Potential Financial Services Chairman: Bank Regulators Should Have ‘Final Say’ Over Consumer Bureau

November 16, 2010 · Posted in The Capitol · Comment 

At the moment, the top two candidates to chair the House Financial Services Committee next year — Reps. Spencer Bachus (R-AL) and Ed Royce (R-CA) — are going back and forth, one-upping each other on who would be most aggressive in rolling back the financial reforms enacted by the Dodd-Frank law. Bachus has announced his intention to deny the new Consumer Financial Protection Bureau funding, roll back the Volcker rule, and remove the government’s new powers to dismantle failing financial firms without using taxpayer dollars.

Today, Royce appeared on CNBC to lay out which sections of Dodd-Frank he wants to “revisit,” and first on the list is the newly-created Consumer Financial Protection Bureau. Royce explained that he wants to revive an amendment he proposed during the financial reform debate that would have allowed bank regulators to veto the Bureau’s rules:

One of the ones that I think is most important that we revisit — and of course, the Democrats had the votes to prevent this — but the prudential regulators, the regulators for safety and soundness warned us, ‘do not set up a Consumer Financial Protection Bureau which is able to trump safety and soundness.’ The safety and soundness regulator needs to have a say, needs to have final say in this. My amendment during the markup on the Dodd-Frank bill would have given the prudential regulator that say in the process, so that we didn’t repeat some of the mistakes that we made with Fannie Mae and Freddie Mac. We have to revisit that issue.

Watch it:

There were clearly rampant consumer protection violations that occurred in the subprime lending market, and the bank regulators were completely disinterested in policing such lending, even when they had the authority to do so. Royce would put those same regulators right back in charge, handcuffing the one agency whose explicit mission is protecting consumers from the banking industry’s excess.

The CFPB is already subject to veto by the bank regulators. A two-thirds vote of the Financial Stability Oversight Council — a nine member board composed of the heads of the bank regulators, the Treasury Secretary, and an “insurance expert” — can nullify any CFPB regulation. Royce is clearly trying to set the bar even higher, giving individual regulators the ability to blunt any rule they don’t like.

In the end, both Royce and Bachus have made it abundantly clear that the next chairman of the Financial Services Committee is going to be interested, first and foremost, in protecting the ability of banks to do whatever they want, regardless of the effect on consumers.

Wonk Room

House Republicans Warn SEC Against Implementing Financial Reform Regulations

November 15, 2010 · Posted in The Capitol · Comment 

Rep. Kevin McCarthy (R-CA)

Yesterday, the American Bankers Association (ABA) explained that it is eagerly anticipating working with the incoming Republican House of Representatives to slow down regulation affecting the financial services industry. “We had been disappointed with a number of legislative outcomes with the past Congress, and so we look forward to better outcomes with this Congress,” said Peter Garuccio, a spokesman for the ABA.

To that end, Republicans on the House Financial Services Committee have been warning regulators implementing the Dodd-Frank financial reform law that the GOP is in no mood to see regulations that actually rein in the predatory and risky practices of the banks. And Reps. Spencer Bachus (R-AL) and “Young Gun” Kevin McCarthy (R-CA) have now fired a shot across the bow of the Securities and Exchange Commission, telling SEC Chairwoman Mary Schapiro to tread lightly when it comes to implementing Dodd-Frank:

Despite its sweeping scope, the Dodd-Frank Act does little to spur the type of capital formation that is essential for any real and lasting economic recovery to take hold. Without access to capital, business slows, and without regulatory certainty, capital disappears…In the 112th Congress, promoting capital formation that leads to the creation of jobs will be at the forefront of our agenda for economic growth. We look forward to your prompt response on the actions the Commission plans to take to implement these important recommendations.

Before Congress left for its pre-election recess, the federal bank regulators — including the SEC — requested funding to begin implementing Dodd-Frank, but Republicans balked and blocked it. And it’s becoming clearer that they intend to deny the agencies funding if the rule-making process isn’t to their liking.

