Congress moves toward easing bank, Wall Street rules

14 Jan 2015 | Author: | No comments yet »

Clip Dodd-Frank at your own risk.

WASHINGTON More than six years after the financial crisis struck, the House is moving toward softening a post-crisis law that brought the strictest rules for banks and Wall Street since the 1930s. Boosted by their November election gains, congressional Republicans have launched a new effort to weaken, bit by bit, a law that dramatically expanded federal oversight of the financial system after the Great Recession.WASHINGTON – To anyone paying attention, the current battle in Washington over rolling back some of the more arcane provisions in the Dodd-Frank financial overhaul resembles a circular firing squad.

In this conversation between the Massachusetts senator and Fortune Contributor and former FDIC Chairman Sheila Bair, a more business-friendly side of Warren emerges — and the final word on a White House run. Under a veto threat from the White House, the bill pushed by the newly bulked-up Republican majority came under discussion in the House on Tuesday for the second time in less than a week. On Wednesday, the Republican-controlled House is expected to pass a package of bills making changes to the 2010 law, known as Dodd-Frank, which also created a powerful new agency to protect consumers.

Under conditions laid down by the House Rules Committee late Monday, the GOP will be able to easily pass the legislation as part of an 11-point deregulation plan without Democratic support, while ignoring any Democratic amendments. Many despise Dodd-Frank almost as much as they do Obamacare because they believe it’s an overreaction to the 2008 financial crisis and an unnecessary burden on business.

One Dodd-Frank restriction was eased in a provision attached to the spending bill passed in December, and another as a rider on the legislation passed last week to renew government terrorism insurance. Associated Press WASHINGTON—Four-and-a-half years after Democrats in Congress enacted the Dodd-Frank law to stiffen regulation of Wall Street, the two parties are again clashing over government regulation of financial markets. Most notably, it would give U.S. banks two extra years — until 2019 — to ensure that their holdings of certain complex and risky securities don’t put them out of compliance with a new banking rule. A new bill currently being debated in Congress seeks to create further loopholes in derivatives trading, while easing regulation of private equity firms and postponing once again full implementation of the Volcker Rule requiring banks to separate speculative trading from their commercial bank operations.

When federal regulators approved the rule in late 2013, they banned banks from owning complex securities known as collateralized debt obligations — risky pools of corporate debt that are sliced into smaller packages for sale to banks. I have known and worked with Warren for many years, beginning with her days as a Harvard law professor and prominent bankruptcy expert to her current role as the senior Senator from Massachusetts. In debate Tuesday night in a nearly empty House chamber, Democratic lawmakers denounced the move as a giveaway to the largest U.S. banks, which hold the bulk of the securities in question. On the House floor, Democratic lawmakers objected to the measure being whisked through the House in the first days of the new Congress without the chance for discussion or changes at the level of congressional committees.

But Democrats worried about GOP attempts to chip away at Wall Street regulations are increasingly objecting to even minor changes in an effort to put down markers ahead of more bruising battles to come. Sinai,” said House Financial Services Committee Chairman Jeb Hensarling (R-Texas), who is leading the effort to change the law. “Congress would be negligent in its duties if we did not continually monitor and fix Dodd-Frank’s unintended consequences.” In the last few weeks, Republicans watered down key parts of Dodd-Frank by attaching provisions to so-called must-pass bills — one funding most of the federal government and another reauthorizing an important terrorism risk insurance program that had expired. And there is definitely reason to fear that banks, given an inch, will not hesitate to take a mile and will abuse whatever restrictions are in place even as they succeed in loosening them. Michael Fitzpatrick, R-Pa., insisted it makes “smart, technical reforms.” It would have the effect of “reining in out-of-control Washington regulators” and helping small businesses create jobs by reducing their compliance burden, Fitzpatrick said. The maneuver provided an early road map to how the new Republican-controlled Congress might try to make long-sought changes to financial regulations over Obama’s objections.

That kind of risk-taking on Wall Street helped trigger the 2008 crisis. “Just one week after being sworn into office, the House of Representatives is already showing the American people that its priorities are all wrong,” Dennis Kelleher, president of Better Markets, a group that advocates strict financial regulation, said in a statement. I recently sat down with her to discuss her thinking on banking, tax reform, the economy, the plight of the middle class, and the 2016 Presidential elections. –Sheila Bair Fortune: Congress just effectively repealed a Dodd-Frank prohibition on big banks using FDIC-insured deposits to fund high-risk derivatives, notwithstanding bipartisan opposition led by you and GOP Senator David Vitter. Liberals’ anti-Wall Street fervor was highlighted this week when investment banker Antonio Weiss withdrew his nomination to a senior Treasury Department position because of opposition from Warren and others who objected to his Wall Street background. “We’ve already seen that the new Republican Congress is going to aggressively attack the Dodd-Frank act,” said Warren, who was an outspoken advocate for the legislation.

