Berkley Better on Financial Regulation Reform

There’s one very direct way to get to my heart — support common sense regulations to curb the excesses of Wall Street which threaten the interests of Main Street.  Representative Shelley Berkley’s (D-NV1) done this.  Senator Dean Heller has not.

Case in Point:  Here’s a segment of Senator Heller’s response to Rep. Berkley’s charge that he has placed the interests of Wall Street over those of Main Street.

“Fact: Dean Heller voted against Dodd-Frank bill, legislation masked as “Wall Street reform.” This bill would institutionalize bailouts, harm job growth, and create new taxes by intrusive and unaccountable government agencies and offices. (Paul Sperry, “Dodd-Frank Rules Will Crush Employment,” Investor’s Business Daily, December 13, 2011)”    [Heller]

In order to accept Heller’s “fact” we have to accept that the Dodd Frank Act (1) institutionalizes bailouts, (2) harms job growth, and (3) creates unaccountable government agencies.”  Three falsehoods do not create a FACT.

Does the Dodd Frank Act institutionalize bailouts?  NO.  The Dodd Frank Act expressly forbids financial regulators from bailing out a failed institution.  As I’ve repeatedly pointed out on this site, Dodd Frank requires that a failing institution either (a) be placed into bankruptcy or (b) go into resolution.   So, what could Senator Heller be talking about?

There is a provision in the Dodd Frank Act which allows the Federal Reserve and the FDIC to provide “system wide support” in the event of a major systemic crisis.  Critics of the Dodd Frank Act have erroneously cited these elements to argue that the statute perpetuates bail outs.  Wrong. What perpetuates bail outs is the pre-Dodd Frank environment in which there was no authority to wind down failing financial institutions and prevent them from “infecting” other stable ones.

Even a modicum of common sense says that you don’t allow one bad apple to sour the entire barrel.  In the case of a financial bad apple (or actor) you put it in “resolution,” a term bankers like ever so much more than “bankruptcy,” and prevent it from taking the healthy parts of the  system down with it.

Does Dodd Frank harm job growth? NO. The article cited by Senator Heller comes from the  Investor’s Business Daily, which in turn quotes the outgoing chairman of the American Bankers Association.

But the banking industry says burdensome red tape is hurting economic growth and jobs in a still-sluggish labor market.

“The level of real GDP could be 2.7% less by the year 2015 than would otherwise be the case for the United States,” said Stephen Wilson, outgoing chairman of the American Bankers Association. “This could result in 2.9 million fewer jobs being created.” (emphasis added)

First, let’s deal with the “burdensome red tape” argument.  One of the more intriguing parts of the ABA’s assault on the reforms has been to send their lobbyists by the brigade load to help write agency rules to meet their needs, and then to complain vociferously that the rules are “too complicated.” The former head of the FDIC explains:

“As to complaints from the banks that overlapping regulations are adding complexity without benefit, Bair suggests that perhaps reforms like the Volcker rule would be less complex had bank lobbyists not pushed for so many exceptions and clarifications to accommodate for industry concerns.” [Forbes]

Secondly, what Senator Heller is taking as a “will,” as in the implementation of the Dodd Frank Act will cause job losses is actually a “could” in the original article he cites.  Furthermore, the ABA spokesperson is projecting out to 2015.  I could just as easily argue that problems in the EuroZone will depress the global economy by 2015, but that doesn’t mean we should stop doing business with France or Germany because issues their monetary system could affect us.

Third, it’s more than a little ironic to have Senator Heller seeking to substantiate his Independence From the MegaBanks and Wall Street by citing the arguments made by MegaBanks and Wall Street (ABA) in opposition to the Dodd Frank Act, in a publication the editorial policy of which represents Wall Street interests.

Finally, compare the “could cost” jobs contention with the reality that self regulation and de-regulation in which the Housing Bubble Blossomed, the Mortgages Melted Down, and the Financial Sector Seized Up, cost the real American economy all manner of REAL jobs.

Are there “unaccountable” government agencies and offices? NO.
There are two provisions of the statute which precipitated this charge.  The first, and most obvious, target was the Consumer Financial Protection Bureau.  “The bureau’s goals include scrutinizing major violations of mortgage disclosure laws and other infractions at firms that could cause consumers to unwittingly sign up for risky loans. It also examines whether credit card forms issued by big banks are misleading.” [NYT] Right off the bat we can tell these activities weren’t going to be popular with the MegaBanks and the Wall Street investment firms.

Arguments from the Bankers give the impression that the CFPB is some rogue organization out to haunt the bankers with little or no oversight. In reality the CFPB is a division of the Department of the Treasury.   Additionally, Section 1017(e)(4) of the Dodd-Frank Act gives the Bureau a statutory responsibility to present an annual report to the Congress. Thus, the leadership of the agency are subject to confirmation by the Senate, the bureau is under the administrative jurisdiction of the Treasury Department, and it is required to prepare annual reports for the Congress.  Hardly the structure of an “unaccountable agency.”

The hard truth is that the bankers, mortgage originators, mortgage securitizers, and the credit card companies didn’t want ANY agency, and if one had to be created they wanted it to be ensconced in the Office of the Comptroller of the Currency, an agency which sees its mission as protecting banks  and not consumer advocacy. [ISLR] This would also be the same agency which over-ruled state consumer protection statutes beginning in 1998.* [ConsumersUnion]

Again, there’s no small amount of irony in Senator Heller’s claim to be independent of banking sector influence while touting the talking points from the bank lobbyists who tried their hardest to either kill the agency protecting consumers, or if its death weren’t an option, then to put it under the administrative jurisdiction of an agency well known for being more concerned with banks than with their customers.

