Defang and Delay—Wall Street Plans to Neuter FinReg
Business + Economy

Defang and Delay—Wall Street Plans to Neuter FinReg

The lobbyists seeking to influence the implementation of the financial regulation bill do not use slogans like “repeal and replace.” Their preferred strategy is defang and delay.

The most important battles over the Dodd-Frank financial regulation bill signed into law by President Obama last July won’t take place in the halls of Congress. They will involve grueling trench warfare by the army of lobbyists already engaged in a campaign to influence the more than 300 rules and regulations that must be put in place over the next 18 months by federal agencies charged with implementing the law.

The newly-elected Republican House will try to put its stamp on the process, in a bid to alter or blunt the effect of some provisions that Republicans opposed during the legislative debate. A heated battle is underway between Rep. Spencer Bachus, R-Ala., who is in line to become the next chairman of the House Financial Services Committee, and Rep. Ed Royce, R-Calif., who is challenging him for the post currently held by Democrat Barney Frank of Massachusetts.

But unlike the GOP drive to derail or dismantle the new health care reform law, efforts at outright repeal of the financial services legislation are not in the cards. Banks remain the most reviled institutions in America in the wake of the 2008 financial crisis that nearly sank the still-struggling U.S. economy.

A Gallup poll taken in September found 61 percent of the public supported greater controls on banks and other financial institutions, making it the only legislation passed during the Obama administration’s first two years that garnered majority public backing.

Royce is pledging to end Fannie Mae and Freddie Mac’s
role in purchasing and reselling home mortgages while
attacking the “crony capitalism” of “too big to fail.”

The rhetoric emanating from the would-be rivals for House Financial Services chair is illustrative. Royce, who hails from Orange County, Calif., is presenting himself as the populist upstart. He’s pledging to pursue his long-standing agenda of ending Fannie Mae and Freddie Mac’s role in purchasing and reselling home mortgages while attacking the “crony capitalism” of “too big to fail,” which he says failed to subject banking institutions to market discipline.

More than half the $1.25 million donated to Royce’s Road to Freedom political action committee (PAC) over the last two election cycles came from banks, auditors and insurance companies, according to the Center for Public Integrity.

Fight Training
Bachus is a courteous, soft-spoken Southerner with a history of doing favors for financial firms. He is promising to use oversight hearings to target specific provisions that trouble banks and insurers. He, too, has deep financial ties to the industry, which contributed more than half the $2.7 million in PAC money he received in the past four years. “We need to take incremental steps” that can win the support of moderate Democrats in the Senate, he told CNBC in the wake of the midterm election which shifted control of the House back to Republicans.

The fight over the Consumer Financial Protection Bureau and its architect, Elizabeth Warren, a former Harvard bankruptcy expert who is now advising Treasury Secretary Timothy Geithner, garnered the most attention during the fight over the financial overhaul legislation. The CFPB promises to provide plain-English information about mortgage and credit card rates, while cracking down on excessive fees and deceptive business practices.

Now that it is in the law, liberal activists have made funding the agency and giving it some teeth the centerpiece of their limited lobbying efforts. “They’re not going to eliminate it,” said Travis Plunkett of the Consumer Federation of America. “The statute says explicitly that the funding is not reviewable by the [congressional] appropriations committee.”

Financial service industry lobbyists have all but given up on that
fight, concentrating instead on making their own demands on Warren.

They’re fighting the last war, however. Financial service industry lobbyists have all but given up on that fight, concentrating instead on making their own demands on Warren. “The industry is working with her to try to get it right,” said Steve Bartlett, president of the Financial Services Roundtable. “We stated our objections, but now the law is the law.”

For instance, they want one of the CFPB’s first acts come July to be issuance of a single, simple truth-in-lending disclosure statement that can be used during mortgage closings, not the multiple forms in incomprehensive language required now. That will need interagency coordination and rapid changes in bureaucratic behavior, which could prove problematic for Warren, a novice in Washington. 

