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By Jeff Bater
June 7 — The chairman of the House Financial Services Committee unveiled a plan June 7 to roll back the Dodd-Frank Act, incorporating previously introduced proposals that would likely require Republican gains in the fall election to be enacted into law.
The plan by Rep. Jeb Hensarling (R-Texas) would greatly increase penalties for securities law violations, repeal the Volcker Rule, and generally overhaul the 2010 law passed over Republican objections. The new legislation, which incorporates earlier Republican proposals that have only made headway in the House, will be introduced this month and is meant to help taxpayers and banks, the Texas lawmaker said.
“Dodd-Frank’s false premise is that an alchemy of Wall Street greed, outsized private risk and massive Washington deregulation almost blew up the world economy,” he said in prepared remarks for delivery before the Economic Club of New York. “It wasn’t deregulation that caused the financial crisis; it was dumb regulation.”
Hensarling called Dodd-Frank a failure and “a grave mistake.” He also said in his remarks, “We need economic growth for all and bank bailouts for none. This is the foundation of the Republican plan.”
Released along with Hensarling's remarks was a summary of the proposal. Among other things, the plan calls for changing the governance structure of the Consumer Financial Protection Bureau (CFPB) and repealing the authority of the Financial Stability Oversight Council (FSOC) to designate companies as systemically important financial institutions (SIFIs).
Presumptive Republican presidential nominee Donald Trump is also working on a plan to repeal much of Dodd-Frank (98 Banking Daily, 5/20/16). Hensarling's spokeswoman, Sarah Rozier, told Bloomberg the lawmaker was meeting Trump to discuss an alternative to Dodd-Frank.
Just as Hensarling is a strident critic of Dodd-Frank, Sen. Elizabeth Warren (D-Mass.) is a staunch supporter of the law, as well as an early advocate of the creation of the CFPB. At a Senate Banking Committee hearing June 7 on bank capital, Warren referred to the Hensarling-Trump meeting and called the lawmaker's plan “his Wet Kiss for Wall Street Act.”
“Now while most Republicans in Congress are debating not whether to run away from Trump but how far and how fast, Congressman Hensarling is sprinting toward Trump Tower,” she said. “I get that the Republicans want unity right now, they want to do well in the elections, and they think unity is how to get there. But if unity means a marriage between Donald Trump's toxic racism and Jeb Hensarling's Wall Street giveaways, then I think they'd be better off with division. That is not what the American people are looking for, and it is a path to ruin both for our economic system and for our country.”
Ian Katz, an analyst at Capital Alpha Partners, said the Dodd-Frank substitute plan, parts of which were leaked to the media, “is more interesting than important.”
“For these things to happen, not only would Donald Trump have to win the presidency, but Republicans would probably have to gain seats in the Senate, which seems unlikely. Yes, people may contend that these proposals help frame the debate, but we think only very slightly,” Katz wrote in a June 6 research note.
Katz, in a later e-mail to Bloomberg BNA, said of the plan, “It's not new in the sense that we've known for a long time that the Republicans don't like the authority given to the CFPB and the FSOC.”
“This lays down their marker, but a lot of things would have to happen for this to become reality,” Katz said of the House Republican plan.
Douglas Landy, a partner at Milbank, Tweed, Hadley & McCloy, said the timing of introducing new ideas toward the end of a presidential administration to influence what happens in the next administration “is an age-old process that often is successful.”
“He's putting a stake in the ground here with what appears to be some ideas that we'll see what they look like and whether they gain any traction,” Landy said of Hensarling's bill.
A summary of the Republicans' proposal calls for repealing Dodd-Frank’s Title II orderly liquidation authority, which authorizes the Federal Deposit Insurance Corp. to borrow from the Treasury to lend to a failing firm, buy its assets, guarantee its obligations and pay off its creditors.
Hensarling said Title II should be replaced with a new chapter of the Bankruptcy Code designed to accommodate the failure of a large, complex financial firm.
In April, the House passed a bill by voice vote that would amend Chapter 11 of the Bankruptcy Code to address large failing financial institutions. H.R. 2947 would establish a new bankruptcy process for certain financial institutions with assets of $50 billion or more.
Hensarling said there are sound reasons why Republicans prefer bankruptcy over bailouts. “Bankruptcy does not depend on taxpayer-provided funds to bail out, liquidate, or reorganize a failing institution,” he said in his remarks.
The GOP plan also repeals the Volcker Rule, which implements Dodd-Frank's Section 619 requiring limitations on proprietary trading and investment in hedge funds by banks.
Furthermore, the summary calls for enhanced penalties for financial fraud. It would allow the Securities and Exchange Commission to triple monetary fines sought in both administrative and civil actions in certain cases where the penalties are tied to the defendant's illegal profits.
A Republican sweep of the elections in November could raise the odds of replacing Dodd-Frank, and, in that event, a question emerges: What would be the banking industry's reaction, given the efforts to comply with implementing rules since the 2010 passage of the law?
Landy said the big banks have to be separated from the community banks. “They live in different worlds,” he said.
Small lenders have long called for relief from Dodd-Frank, saying they didn't cause the 2008 crisis. “A lot of people feel they are overburdened by compliance function now,” Landy said. “For the big banks, it's a much more mixed and interesting question.”
Dodd-Frank puts a “tremendous and broad” burden on those lenders, Landy said. “Most observers feel that the banks are far better capitalized, far better supervised and far better internally managed — and better capable of withstanding the next crisis,” he said. “That said, everything comes with a cost.”
Big banks have “made their peace” with certain aspects of Dodd-Frank, Landy said. “I do think there's a sense the banks have invested a lot of time, effort and compliance money in figuring this stuff out and now to come and just wipe that away and replace it with other stuff puts them back at the beginning again,” Landy said.
To contact the reporter on this story: Jeff Bater in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Mike Ferullo at email@example.com
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