Financial reform battle continues over Dodd-Frank law
By Danielle Douglas,
The fate of financial reform may be decided in the coming year as congressional leaders on both sides of the aisle attempt to modify the Dodd-Frank Act.
In the two years since Congress passed the far-reaching regulatory overhaul, lawmakers have railed against the law for either not going far enough to reform Wall Street or being too burdensome to the industry. Republicans have sought to dismantle Dodd-Frank through a series of failed bills, placing Democrats on the defensive despite their own misgivings about the law.
But rhetoric has softened and bipartisan alliances have formed, leading some analysts to anticipate that meaningful legislation will be on the agenda next year.
“There is no repealing Dodd-Frank, but there will be efforts to eliminate duplicative parts of the law to avoid unintended consequences,” said Jaret Seiberg, senior policy analyst at Guggenheim Partners.
Republicans remain motivated to gut key statutes, as evidenced by the failed “Plan B” proposal to avert the fiscal cliff. GOP leaders tucked language into that bill that would have cut automatic funding to the Consumer Financial Protection Bureau and stripped regulators of the power to unwind “too-big-to-fail” institutions.
If the bill is indicative of things to come, critics say, polarizing ideology may continue to prevent lawmakers from working together on technical fixes to Dodd-Frank. They point out that the makeup of the House and Senate will generally be the same in the next Congress, raising fears that gridlock will continue.
“Until the Republicans have an opportunity to control the Senate, it’s very unlikely they will be proposing much reform legislation in the House,” said Peter J. Wallison, a senior fellow at the American Enterprise Institute. “Most of what will happen will be a studying of reforms, but no legislation.”
But there are signs that lawmakers have the political will to modify financial reform. Late Friday evening, the Senate unanimously passed a bill that would direct the Government Accountability Office to examine the economic benefits large banks receive for being “too big to fail.”
The bill, sponsored by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.), asks the agency to study whether institutions with more than $500 billion in assets enjoy favorable pricing of their debt because of inflated credit ratings built on the perception that the government will always step in to prevent their collapse. It’s unclear whether the House will take up the bill before the end of the session, but advocates of reform are encouraged by the broad support in the Senate.
Brown and Vitter are part of a small but growing group of Democrats and Republicans interested in exploring whether the nation’s largest banks need to be downsized to protect financial stability. Analysts say the addition of Sen. Elizabeth Warren (D-Mass.), the architect of the Consumer Financial Protection Bureau, to the Senate Banking Committee will strengthen the coalition.
In an interview earlier this month, Brown said he intends to reintroduce an amendment he had co-sponsored with then-Sen. Ted Kaufman (D-Del.) to limit the size and scope of bank operations. The Senate shot the bill down in 2010 by a vote of 61 to 33, but Brown said his colleagues have expressed interest in revisiting the measure.
“You can’t do everything at once. Dodd-Frank was pretty comprehensive . . . but we’re going to see legislative initiatives . . . on everything from capital requirements to dealing with the size of the banks,” he said. “I’m optimistic that this isn’t over.”
Even if Brown’s bill dies in committee, there are other proposals from influential policymakers that could make it to the floor. Federal Reserve Governor Daniel Tarullo, for one, has called on Congress to restrict the expansion of big banks by limiting their non-deposit liabilities — funding that comes from sources other than consumer deposits in savings or other accounts.
“There is a potential for an alliance between liberals and conservatives,” said James Kwak, co-author of “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.” “Liberals don’t like that big banks have lots of market power, which enables them to act in a predatory manor. Many conservatives don’t like the fact that these banks have an implicit government subsidy.”
Conservatives, however, are even more opposed to the government interfering with the financial markets by limiting the size of banks, said Kwak, who is also an associate professor at the University of Connecticut School of Law. The balance of power in Congress, he stressed, has not shifted enough for substantial reform to come from the Hill.
Getting any legislation passed will depend on the political will of the House Financial Services Committee. Incoming chairman Jeb Hensarling (R-Tex.) is a staunch advocate of community banks, but he doesn’t favor breaking up big banks. He has said that ending “too big too fail” is a top priority but has been vague on a plan. Hensarling could not be reached for further comment.
For her part, Rep. Maxine Waters (Calif.), now the ranking Democrat on the Financial Services Committee, supports the blueprint that Dodd-Frank has already created for ending government bailouts, including orderly liquidation, said her chief of staff, Mikael Moore.
Economist Phillip Swagel, who teaches at the University of Maryland School of Public Policy, said, “It’s clear Congress is thinking about the extent of government involvement in the financial markets, but the legislative approach will likely be incremental.”
He added that parts of Dodd-Frank are still being phased in, and lawmakers may wait to judge the impact of the new rules before making changes.
Like many market watchers, Swagel is curious about how housing finance reform will play out in Congress next year. There is a broad consensus that the secondary mortgage market must be reformed, but congressional leaders appear to be miles apart on strategy.
Hensarling opposes federal guarantees for home loans and wants to wind down Fannie Mae and Freddie Mac. Waters is not on board to place the mortgage market solely in the hands of private companies. Yet there are aspects of housing reform that she and Hensarling may agree on, even if their motivations are different.
Both lawmakers have questioned whether risk-retention rules, which force banks to hold 5 percent of mortgages on their books, will stall recovery in the housing market. Guggenheim’s Seiberg said Waters has raised concerns that the Dodd-Frank provision might restrict credit availability, while Hensarling probably considers the rule a regulatory burden that could preclude the return of the private securitization market.
“Hensarling and Waters could become the new power couple in financial services. They’re polar opposites from their political backgrounds, but they will share key objectives,” Seiberg said.