Under Dodd-Frank, the SEC is responsible for laying out new rules of the road when it comes to derivatives trading, credit-rating agencies, and corporate governance — all key areas where regulatory failure contributed to 2008′s financial meltdown. The SEC is also tasked with setting up new offices, like the Office of Women and Minority Inclusion, which will be charged with ensuring fair access to markets.

During the regulatory reform debate, Republicans consistently claimed that any profitable activity that a bank undertakes — even if the profits come via ripping off consumers — is not to be restricted. As Sen. Richard Shelby (R-AL) put it, “[Bank] safety and soundness trumps everything. It trumps the consumer finance whatever.” And the incoming Republicans in the House are taking that sentiment to its logical conclusion, telling the regulators tasked with policing the financial marketplace to ease up or face the consequences.

Wonk Room

At G20, Obama Tastes ‘Bitter Reality’ of America’s Decline: Financial Times Deutschland, Germany

November 13, 2010 · Posted in The Capitol · Comment 

This is a challenging moment in history, and according to columnist Peter Ehrlich of Germany’s Financial Times Deutschland, President Obama is a victim of it: The United States, relative to other nations, is growing comparatively weaker. And with economics rather than military prowess the modern measure of true influence, Ehrlich contends that presidents of the United States, starting with Barack Obama, will have to adjust.

I’d like to insert a personal note on this narrative to say, that what is happening today in terms of the relative drop in U.S. dominance reflects the unalloyed success of American policy since the end of World War II. We encouraged the rest of the world to embrace free markets and personal choice for their own good – and ours. Now that they have, we are relatively weaker – but by no means weak. And as Peter Ehrlich emphasizes, it is a world more characterized by economic competition than military.

For Germany’s Financial Times Deutschland, Peter Ehrlich writes in part:

SEOUL: In times of peace, thankfully, there’s no need for historic battles like those of Trafalgar or Waterloo to change the balance of power in the world. These days, change happens little by little, day by day – only becoming noticeable at meetings like the G20 Summit in Seoul. What we witnessed was the end of American global dominance. The “American Century” is over.

At least since the First World War, the United States has been the most significant power both militarily and economically. Twenty years ago after the collapse of the Soviet bloc, it became the only remaining “superpower.” When then U.S. President George H.W. Bush spoke of a “new world order,” he was thinking of a Pax Americana. But from then on, it was all downhill.

Militarily, the U.S. still dominates, but today, even America can no longer afford to go it alone as it did in Iraq. Economically, it is still by far the most significant nation, but the fate of the global economy now lies in Europe and China. Barack Obama, who in contrast to Bush Jr. advocated a multilateral world order, now must bitterly experience what that means in practice. Once staunch allies like Germany now openly criticize the monetary policy of the U.S. Federal Reserve.

READ ON AT WORLDMEETS.US, your most trusted translator and aggregator of foreign news and views about our nation.

The Moderate Voice

Potential Financial Services Chairman Wants To Subject Consumer Bureau To Congress’ Funding Whims

November 12, 2010 · Posted in The Capitol · Comment 

Rep. Spencer Bachus (R-AL)

Rep. Spencer Bachus (R-AL), who will be chairing the House Financial Services committee next year if he can withstand a challenge from Rep. Ed Royce (R-CA), is already gearing up to chip away at the Dodd-Frank financial reform law in any way he can, and one of his targets is the newly-created Consumer Financial Protection Bureau.

Republicans on the Financial Services Committee have already called for the Bureau to be defunded. But defunding is only an effective strategy for holding back the agency until July 2011, when the Bureau will begin to receive an independent funding stream from the Federal Reserve. Bachus, though, wants to ensure that the Bureau is in a constant fight for funding by subjecting it to the annual Congressional appropriations process:

House Republicans are interested in more than tinkering. Spencer Bachus of Alabama, a contender to lead the House Financial Services Committee, has said he would seek to subject the newly created Consumer Financial Protection Bureau to the appropriations process. Under the law, its funding would come from Federal Reserve profits each year.

The rationale for giving the Bureau an independent stream of funding is to isolate it from the whims of Congress and to prevent appropriators from pushing a political agenda through the agency by threatening funding cuts. The Federal Reserve and the Securities and Exchange Commission have independent budgets for the same reason.

