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AEI: Dodd Frank Chasing a Ghost?

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AEI: Dodd Frank Chasing a Ghost?
February 8, 2013 12:00 pm
February 8, 2013 3:30 pm
January 14, 2013
1150 17th Street, NW 12th Floor, Washington, DC, DC, 20036 , United States

A new paper by Hal Scott of Harvard Law School — which draws from a
close analysis of the Lehman Brothers and AIG cases — casts doubt on the validity of an
idea that underlies the Dodd-Frank Act. The act is based on the notion that the failure of a large financial firm like Lehman could cause another systemic crisis because of the firm’s “interconnections” with other large firms. Accordingly, the Financial Stability Oversight Council is authorized under the act to designate large banks and nonbank financial institutions as “systemically important” because of their interconnections with others, and subjects them to stringent new regulation by the Federal Reserve. The Fed, in turn, has proposed a regulation that would limit interconnections among these large financial firms. Scott, however, shows that interconnections were not responsible for the chaos that followed the Lehman bankruptcy. Instead, Scott suggests that “contagion” — the tendency for runs to develop among firms that rely on short-term funding — is a better explanation for what happened in the 2008 financial crisis. The Dodd-Frank Act, he argues, would be more effective if it focused on preventing run-like behavior rather than imposing new and restrictive regulation on individual institutions. This conference will examine the Scott paper and its implications for the Dodd-Frank Act. To register, please visit

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