Dodd-Frank Act

The global financial crisis of 2008 led to the worst recession since the Great Depression of 1929. Many large banks such as Lehman Brothers, Bear Stearns, Merrill Lynch, along with major global financial services such as Fannie Mae and Freddie Mac, collapsed and with them the US economy. In this paper I will present reasons some of the measurements that the government has implemented in order to prevent future meltdowns.

After conducting the research for reasons for so many failures of big institutions it is clear that there is a serious need for reconstruction in the financial sector. By investigating the roots of the financial crisis one can say that a big portion of blame for ignoring warning signs and failing to act in time can be contributed to Wall Street and politicians, and of course to the banks who became rich by creating trillions of dollars by applying risky investments. In July 2010, under President Obama, the Dodd-Frank Wall Street Reform and Consumer Protection Act has been signed into law, one of the most significant regulatory reform measures since the Great Depression

Dodd-Frank brought new regulations to the over the counter (OTC) derivatives market. Financial firms must use derivatives clearinghouses, where traders post capital once a contract is open to cover potential losses, thus limiting the bets a firm can make. These requirements are higher for firms with larger positions that may pose a greater systemic risk. The act also mandates that most derivatives must be traded through a regulated exchange or on a trading platform that meets specific requirements (Yu, 2012). This act adds transparency to pricing.

A systemic risk exists when the failure of one firm may topple others and destabilize the entire financial system. The firm is "too big to fail," or perhaps more accurately, "too organized to fail" (Yu, 2012). In order to reduce this risk Dodd-Frank established the Financial Stability Oversight