Of course, there are plenty of other ways in which a regulatory agency can still be kneecapped: when the Bush administration was in power, it simply appointed regulators who didn’t have any interest in actually regulating. Former SEC Chairman Chris Cox is a prime example of this.

But an independent source of funding at least ensures that an agency won’t have to come before Congress begging for dollars and agreeing to whatever policy prescriptions will enable them to keep the lights on. Of course, that’s precisely the point of the House Republicans’ push: if they can’t repeal the creation of the agency outright, they want to render it as toothless as possible, so that Wall Street can continue to dream up new, expensive consumer products free from oversight.

Wonk Room

House GOP Goes All-In Against Financial Reform, As Rep. Royce Challenges For Financial Services Chairman

November 4, 2010 · Posted in The Capitol · Comment 

Rep. Ed Royce (R-CA)

Yesterday, Rep. Ed Royce (R-CA) announced that he is going to challenge Rep. Spencer Bachus (R-AL) for the chairmanship of the House Financial Services Committee. “I think we need a strong chairman in this position,” Royce told Bloomberg News. “I discussed this earlier today with Spencer Bachus and I shared with him that this is nothing personal.”

The prospect of a challenge to his committee leadership may explain why Bachus has been going gangbusters with his rhetoric regarding dismantling the Dodd-Frank financial reform law. And he kept it up yesterday, sending a letter to the newly created Financial Stability Oversight Council scaremongering about the effects of the Volcker rule, which is meant to prevent banks from engaging in risky trading with federally insured dollars:

Bachus says that a ban on proprietary trading – known as the Volcker rule – that was included in the new Dodd-Frank financial reform law will “impose substantial costs on the American economy and market participants” with “doubtful” benefits.” “Depending on how US regulators choose to implement it, the Volcker rule may spark a mass exodus of clients from US banks to banks based abroad.”

In the letter, Bachus casts doubt on the very notion that risky trading had anything to do with the financial mentldown of 2008. But as the Political Economy Research Institute at the University of Massachusetts pointed out “risky proprietary investments by investment banks, along with trading for clients whose decisions were influenced by these banks, was one of the main forces that sustained upward pressure on securities prices in the bubble…Indeed, by running large trading books, banks had inside information on client trading patterns and could use that information to front-run, and thereby help sustain market trends.”

Royce, for his part, is no more sympathetic towards the Dodd-Frank law. Last week, in fact, he said that he would allow bank regulators to have direct veto power over the newly created Consumer Financial Protection Bureau. During the financial reform debate, he was also one of the foremost promulgators of the myth that Fannie Mae and Freddie Mac caused the housing bubble. It should come as no surprise that he has raised far more money from the finance industry than any other business sector during his career.

Even the likely Speaker of the House, Rep. John Boehner (R-OH), is getting into the anti-financial reform game, saying that under his watch, “not only will the Congress understand, but the American people will understand, just what this bill will do to our financial services industry.” So, no matter who takes over the Financial Services Committee, as Barry Ritholz wrote, we should expect “new hearings, new subpoenas, and general harassment of regulators by the House of Representatives.”

Wonk Room

Rep Spencer Bachus (R-Alabama) Plots to Weaken Financial Regulation, Strengthen Banks

November 4, 2010 · Posted in The Capitol · Comment 

I think relatively few people understand that one of the principal substantive complaints the new Republican House majority has about Barack Obama is that he’s been unkind to the incumbent firms in the financial services sector.

But here’s Spencer Bachus, the likely new chair of the relevant committee, firing warning shots on behalf of Wall Street:

Spencer Bachus, a potential Republican chairman of the House financial services committee, has fired the first salvo in a battle with regulators – warning them against harming US banks by curbing their trading activity. […]

Underlining the change in Congress, Mr Bachus, who as ranking Republican on the committee could replace Barney Frank as chairman of the panel, expressed concern that shareholders of Goldman Sachs and JPMorgan Chase will be hurt because the banks will be less profitable. […]

The derivatives provisions in Dodd-Frank alone… as they stand now they’re going to take a trillion dollars out of our economy. Think how many jobs that’s going to kill,” he said.

