Dodd-Frank in Retreat

Regulators admit the law hasn’t worked while judges question abuses.

It’s been a rough few weeks for President Obama’s signature reform of American finance. Across Washington deep cracks are appearing in the foundations of the Dodd-Frank law Mr. Obama enacted in 2010.

A federal judge has knocked down a major decision from Mr. Obama’s Financial Stability Oversight Council. Also, a federal appeals court panel is questioning the constitutionality of Mr. Obama’s Consumer Financial Protection Bureau. On Wednesday regulators officially declared that most of the nation’s banking giants are still too big and too complicated to fail.

Dodd-Frank’s failure on its own terms virtually guarantees that someone will reform it. The question is whether it will be the judicial or legislative branch. Republicans have been criticizing Dodd-Frank since it was on the drafting table. More significant is that both Democratic presidential candidates are now also talking reform. Obviously a Bernie Sanders rewrite of financial rules would look very different from a Ted Cruz version. But outside of the White House, the status quo has almost no constituency. And with Barack Obama due to vacate the premises in just nine months, Dodd-Frank’s flaws are becoming impossible to ignore.

Two weeks ago U.S. District Judge Rosemary Collyer rescinded the government’s designation of insurer MetLife as a “systemically important financial institution.” It was the first time such a designation had been challenged in court. Indeed in its first title defense, the stability council created by Dodd-Frank lost by a knockout. Judge Collyer called the council’s decision “unreasonable” and the result of a “fatally flawed” process.

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