Skepticism was the theme of the day during a discussion on financial regulatory reform at the Milken Institute Global Conference today in Los Angeles. Panelists openly questioned how practical the reforms are and how effective regulators will be in enforcing them. They also lamented some of the issues the Dodd-Frank Act failed to address.

Too big to fail

On the issue of “too big to fail,” Allstate CEO Thomas Wilson questioned the effectiveness of the Orderly Liquidation Authority in the Dodd-Frank Act. “I think it creates uncertainty rather than certainty. … If we could unwind our company in a day, I wouldn’t be able to provide insurance,” Wilson said.

Ken Griffin, founder and CEO of Citadel Asset Management, said he thinks the power to liquidate financial firms faces two huge hurdles: international uproar that would take place if the power were used to shutter a firm with global operations and crony capitalism that would affect regulators’ decisions to use the authority.

Jim Millstein said regulators wouldn’t be too eager to use the authority, regardless of the firm, adding that regulators faced with the prospect of exercising the Orderly Liquidation Authority would do so “with terror in their eyes.” Millstein, former chief restructuring officer for the Treasury Department who helped shape the Dodd-Frank Act and played a critical role in the management of the government’s investment in American International Group, went on to say that he views Dodd-Frank as two acts: one that writes rules and one that prods regulators to actually regulate – something Millstein thinks they failed to do before the financial crisis.

Credit ratings

When the conversation turned to the failure of Dodd-Frank to address credit rating agencies, Moody’s Investors Service boss Raymond McDaniel Jr. cautioned those calling for rating agencies to function more like auditors. McDaniel stressed that while auditors take data and provide a backward-looking assessment, rating agencies are asked to project how an asset will perform.

McDaniel also suggested that ratings should not be used in a “mechanistic” way, meaning any shift in a rating agency’s assessment should not engender automatic reaction from the market.

Capital ratios

The panel also shared varying ideas on the topic of capital ratios. Millstein cited a study that found that most banks would have weathered the financial crisis if their capital ratios were at 7%. Griffin adopted an idea under discussion in the U.K. that would see deposits and other core activities walled off, or ring-fenced, from banks’ riskier activities.

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