Rising stars in the conservative media firmament have painted an appealing picture over the past two years of a populist right outraged by allegedly undue entanglement between government and big business and eager to help out the little guy. But this is the reality. The article is via Tyler Cowen who remarks “It is difficult to fathom how that last pararaph can make any sense, other than as fabrication.”


The Constitution in the Financial Crisis Conference at Stanford Law School

November 4, 2010 · Posted in The Capitol · Comment 

(Todd Zywicki)

Next Thursday and Friday the Stanford Constitutional Law Center (headed by Michael McConnell) will host a conference on “The Constitution in the Financial Crisis.”  Ken and I will be presenting along with many others.  Registration is free but they ask for registration in advance.

The Volokh Conspiracy

Incoming Financial Services Chairman Looks To Weaken Derivatives Reform, But CFTC Chairman Pushes Back

November 3, 2010 · Posted in The Capitol · Comment 

Rep. Spencer Bachus (R-AL), who will likely be the next chairman of the House Financial Services Committee due to the Republican victory last night, has signaled his intent to weaken a series of provisions in the Dodd-Frank financial reform law, including the Volcker rule and the resolution authority for dismantling failed banks. And he told the Wall Street Journal this morning that he also “plans to rewrite the derivatives provisions” in the law:

“That’s one of the job-killing provisions of Dodd-Frank that needs to be addressed,” the Alabama Republican said in an interview Wednesday morning, calling the provisions “overly expansive.” Mr. Bachus said the new derivatives rules, which will require most routine swaps to be traded on exchanges and routed through clearing houses, will redirect as much as $ 1 trillion from the U.S. economy, draining capital from the financial system that could be used for loans or job creation.

During the debate over Dodd-Frank, Bachus had an utterly incoherent position on derivatives reform, calling for transparent derivatives markets while opposing all reforms that would increase market transparency. Now, it seems, he’s ready to carry Wall Street’s water by dialing back the requirements designed to bring currently unregulated derivatives trading out of the dark.

This is troubling, as the derivatives title is one of the strongest parts of the Dodd-Frank bill, bringing much needed regulation to a portion of the financial system that suffered from a severe lack of oversight. Remember, it was AIG’s issuing of billion in credit default swaps that it couldn’t honor that led to its downfall; Lehman Brothers was also sunk by exposure to derivatives. The derivatives title of Dodd-Frank — authored by outgoing Sen. Blanche Lincoln (D-AR) — sets up exchanges so that derivatives must be traded publicly (like stocks) and employs clearinghouses to ensure that both parties in a derivatives trade have adequate collateral backing it up.

What House Republicans will likely aim to do — if their rhetoric during the financial reform debate is any indication — is try to grant wide exemptions to the exchange and clearing requirements, letting all sorts of activity that is purely speculative continue unabated.

But Commodity Futures Trading Commission Chairman Gary Gensler, who has been one of the staunchest supporters of strong derivatives reform, is pushing back, saying the election yesterday won’t interrupt the CFTC’s rule-writing effort. “Any regulatory agency is obliged to follow the statute and what Congress wrote, and that’s what we’ll do,” Gensler said.

Wonk Room

Cantor Confirms GOP Wants To Defund Financial Reform: ‘That’s What The American People Are Expecting’

November 3, 2010 · Posted in The Capitol · Comment 

Republicans on the House Financial Services committee have made no secret of their desire to defund and defang portions of the Dodd-Frank financial reform law, particularly the newly-created Consumer Financial Protection Bureau (which does not stand on its own, divorced from the Congressional appropriations process, until July 2011). And now that they’ve gained a majority in the House of Representatives, the GOP’s game plan is kicking into gear.

Last night on CNBC, the potential House Majority Leader, Rep. Eric Cantor (R-VA), said that House Republicans fully intend to deny funding to regulators seeking to implement the Dodd-Frank bill because, according to Cantor, “that’s what the American people are expecting”:

CANTOR: The House has the power of the appropriations process and the leverage that comes with that essentially puts us in a position to deny the administration funding for promulgating the regulations that carry through the missions of these two bills…And that’s what the American people are expecting. They want us to focus on job creation first they results.

