back, but what happens if the company goes bankrupt? That’s where

2:54a credit default swap comes in. It’s your insurance.

2:57But before Dodd-Frank, swaps weren’t regulated. And the sellers of the credit default swaps

3:02didn’t actually have enough money to pay out if the worst happened.

3:05Now thanks to Dodd-Frank, these insurance-type products are more heavily supervised.

3:12When you deposit your money into a bank, you expect for it to be kept safe and sound. But

3:18before Dodd-Frank, banks could use your money to trade for their own personal gain. Now,

3:27they have to get out of that business – unless you specifically ask them to trade on your

3:32behalf.

3:35So do all these new rules mean we’ll never see something like the financial crisis again?

3:40The jury’s still out on that one.

3:41Supporters of the Bill say it has improved regulation and has made the US financial systems

3:46more stable. But critics see Dodd Frank as the Obamacare for the economy and argue it

3:51leaves American’s with fewer choices, higher costs and less freedom.

3:56So what does the future hold for an act which regulators, even after five years, have only

4:00competed two-thirds of?

4:03Dodd-Frank was never popular with Republicans, so it’s likely with a Republican president

4:07and Congress… Some if not all could be pulled… leaving its future

4:13an uncertain one.