The Next Big, Necessary Fight!

ECONOMY

The Next Big Fight

Now that health care reform has passed both the House and the Senate, Congress and the Obama administration will turn to, among other things, financial regulatory reform aimed at correcting the deficiencies that led to the 2008 meltdown. "Our regulatory framework was built in a different era for a long extinct form of finance. It long ago fell behind the curve of market developments," Treasury Secretary Tim Geithner said on Monday. "We have the chance to enact the strongest, most important financial reforms since those that followed the Great Depression." And one of the most critical reform issues is preventing financial institutions that are "too big to fail" from threatening the entire financial system and requiring a government rescue when they collapse. The House has already passed reform legislation doing this -- the Wall Street Reform and Consumer Protection Act of 2009 -- and this week, the Senate Banking Committee approved Chairman Chris Dodd's (D-CT) reform bill on a party-line 13-10 vote. Republicans had originally planned to propose more than 200 amendments to Dodd's bill, but they decided that they'd rather vote against it in committee and bring up their amendments on the Senate floor. Many of these amendments would weaken Dodd's measures to rein in the banks that are "too big to fail" and keep taxpayers on the line if another financial behemoth goes belly-up.

DODD'S PLAN: As Federal Reserve Chairman Ben Bernanke said last week, "It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms." To grapple with this problem, Dodd's bill would implement stricter standards for capital and leverage on the very biggest financial firms and systemically "significant" non-bank financial firms (such as the giant insurer and current ward of the state, American International Group). These firms will be scrutinized by a new Financial Stability Oversight Council (FSOC), which will additionally be tasked with watching for trends that threaten the wider economy. Dodd has also proposed barring any institution from owning more than 10 percent of the assets in the financial system. But perhaps most importantly, Dodd's bill creates a resolution authority for unwinding systemically risky financial firms without resorting to taxpayer-funded bailouts. The largest financial firms would be forced to pay into a $50 billion fund to be tapped in the event that one of them failed and could not be put through a typical bankruptcy (because of size and interconnectedness). "We need to develop a resolution regime that provides for the orderly wind-down of large, systemically important financial firms, without imposing cost to the taxpayers," Federal Deposit Insurance Corp. Chairman Sheila Bair has said. "Without a new comprehensive resolution regime, we will be forced to repeat the costly, ad hoc [bailouts]."

REPUBLICAN MISINFORMATION: Despite Dodd's serious attempt to address "too big to fail," Republicans have derided his bill as inevitably leading to more taxpayer-funded rescues of financial firms. For instance, Sen. Richard Shelby (R-AL) said the bill "still falls short of ending bailouts and associated moral hazards." Sen. David Vitter (R-LA) added that it "still enshrines 'Too Big To Fail,' doesn't replace it." Sen. Judd Gregg (R-NH) claimed that "this bill unfortunately, sort of preserves 'too big to fail.'" This follows the advice of GOP pollster Frank Luntz, who crafted a memo advocating that -- regardless of what the legislation actually says -- Republicans should characterize regulatory reform as surely leading to "bailouts." But this line of attack was blunted Monday by Sen. Bob Corker (R-TN), who told the Huffington Post that, while there is "some tightening up that needs to take place...the bill does not enshrine 'Too Big To Fail.'" "In general, the concept there is good," he added. And while they're complaining about Dodd's approach, Republicans have proposed many amendments that would make Dodd's bill even weaker, by explicitly forbidding regulators from placing stricter standards on larger banks, preventing regulators from overseeing risky non-banks, and scuttling the creation of the resolution fund paid for by the banks themselves. Currently, 57 percent of Americans "have a mostly unfavorable or very unfavorable" view of Wall Street, while less than one-quarter have a favorable view.

DISCRETIONARY VOLCKER RULE?: The Obama administration has also proposed an additional regulatory reform measure known as the "Volcker rule" -- named after former Federal Reserve Chairman Paul Volcker -- which would bar financial firms from trading for their own benefit with federally insured dollars, inhibiting their ability to engage in risky practices that threaten their stability. In an attempt to win support for passage, Dodd has already modified the administration proposal, allowing regulators more discretion in designing and implementing the ban. "I can't write regulations. This is way beyond the competency of Congress," Dodd has said. But lobbyists from the financial services industry are lobbying to weaken the rule even further, giving regulators the final decision over whether the rule will be applied at all. As Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, said, "our hope is that they change 'must' to 'may.'" And Shelby even wrote an amendment to Dodd's bill doing just that. But as Volcker himself explained, Congress should legislate a strict ban because giving regulators too much leeway leads to lax enforcement, especially when institutions apply pressure and complain that enforcement will cut into profits. "In my opinion, it's very unlikely that the regulators and supervisors would evoke a strict prohibition until a crisis came and then it's too late," Volcker said. "Look, I've been a regulator for 20 years. So I know how they are."

There is nothing civil about civil wars!