BARTIROMO: So that’s what you’re going to do? You’re going to deny funding then? That’s one of your tools in the toolbox, deny funding?

CANTOR: Well, it is a check that this public is looking for on this runaway agenda of this administration. They don’t want to see any more spending, especially if it promotes policies that kill jobs. That’s what you’ve got, both with the Obamacare bill and the Dodd-Frank bill.

Watch it:

First off, according to Gallup, financial reform is the lone piece of legislation from the 111th Congress of which a majority of Americans approve. In fact, 61 percent of the public favors the bill.

In an interview with Bloomberg News last night, Financial Services Committee member Jeb Hensarling (R-TX) said that Republicans plan to “ensure that regulators such as the Commodity Futures Trading Commission and the new consumer protection bureau do not write rules that lawmakers consider too restrictive on the banking industry.” “We don’t want them to regulate capriciously, arbitrarily, without engaging in a cost-benefit analysis,” he said. The Big Picture’s Barry Ritholz said that Hensarling’s pronouncement is “representative of a misguided economic cost/benefits analysis that was dominant during the three decades incorporating 1980s-2000s. Its fatal flaw is that it fails to include the expenses and impact of high cost events — like the 2007 recession, 2008 credit crisis, and 2009 market collapse.”

In addition to denying the regulators funding if they write rules that the GOP considers too restrictive, Republicans could also bog down the rule-writing process by hitting regulators with a slew of subpoenas and hearing appearances. And in the meantime, Wall Street will be free to go back to the risky practices that led to its — and the economy’s — downfall.

Wonk Room

Rand Paul’s Jobs Plan: Repeal Financial Reform

November 2, 2010 · Posted in The Capitol · Comment 

I’ve been following various Republican members of the House Financial Services Committee as, in anticipation of the GOP gaining control of the lower chamber, they promise to repeal or defund important provisions in the Dodd-Frank financial reform bill. And if his recent interviews are any indication, these representatives may have a sympathetic counterpart in Rand Paul, Kentucky’s Republican Senate nominee.

Last night, during an interview with CNBC’s Larry Kudlow, Paul asserted that his plan for growing the economy and creating jobs is to prevent some of Dodd-Frank’s regulations from coming online:

KUDLOW: In your campaign, what are your proposals to grow the economy and get jobs?

PAUL: Well, my biggest concern right now, and I think it’s not being talked about enough, was the banking regulatory billMy fear is that a bad recession could turn into a worse recession because of overzealous regulations on banks.

On CNN this morning, Paul reiterated his concern with Dodd-Frank, saying “we need to repeal the things that are preventing us from getting out of this recession.” Watch a compilation:

Contrary to Paul’s assertion, businesses large and small are having trouble accessing loans because the economy is weak and banks are holding onto money (much like large corporations are). Lifting regulations is not going to suddenly make them feel that economic conditions merit making loans, but it would free them up to reengage in some of the risky practices that led to the financial meltdown.

Of course, this fits in with Paul’s wider corporatist agenda, in which businesses could discriminate against customers because of their skin color and safety regulations for workers would cease to exist. But if he winds up in the Senate, Paul will be joined in his push for repeal by Sens. Richard Shelby (R-AL), Tom Coburn (R-OK), and Saxby Chambliss (R-GA). Washington’s Republican Senate nominee Dino Rossi has also said that he would like to see Dodd-Frank repealed. Paul is taking it further, though, claiming that the number one thing that the government can do to create jobs is to encourage Wall Street to go back to running wild.

Regulators are already designing some of the much needed rules to govern Wall Street — particularly those having to do with derivatives and the Volcker rule — and Republicans have made clear they want to throw sand into the regulators’ gears (as any repeal effort will in all likelihood be vetoed by President Obama), burying them in paperwork and hearing appearances that take time away from the rule-writing effort. And it seems that Paul would be all too happy to join in that game.

Wonk Room

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