The purpose of Dodd-Frank was to prevent banks from being in a position to cause another financial crisis like that in 2008-09 and to avoid the need for another government bailout of the banks. He warned there may be a damaging “fire sale” on CLOs if banks aren’t allowed to delay offloading their holdings until July 2019 — 4 1/2 years from now. Warren, whose populist rhetoric against Wall Street accelerated late last year when negotiators included a Dodd-Frank rollback provision in a fiscal 2015 government-funding bill. This meant ending “too big to fail” and otherwise limiting the speculative activities of banks that are essential to the operation of our monetary and financial system. The proposed changes before the House now include a controversial two-year delay in implementing part of the so-called Volcker Rule, which bars banks from making risky investments.

True enough, the increase in capital requirements mandated by Dodd-Frank and implemented with some vigor by the Federal Reserve is starting to put pressure on banks to think about downsizing. Warren: I’m not sure what’s going to happen in the next Congress, but I will tell you that I’m madder than hops about repealing the section of Dodd-Frank that is designed to lower risks in exactly the area where the big banks got into trouble.

Republicans have denounced the law as an excessive expansion of regulatory authority that’s stifling the competitiveness of the U.S. financial industry. The pending Volcker Rule has already prompted some big banks to spin off certain speculative activities, even as the new legislation seeks to delay it. To the extent that the bank lobby and their advocates in Congress are successful in chipping away at Dodd-Frank, they will only make it clearer that a more radical solution is needed.

Democrats say the provision should be subject to a broader debate in committee instead of being rushed to the floor for a vote. “Wall Street giveaways introduced in the dead of night are no way to govern,” Mrs. They know that Wall Street has not been reined in – banks are bigger than ever, bonuses are bigger than ever, and more than ever Wall Street denizens are calling the tune in Washington. After the 2014 elections, however, the Democratic leadership appears to have significantly strengthened its support for bank reform, and has not only attacked efforts to repeal Dodd-Frank, but has pushed for more aggressive tactics to rein in Wall Street.

On that point, at least, Republicans say she is right: They plan to bring it up again this week under the House’s regular timetable, which requires a only simple majority. “It’s disappointing so many Democrats, who voted for these provisions just four months ago, suddenly switched their votes in a transparent ploy to appease their far left-wing base,” Rep. The biggest mistake Republicans could make would be to try to weaken the Consumer Financial Protection Bureau, which is popular with the public, Frank said. Even if this more radical legislation cannot muster a majority in a Congress – let’s not mince words – corrupted by Wall Street money, it will serve as a rallying cry for politicians sensitive to the simmering resentment against banks among voters. Big banks dominate the sector, with JPMorgan Chase alone holding about $30 billion in CLOs, according to the company’s latest quarterly Securities and Exchange Commission filing. Republicans complain the agency is too powerful and want to replace the director with a five-member commission and subject its funding to the congressional appropriations process.

The Office of the Comptroller of the Currency, a major bank regulator, has warned that the corporate debt market is overheating — an important alert for companies holding complex securities tied to corporate debt. Business columnist Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron’s, Institutional Investor and Bloomberg News service, among others The dynamic became apparent in December, when a controversial change eliminating a Dodd-Frank provision requiring big banks “push out” risky trading businesses to affiliates was included in the government funding measure. Democrats submitted 14 amendments to the legislation, all of which were denied under the procedures that Republicans, lead by Rules Committee Chairman Jeff Sessions (R-Ala.), placed on the bill.

Warren sought to strip language included in almost unanimously supported terrorism-insurance legislation because it included an ancillary provision dealing with derivatives. “If we fail to challenge this cynical strategy now, it will only encourage Republicans to pull our financial regulations apart piece by piece,” Ms. When too-big-to-fail institutions can place their employees in government positions, it extends their power and intimidates others who don’t have their connections. It wasn’t so much that they were stronger than government, but they could persuade government to shift the rules to make themselves even more powerful.

Don’t worry.” During the run up to Dodd-Frank, after the market crashed, and Congress was trying to figure out what to do, I can’t tell you how many Senators’ offices I walked into and they would say “Wow. Tell some group that has a new way to deliver financial services to consumers—and they find out it’s going to cost them hundreds of thousands of dollars in fees just to find out if they can make money, much less the costs of all the licensing, vetting that it will take if the decide they want to launch a new business. When I was campaigning for Senate, I would walk into a bar, cafe, or retail store, and I would often hear small business owners say that they are Republican because they are worried about taxes. I did a column about corporate taxes and inversions and I complained that my husband and I have a marginal rate — federal and state — of 53% which is not that uncommon for a professional couple.

I got mostly favorable mail on it, but one guy wrote and said “well, why should I listen to you if you aren’t smart enough to find ways around this high rate?” And it’s kind of becoming the American way — to dodge taxes however you can. Second, rebuild our infrastructure, both to put people to work immediately in better paying jobs, but in the long run, to help our economy because strong infrastructure is what encourages businesses to invest and grow. And you could go down the list of what government sponsored research has given us: nanotechnology, touch screens, vaccines, gene therapies, GPS – and then, entrepreneurs– people who have worked their tail ends off – they have turned that research into extraordinary businesses that employ a lot of people. For-profit colleges account for roughly 10% of all college students, but they account for 25% of federal student aid dollars, and almost 50% of student loan defaults.

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