The more significant decisions as far as the banking industry is concerned, though, will revolve around the law’s re-regulation of their trading practices. The new law for the first time sets up transparent exchanges for buying and selling exotic financial instruments like debt derivatives, which previously operated in the dark and off balance sheets and only became transparent after metastasizing into a cancer on the entire financial system.

The law also imposes new capital requirements on banks, and gives the government authority to seize and liquidate firms that go bankrupt. It sets up a coordinating body of regulators — the Financial Services Oversight Council (FSOC) — to keep watch over complex financial services companies that pose a risk to the entire system. And the law restricts regulated banks from engaging in proprietary trading — the so-called Volcker rule named after the former head of the Federal Reserve Board who advised President Obama during the campaign and early months of the administration.

“Our biggest banks have become dangerous — the
supporting evidence is the deepest recession since 1945.”

The fight over the Volcker rule has only intensified since passage, as more than 1,600 comments poured into the Treasury Department earlier this month in response to an initial FSOC study on how to implement it. Most of the comments came from industry opponents seeking a fuzzy interpretation of the rule.
“The line between the banks’ proprietary trading and their customers’ trading gets blurry because a trade requires two and sometimes three parties,” said Bartlett. “To make the bank the equivalent of the arranger of a telephone call takes the bank out of managing risk, and that will only add to risk, confusion and the cost.”

Bachus also weighed in. His comments questioned the need for the rule. “The financial crisis was caused by the erosion of lending standards and the federal government’s poorly conceived efforts to subsidize mortgage lending,” the House member wrote. “’Proprietary trading’ had virtually nothing to do with the crisis.” 

That drew a strong retort from Massachusetts Institute of Technology economics professor Simon Johnson, a former chief economist at the International Monetary Fund and a senior fellow at the Peterson Institute for International Economics, which is funded by Peter G. Peterson, who also finances The Fiscal Times. “Our biggest banks have become dangerous by any reasonable standard — the supporting evidence is the deepest recession since 1945, more than 8 million jobs lost, and a 40 percentage point increase in the ratio of privately-held federal government debt-to-GDP,” he wrote.  “The Volcker Rule is not a panacea but if designed and implemented appropriately, it would constitute a major step in the right direction. The effectiveness of our financial regulatory system declined steadily over the past 30 years; it is time to start the long process of rebuilding it.”

Another major fight over regulatory implementation revolves around the new derivatives exchanges established by the law which will for the first time provide public disclosure of pricing and trading and set up separate clearing houses for processing and monitoring transactions. Those clearing houses will force market participants post capital to cover their bets before they go sour.

“The primary vehicle for Republicans is going to be to put pressure on the regulators via
hearings, via oversight. They will move the regulators a small amount.”

“AIG never had to post any capital,” said Michael Greenberger, a law professor at the University of Maryland who served as chief counsel to Brooksley Born, former chairperson of the Commodity Futures Trading Commission. Pointing to the $80 billion taxpayer bailout of American International Group, Greenberger said “that kind of thing would never have happened had AIG had to post collateral from the very first set of transactions they entered into.”

The tough new requirements were included in the law at the insistence of junior Democratic senators including Jeff Merkley of Oregon and Blanche Lincoln of Arkansas, who lost her seat earlier this month. Among Lincoln’s other major concerns was a push to make banks set up separate subsidiaries for swaps trading so they wouldn’t pose a risk to the entire system.

Greenberger said it is re-regulatory provisions like these that will eventually be seen as the most significant part of the Dodd-Frank law, but only if they can get past industry lobbyist efforts to weaken them. While most of that will play out in the regulatory trenches, industry lobbyists could seek to influence the process by wielding their newfound clout on Capitol Hill.

The Commodity Futures Trading Commission “has absolute discretion of which derivatives have to be cleared and how much margin they have to hold,” said Mark Calabria, a senior fellow at the Cato Institute and a former top aide to Sen. Richard Shelby, R-Ala., when he chaired the Senate Banking committee. “The primary vehicle for Republicans is going to be to put pressure on the regulators via hearings, via oversight. They will move the regulators a small amount.”

But, Calabria predicted, “they will make them bend, they will not make them break. They will not undo Dodd-Frank.”