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H.R. 4173, the “Dodd-Frank Wall Street Reform and Consumer Protection Act”

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Washington, June 30, 2010 | comments

June 30, 2010

H.R. 4173, the “Dodd-Frank Wall Street Reform and Consumer Protection Act”

Rep. Barney Frank (D-MA)

           More than 2,300 pages long, H.R. 4173 is every bit as far-reaching in its consequences for the American economy as the Democrats’ radical plan for “fixing” the nation’s health care system.  And yet for all of its broad new governmental mandates and vast new government bureaucracies, the bill fails to address the root causes of the financial crisis.  Moreover, it leaves American taxpayers more exposed than ever to paying for mistakes made on Wall Street and in Washington.  H.R. 4173 makes bailouts permanent, assumes government bureaucrats can better manage our economy than individuals and markets, and destroys jobs.  Democrats’ approach with this legislation not only ensures future crises, but it will make those future crises worse. 

 

In sector after sector of the economy, the Obama Administration and the majority in Congress are dictating the choices an individual consumer can make, determining the operations of businesses, and destroying the competitiveness of our economy.  This legislation grants powers to regulators which seem more appropriate to a Soviet-style command-and-control economy than a system of free-market capitalism in which capital flows freely to where it can be most efficiently used to fund productive activities and create jobs. 

 

Republicans believe that any financial regulatory reform bill must do four things that H.R. 4173 fails to address.  First, financial regulatory reform must stop the Democrats’ taxpayer-funded permanent bailouts for their Wall Street allies.  Second, it must reform the “Government Sponsored Enterprises” (GSEs) Fannie Mae and Freddie Mac—the root causes of the housing meltdown and the ensuing financial crisis which have cost taxpayers more than $145 billion already and may cost them as much as $380 billion.  Third, it must empower businesses small and large to create jobs and spur economic growth—not cost jobs and hurt the economy.  And fourth, it must demand accountability from failed federal bureaucrats.         

 

Americans deserve financial regulatory reform which forces market participants to bear the costs of their mistakes—not taxpayers—and results in a robust financial system, creating jobs by ensuring credit is available to the consumers and small businesses on which our economy depends.  Because H.R. 4173 falls far short of these standards for real reform, Republicans strongly oppose it and urge its defeat.

 

Specific Concerns with H.R. 4173

 

Perpetuates the Bailouts 

 

H.R. 4173 provides the FDIC with the power to continue AIG-style bailouts by using its discretion to bail out selected creditors and counterparties at up to 100 cents on the dollar.  To pay off the creditors of a “too big to fail” financial institution, the bill confers upon the FDIC the authority to borrow an amount equal to the assets of the firm being liquidated. For the largest firms, such as Citigroup or Goldman Sachs, this amount would be $2 trillion dollars each.  Indeed, for the six largest financial firms combined, this amount would be more than $8 trillion. 

 

In contrast, House Republicans have pressed at every step to end the era of taxpayer-funded bail-outs by advocating an enhanced form of bankruptcy for large non-bank financial institutions.  Bankruptcy is an open, transparent process, administered according to clear rules and settled precedent.    Most importantly, in a bankruptcy, the losses resulting from a large firm’s failure are borne directly and exclusively by the creditors, counterparties, and shareholders of the firm—who sought to profit from investing in the firm—rather than being inflicted on unsuspecting taxpayers or financial companies that had nothing to do with the failed firm.  The Republican plan would have made financial crises more manageable by forcing participants to plan for the possibility of failure, rather than encouraging them to continue their recklessness in hopes of a taxpayer handout. 

 

Codifies “Too Big To Fail”

           

By directing the Federal government to designate firms as “systemically significant” so that they can be subjected to “heightened prudential standards,” H.R. 4173 essentially codifies the concept of “too big to fail.”  This special designation will provide such firms with a competitive advantage because creditors will perceive that the government will backstop their losses.  As a result, risk will continue to be mispriced, and capital will be directed to less productive firms and less efficient uses—while firms deemed “too small to save” struggle to remain in business at all. 

 

Clearly, Democrats did not learn from the tragic mistake of cloaking Fannie Mae and Freddie Mac with an implicit government guarantee.   Instead, with these provisions Democrats have extended the government guarantee to the entire financial industry.  H.R. 4173 creates a new class of Fannies and Freddies, and it sets the stage for the next bubble and the next bailout. 

           

Increases Government Control of the Economy

 

It has become increasingly apparent in recent months that America must choose between two futures.  In one future, America will continue to be a nation organized around the principles of free enterprise: limited government, individual freedom, and rewards determined by success or failure in the market.  In the other, America will move toward a managed economy, expanding government bureaucracies, and perpetual subsidies for Wall Street at the expense of the taxpayer.  The Administration and Congressional Democrats have used the financial crisis as a pretext to move us toward the second future, introducing breathtaking expansions of state power by way of a regulatory restructuring plan.  

 

The collapse of the subprime mortgage market and subsequent financial meltdown demonstrate the failure of government at every level, from the folly of government mandates to relax underwriting standards to sell houses to people who could not afford them, to subsidizing the GSEs with an implicit government guarantee while turning a blind eye to the dangerous leverage and risky investments used to feed a housing bubble, to a Federal Reserve monetary policy that kept interest rates too low for far too long.  If nothing else, the subprime debacle and the resulting credit crisis show that bureaucrats make mistakes, and that we cannot count on them to be omniscient. 