The Financial Stability Oversight Council is a second target of the banker’s objections.  It, too, is under the administrative jurisdiction of the Department of the Treasury.  The function of this council, created by Title I of the Dodd Frank Act, is to “(1)  identify the risks to the financial stability of the United States from both financial and non-financial organizations, (2) promote market discipline, by eliminating expectations that the Government will shield them from losses in the event of failure, and (3) respond to emerging threats to the stability of the US financial system.”

In short, banks and investment operations will be scrutinized to see if they are creating a financial situation which threatens the stability of our economic system, and will be told in no uncertain terms that if they are a threat then NO BAILOUTS will be forthcoming.  Although, bankruptcy and resolution might be.

What the FSOC does is to get all the regulators in the same room.  The Secretary of the Treasury is the chair, and voting members include the Federal Reserve chairman, the Comptroller of the Currency, the director of the CFPB, the chair of the SEC, the chair of the FDIC, the chair of the CFTC, the director of the FHFA, the chair of the National Credit Union Administration Board, and one independent member appointed by the President and confirmed by the Senate.  [FSOC]

Ultra-conservative organizations allied with the bankers and Wall Street investment firms have thus far criticized the FSOC as an unconstitutional power grab and alternately as an organization incapable of getting anything done. [WaPo] [CEI]  Let’s return to the commentary pointing out that it is very difficult to get things moving, much less finalized, when industry lobbyists are pushing for exceptions and clarifications “to accommodate industry concerns.”

If Senator Heller is categorizing the FSOC as one of the “unaccountable government agencies and offices,” then he is objecting to a structure in which federal regulators have the opportunity to get on the same page.  The banking and financial sector fought the Dodd Frank Act oversight provisions saying that “de-regulation” and “self regulation” would suffice to prevent the next big market Bust.

If we aren’t convinced the bankers and financialists are still trying to make the argument for de-regulation and self regulation, then a snippet from last evening’s presidential debate from Governor Romney should make the point clearly:

“It’s been two years. We don’t know what a qualified mortgage is yet. So banks are reluctant to make loans, mortgages. Try and get a mortgage these days. It’s hurt the housing market because Dodd-Frank didn’t anticipate putting in place the kinds of regulations you have to have. It’s not that Dodd-Frank always was wrong with too much regulation. Sometimes they didn’t come out with a clear regulation.” [ABA]

And, a clear regulation would be what?  One that conforms to the interests of the mortgage originators? The bankers? The securitizers?  Of course the proponents of the Dodd Frank Act knew that regulations would have to be written to implement the bill — every bill requires that process!  What they also knew was that there would be industry/sector push back against any attempt to rein in the Wall Street Casino.

Apparently lost to Governor Romney is the fact that more stringent mortgage requirement are now in place, and the glut of no-doc subprime Heaven only knows what the rates will be mortgages which fed the securitization machine feeding in turn the Housing Bubble, is Kaput.  Unless, he’d like to go back to the Good Old Days of Synthetic CDOs based on those no-doc hybrid adjustable rate mortgages which proved so deleterious to the American economy?  We’ve tried self regulation and de-regulation and look what it got us in 2007-2008.

If Senator Heller is nostalgic for the days of self regulation and de-regulation then he’d by all means seek to dismantle the two government offices newly responsible for the oversight and supervision of our financial services.  However, to do so invites precisely the kind of behavior on the part of the financialists which got us in deep trouble — from which we are still trying to dig our way out.  His response to Rep. Berkley merely serves to illustrate his adoption of the MegaBank and Wall Street party line, and his ties to the financial sector rather than his independence from it. Or, as an elderly relative once put it: If you Quack like a duck, don’t get upset when someone calls you  a Mallard.

Representative Berkley’s support for the Dodd Frank Act, with its reforms of the oversight and supervision of our financial institutions, demonstrates a far better understanding of the necessity to restrain the excesses of a financial environment in which short term profits are given greater weight than long term economic stability.

References and Additional Reading:  “Dodd-Frank Rules Will Crush Employment, Banks Warn,” Investor’s Business Daily, Paul Sperry, December 12, 2011.  Representative Spencer Bachus, HFSC. citing IBD article.  “Real Talk With Sheila Bair,” Forbes, July 25, 2012. Jeremy Hobson, “Former Regulator…,” MarketPlace.Org, September 25, 2012.  CFPB report archives, as of October, 4, 2012. * “OCC’S AGGRESSIVE PREEMPTION OF  STATES’ CONSUMER BANKING PROTECTIONS, Consumers Union, July 17, 1998.   USPIRG, “Consumer, Civil Rights Groups Attack New Proposed Rule Preempting State Consumer Protection Laws,” May 26, 2011.   Bloomberg News, “U.S. Treasury Criticizes Currency Comptroller on State Rules,” June 28, 2011.   Jeanine H. Arnett, Director, Government Relations & Public Policy, AFP, “Geithner Gives New Life to Money-Market Fund Proposals,” September 28, 2012.  Congressional Research Service, “Financial Stability Oversight Council: A
Framework to Mitigate Systemic Risk,” (pdf) November 15, 2011. ABA Reform Tracker, Dodd Frank, October 4, 2012.

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