by Jesse Eisinger and Jake Bernstein ProPublica, June 3, 2011, 9:16 a.m.by Jake Bernstein and Jesse Eisinger, ProPublica, Dec. 22 by Jake Bernstein and Jesse Eisinger, ProPublica, Aug. 26by Jesse Eisinger and Jake Bernstein, ProPublica, April 9

Early last year, as t
hey weighed whether to bar banks from speculative trading with their own money, congressional staffers turned to a key regulator for advice.

The response from Julie Williams, the chief counsel of the Office of the Comptroller of the Currency, was startling, according to people familiar with the conversations. Williams insisted new rules were unnecessary since this type of trading did not play a major role in the financial meltdown.

Congressional Democrats went ahead and wrote the trading prohibition into Dodd-Frank, the sweeping overhaul of the nation’s financial rules pushed through last July.

But now, behind closed doors, financial agency powerbrokers are jockeying over how to implement the law, a process turning out to be as bitterly contentious and politicized as passing Dodd-Frank in the first place.

Government officials — including Williams and the OCC — are inserting exemptions as they formulate rules to enforce the law. Some regulators, facing severe budget constraints, caution that they may not be able to carry out some of its key provisions. Foes of the law in Congress, and even some former friends, are voicing concern that aspects of the law could erode American competitiveness. Wall Street is mounting a determined lobbying campaign to blunt provisions it failed to defeat on the floors of the House and Senate.

To some, the emerging roadblocks reinforce a fear that Dodd-Frank, which was intended to touch on almost every aspect of the American financial system, may never provide the sweeping reform it promised.

“It was doomed at the outset and nothing can possibly salvage it. We might even have been better off without it,” said Arthur Levitt, a former chairman of the Securities and Exchange Commission.

Dodd-Frank is so sprawling — the legislation runs to more than 2,000 pages — that the law firm Morrison & Foerster dubbed the tracker it created to monitor the implementation process “FrankNDodd.”

The law laid out principles but often left it to regulators to write the actual rules. Those would be the same regulatory agencies that failed to prevent the financial crisis and that, in some cases, view the banks they oversee, not taxpayers, as their primary constituents.

Dodd-Frank requires 387 different rules from 20 different regulatory agencies. The Byzantine, tedious rulemaking process has occasionally pitted regulator against regulator and proved a bonanza for lobbyists.

“The decisions that are coming down are not promising,” said Ted Kaufman, the former Democratic senator from Delaware who worked on the legislation. “The regulators are not making the hard decisions. If the Congress would not make the hard decisions, how can you expect the regulators to make them?”

Regulatory agencies also are caught between Republicans who complain they are moving too fast and Democrats who urge them to comply with the deadlines set in the law.

Congress set aggressive deadlines for regulators to make rules to enforce the law, and, unsurprisingly, they are failing to meet them. The agencies missed each of the 26 deadlines they were supposed to meet for April. So far, regulators have finalized 24 rules and missed deadlines on 28, according to the law firm Davis Polk.

Treasury officials are sanguine about the delays. “If we have to sacrifice a little bit of time to get to the right answer, that’s the right thing to do,” said Mary Miller, the assistant secretary for financial markets.

The law’s defenders say most aspects of the implementation process are going well. Among the successes they point to: The Consumer Financial Protection Bureau, a new agency created to protect consumers from dangerous financial instruments they don’t understand, is coming together, though the Obama administration has yet to appoint a person to head the agency. Rules have been agreed upon for portions of Dodd-Frank that give shareholders a say on executive pay, register municipal advisers and create a program to reward whistle-blowers.

“The first set of rules are going to be good ones,” said the law’s namesake, Rep. Barney Frank, D-Mass. “These regulators are on the right side.”

Still, while the process is far from complete, the early signs suggest that several of Dodd-Frank’s most critical elements are in danger, an outcome that could increase the chances of another financial crisis.

“I am concerned that we are not putting in place the things that we need to do to prevent this from happening again,” says Kaufman.

Here are a few areas where followers of the process see the most cause for concern:

The Volcker Rule

What Dodd-Frank does: Colloquially named after Paul Volcker, the former head of the Federal Reserve who championed it, the rule bars banks from an activity known on the Street as “proprietary trading” — making investments on their own behalf, rather than for clients.

The reason for the rule: During the credit bubble, highly leveraged investment banks speculated heavily in mortgage-backed securities. When those securities went bad, banks like Merrill Lynch and Citigroup were crippled. A report by the United States Senate Permanent Subcommittee on Investigations detailed how proprietary trading “led to dramatic losses in the case of Deutsche Bank and undisclosed conflicts of interest in the case of Goldman Sachs.”

To comply with the law, Morgan Stanley and Goldman Sachs and other banks have jettisoned their internal hedge funds and private equity firms.

Stumbling blocks: Regulators are haggling about complicated, but vitally important, definitions.

The OCC is pushing for banks to have wider latitude in making trades to balance and manage their assets and liabilities. Dodd-Frank specifies Treasury securities as suitable for this purpose; the OCC has suggested in private negotiating sessions with fellow regulators that banks be allowed to invest in other securities as well, according to people familiar with the talks.

As currently written, the Volcker rule allows banks to trade in securities for existing clients but blocks them from doing so for future clients. The OCC has advocated lifting that restriction in the negotiating sessions, according to people familiar with the conversations.

Critics fear that adding the provisions sought by the OCC would mean banks could make almost any trade and claim an exemption, rendering the rule meaningless.

Last year, Volcker himself reached out to Acting Comptroller of the Currency John Walsh to express worry that Julie Williams, the agency counsel, was trying to weaken the rule. Walsh took umbrage at the suggestion, according to a person familiar with the conversation.

Frank said he and other lawmakers were so concerned about Williams, who has held her position since 1994 and has served as the acting comptroller twice, that they inserted a provision in the financial reform legislation that strips her job of civil-service status. “I disagree with her very strongly,” Frank said. “Her job tenure was eliminated, and a new comptroller can appoint new counsel. That was deliberate.”

OCC officials would not comment specifically about the agency’s efforts in regard to the Volcker rule. The agency didn’t respond to detailed questions about Williams’ role and declined to make her available.

“We’re working on an interagency basis to implement the Dodd-Frank Act in a way that is faithful to congressional intent,” an OCC spokesman said. “It would not be appropriate to discuss confidential interagency deliberations regarding the formulation of pending rulemaking.”

Derivatives

What Dodd-Frank does: Aiming to remake this multitrillion-dollar shadow arena into a transparent, regulated market, the law calls for most derivatives to be traded on exchanges.