 

Yet H.R. 4173 assumes that these regulators are always right, that markets can never be trusted, and that government bureaucrats are best-qualified to choose the products and services consumers should be allowed to use and to determine how big a financial institution should be permitted to grow.  This “Obama Doctrine” was rejected by the American people in the context of the takeover of health care, and it should be rejected here.

 

The sweeping powers that flow from this paternalistic philosophy give bureaucrats the ability to fundamentally alter our U.S. economy.  Democrats are empowering government to seize private firms with virtually no due process and to funnel taxpayer funds to the politically favored.  They also are creating a “consumer protection” czar whose agency will ration credit and decide the kinds of financial products that consumers can be trusted to use responsibly. Moreover, the Democrats have created an innocuous sounding Office of Financial Research that is in reality a surveillance system to monitor the financial activities of private citizens while providing taxpayer funded research about consumers to Wall Street. 

 

Giving such unbridled powers to government regulators to pick winners and losers in the economy moves America one giant step further down a road in which success is determined not by individual achievement or entrepreneurial initiative, but by political clout and government edict. 

 

Fails to Address the Biggest Single Cause of the Financial Crisis

 

Fannie Mae and Freddie Mac were at the center of the housing and financial market melt-down, and their collapse in September 2008 has thus far cost American taxpayers more than $145 billion.  The nonpartisan Congressional Budget Office predicts that this tab will ultimately reach $380 billion, and other independent analysts worry that the price tag could soar far higher if the Obama Administration is allowed to continue using Fannie and Freddie as dumping grounds for banks’ bad loans.  Due to the Democrats’ inattention and neglect, it is now all but certain that the cost of bailing out the GSEs will dwarf the costs of other government bail-outs by hundreds of billions of dollars.  And yet H.R. 4173, the most sweeping financial reform legislation in decades, offers only one provision on the subject of the GSEs—and it is a study.  Only doing a study is a dangerous delaying tactic that imperils a meaningful recovery in the housing market.

 

Chairman Frank largely refused to allow GSE amendments to be debated by the conferees.  The one time he did permit GSE-related amendments, he quickly reversed himself the next week.  Only when mega-banks complained that a Republican amendment subjecting Fannie Mae and Freddie Mac to the same “resolution authority” as other large, interconnected and complex financial institutions might cost them – rather than the taxpayers – billions of dollars to wind down the two companies, did Democratic conferees strip out the provision.  H.R. 4173 allows the big banks to win at the expense of the American people. 

 

Destroys Jobs and Harms the Economy

 

The blizzard of new regulatory mandates imposed by H.R. 4173 will throttle economic growth and kill jobs, and make it more expensive and more difficult for ordinary Americans to obtain the financial services they need.  Economists have estimated that the Consumer Financial Protection Bureau alone will reduce the new jobs created in the economy by 4.3 percent on a net basis, by restricting the supply of consumer credit and inflicting collateral damage on small businesses.  Tellingly, the last major piece of legislation that the Democrat Congress is likely to pass this year will destroy – not create – American jobs, unless one counts the thousands of new positions for government bureaucrats needed to implement the bill, and for the army of Washington lobbyists who will seek to influence the regulators as they begin churning out the estimated 400 Federal rule-makings and studies mandated by the legislation.  By comparison, Sarbanes-Oxley only had 16 rulemakings (which took more than two years to complete) and six studies.  

           

           While Democrats punted many of the details of this mega-legislation to rule-makings, they rushed to finish the bill when considering the derivatives title.  This portion of the bill – substantially rewritten in the frenzied final day of a House-Senate conference that concluded after 20 hours at 5:40 am on June 25th – has the potential to do more lasting harm to the U.S. economy than perhaps anything else in this over 2,000-page bill.

 

Indeed, rather than take the time necessary to craft a coherent regulatory framework for the multi-trillion dollar derivatives market, Democrats cobbled together the relevant provisions in the middle of the night and behind closed doors.   The short-term political benefits that the Democrats hope to reap from these hastily-drafted and ill-conceived provisions will come at the cost of long-term damage to the ability of U.S. firms to compete in the global economy and create sustainable employment opportunities for American workers.  The American people deserve both a better process and a far better policy outcome from their elected representatives. 

 

Uses Accounting Gimmicks and TARP to Fund the Bill

 

Yesterday, Democrats passed an amendment to the Dodd-Frank conference report that would replace a $20 billion “lending tax” with a new accounting gimmick using TARP and increased assessments for the FDIC fund that protects depositors in order to squeeze H.R. 4173 past the requirements of their own Pay Go rules. 

 

Democrats claim the provisions, which include ending TARP three months early, will generate billions in “savings” to pay for the bill because TARP will not lose as much money.  That is specious accounting at best.  Moreover, TARP funds by law are specifically required to reduce the deficit in order to protect the taxpayers’ investment and limit their exposure.  But the Democrats are rewriting the law to use TARP as their own personal slush fund to pay for new government programs. 

 

In addition, the FDIC assessments, which apply to banks with more than $10 billion in assets, merely change the original tax on lending into a fee and expands it to hit more financial institutions.   As the Wall Street Journal said today: “This would also mean that commercial banks could essentially end up paying to bail out large hedge funds.” (The Bailout Tax: The latest reason to oppose Dodd-Frank, WSJ, June 30, 2010)

H.R. 4173 perpetuates the cycle of bailouts, sets the stage for future crises, and rewards those regulators whose failures caused the last crisis. Republicans do not believe that government knows best.  For all of these reasons, House Republicans reject the institutionalized bailouts and the centralized economic planning that lie at the heart of H.R. 4173, and strongly urge its defeat.

Provided by Republican Leadership and Financial Services Committee Republicans.

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