Sometime soon we will get a bill from the Senate on financial reform. Your natural reaction will be to compare it to Barney Frank’s bill that was passed mid-December. What parts of this financial reform bill are stronger compared to Frank’s bill, what is weaker?
That’s not going to be a good comparison point: The interesting comparison for me is how similar it will be with the House GOP financial reform bill that never got to the floor.
What’s that? The House GOP had a financial reform bill? It did. It seemed very thrown together, in a “our staff has nothing to do since we don’t run anything, why not put together a bill in the downtime?” kind of way. (To quote the movie Ghostbusters: “Any customers?” “No, Dr. Venkman.” “It’s a good job, isn’t it? Type something, will you? We’re paying you for this stuff.”)
James Kwak covered this bill last August after someone was able to find it online to send to him. The financial blogosphere kicked it around in our downtime. Here’s the section-by-section summary, and the draft bill.
Here’s the House GOP’s version of the CFPA:
Creates an Office of Consumer Protection within the [Financial Institutions Regulator]. The Office of Consumer protection is responsible for all consumer protection rulemaking under the Consumer Credit Protection Act, and will coordinate with the other divisions of the FIR in enforcing consumer protection. Establishes a consumer complaint hotline for the timely referral and remedy of consumer complaints, regardless of charter type or regulatory structure. Requires the Office of Consumer Protection to use extensive consumer testing prior to the promulgation of new consumer protections. Requires a comprehensive review of consumer protection rules and regulations on a regular basis with reports to be issued to Congress based on inaction or action with regards to consumer protection standards.
A hotline! James dug deeper into the bill:
Reading the draft bill, things get even weaker. 311(c) says rules of the Office of Consumer Protection (OCP) have to be approved by the board of directors of the Financial Institutions Regulator (FIR) – read John Dugan, Sheila Bair, etc. 311(e) mandates reviews, every seven (!) years, of disclosures … by the FIR itself. 311(g) requires, every seven years, a cost-benefit analysis of all consumer protection regulations to determine “if such regulation should remain the same or if such regulation should be revised.”
That sounds eerily similar to the ‘compromise’ coming out of the Senate, doesn’t it? Someone in the basement of a more senior regulator, who will need the permission of the banking regulators to do anything, and whose actions will entirely be subject to their review. Actually I’m not sure if the Senate bill will be this strong – nobody has mentioned having a dedicated hotline in the Senate bill.
Checking the rest of the bill:
Title 1 — Creation of New Bankruptcy Chapter for Certain Institutions
Section 101 — This section provides special venue provisions for bankruptcies of non-bank financial institutions. Non-bank financial institutions will have to file for bankruptcy in a bankruptcy court that is located in a federal judicial district in which the non-bank financial institution has its principal place of business or principal assets in the United States that is also the location of a Federal Reserve Bank.
The Senate sounds primed to pass bankruptcy code changes instead of a resolution authority, just like the GOP house bill.
The House GOP Bill doesn’t have anything on derivatives. Has anyone heard anything about derivatives in the Senate bill? Since I haven’t heard anyone throwing vases at each other about “end-user exemptions”, my guess is that nothing is going to go.
Felix is right: these remarks by Gensler about derivatives reform are spot on, and I hope to tackle them later. And I want to add this point: derivatives reform is resolution authority reform. It’s impossible to imagine having resolution authority or bankruptcy for large financial firms without reforming derivatives.
The House GOP bill summary is worth reading. In a “never let a crisis go to waste and nobody is going to read this anyway” sort of way, we get things like: “Section 402 — Requires the Federal Reserve and the Federal Open Market Committee (FOMC) to establish an explicit inflation target.” Heh. Ratings agencies reform I could get behind, and I’m all for Congress getting their arms around the future of the GSEs.
But we had a financial crisis and we need a financial crisis reform bill. This means securitization reform, derivatives reform, new legislation targeting the overlap between commercial and investment banking, tackling the complexity machine of consumer finance, balance sheet reform, and a serious look at the scope and size of our largest institutions.
I suppose this is what you get when you need 60 votes to do anything in the Senate – instead of a time-tested simple majority rule, the crucial power shift away from that responsible median vote to the off-center vote, people willing to torpedo some of the most urgent legislation to make sure his payday lending donors are happy. This is also what happens when you have a radicalized off-center Republican activist/politician front who wants to make everything into a Waterloo for the President. Not a single Republican voted for the House Bill, and only one voted for derivatives reform out of committee that was trying to be in line with what Gary Gensler called for above (2 abstained, and 88% of Republicans voted against). How can the Senate be any different?
So right now I’m curious if the Senate is so broken that it couldn’t even pass the thrown together GOP House Financial Reform Bill. And instead of real reform, I worry we are going to get to wear a T-Shirt that says: “Taxpayers gave TARP, GSEs, TALF, AMLF, Maiden Lanes, ring fenced half a trillion dollars worth of debt in off-balance sheets, TLGP, TSLF, double-digit unemployment etc. and all we got was a consumer hotline to the basement of the Fed.”