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Finreg futures: Three As, Volcker, Bean floated at CFPB

By Mike Konczal

Three points on how the initial post-election strategy on financial reform implementation is shaping up:

The GOP's Three As Approach to Regulatory Implementation

I think the best summary of what tactics the GOP will use to disrupt financial reform comes from Jennifer Taub's "Three As" approach. This may be the same approach they'll take with health care. From the pareto commons (my bold):

When Nancy asked whether the GOP could repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”), I explained that given the Democratic Senate majority and the Presidential veto power, a repeal was highly unlikely. However, I identified ways some members of the GOP might make mischief and weaken the effectiveness of financial reform. I deemed this the “triple A” problem. Appointments. Appropriations. Annoyances.

... Regarding appointments to critical new bureaus and offices created under Dodd-Frank — (think the Consumer Financial Protection Bureau or the Office of Financial Research) – for which the President must seek the advice and consent of the Senate, the Republicans in the Senate can block or stall. Under Senate rules, by filibustering, a single Senator can prevent debate and voting on candidates unless sixty senators vote for cloture — to end the filibuster. Getting sixty votes was already difficult after Senator Scott Brown won the special election in Massachusetts in January. Prior to the midterms, there were only 59 Senators who voted with the Democratic caucus and 41 Senate Republicans. However, as a result of the elections, the appointment process will be even more difficult given that Republicans have picked up at least 6 seats in the Senate.

As for appropriations, Congress controls the budgets for those agencies that are not self-funded. Many fear that this will result in further cuts to already strained budgets at those same agencies tasked both with writing the rules to implement the law and for enforcement of its provisions. Such a result could weaken the already moderate reforms contained in Dodd-Frank.

Agencies at risk include, for example, the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC). The SEC attempted to get self-funding as part of Dodd-Frank, something especially sensible given that the agency collected in 2009 more in fees and assessments than its current budgetary needs.

Moreover, other similar federal regulators such as the FDIC are self-funded. However, because the SEC self-funding proposal did not survive the legislative process, the agency continues to be at the whim of a changing Congress. To make matters worse, under Dodd-Frank, the SEC is given tremendously more responsibilities with a corresponding authorization to have its budget nearly doubled (from $1.3 billion in 2011 to $2.25 billion in 2015). However, this authorization still requires an appropriation which may be in

Finally, there is the annoyance tactic. It is expected that once the Republicans take over the oversight committees, agency heads will be brought to testify at numerous hearings, distracting them from the very labor-intensive process of making the hundreds of rules and performing studies mandated under Dodd-Frank.

Yup. Welcome to your new GOP Congress: Appointments.
Appropriations. Annoyances. And a weaker financial reform agenda, and a return to the extremely friendly pro-bank status quo of 2009.

Volcker Rule

There are two stated immediate targets on financial reform. The first is the Volcker Rule. Whether or not the current state of the Volcker Rule is strong is up for debate:

Economics of Contempt quotes a lawyer quoted in Risk Magazine saying, "I’ll be embarrassed if I don’t manage to exempt all your activities from the rule", while the Wall Street Journal this morning notes: "Many bank executives have abandoned their hope that trading on client desks will be untouched by the Volcker rule."

The Michael Barr quotes in the Wall Street Journal article are very encouraging, because, as Felix Salmon notes, the arguments about not letting hedge funds siphon value off a bank charter lest we be at a "competitive disadvantage” are similar to arguments Treasury Secretary Timothy Geithner has made in the past in reference to leverage ratios (we covered that a different time I guest-blogged here). It would be great to see more vocal support of the Volcker Rule's implementation from Treasury over the next few weeks as the GOP starts to plan out its attack strategy on this important piece of reform.

Bean floated to head the CFPB

We may not even need Republicans to mess up the appointment process. Politico reported this morning that:

Buzz on Friday had Rep. Melissa Bean (D-Ill.) possibly getting tapped as the first Consumer Financial Protection Bureau head, depending on the outcome of her too-close-to-call reelection race, in which Republican Joe Walsh maintained a slight lead as of Sunday afternoon. But a possible Bean nomination is not sitting well with reformers on the left who say the moderate Illinois congresswoman is far too close to the banking industry. Said one administration official: “It’s not clear she would be acceptable to the reformers.”

It's important to understand why reformers would particularly have a problem when it comes to the Biotechnology Industry Organization's Legislator of the Year for 2009-2010, Congresswoman Melissa Bean (D-Ill.), heading the Consumer Financial Protection Bureau: Melissa Bean led the battle for something called preemption. Preemption was the practice of overturning state laws in favor of national laws that were more friendly to the financial industry and ratings agencies.

I discussed preemption at length in a post here, where I discuss the housing bubble round of preemption carried out by Comptroller of the OCC John D. Hawke Jr. There was a close reading of a speech he gave to the Federalist Society on July 24, 2003, where he said the OCC would be overruling Georgia’s anti-predatory laws on behalf of national banks, mortgage securitizers and the ratings agencies. It's a pretty amazing talk if only because it got everything wrong. (At some point since I've linked to and examined it, the OCC has taken down the speech.)

State attorneys general and regulators got it right during the bubble, and the OCC and federal regulators, doing the bidding of Wall Street and the ratings agencies, got it wrong. State-level officials are much better incentivized to watch over their state for budgeting and accountability reasons. Reformers are better at state levels.

And we don’t make regulations to benefit how profitable being large is to national banks – we make regulations to make sure contracts are valid and well-informed, that property rights that involve debt and uncertainty are maintained properly and that borrowing and lending market are as complete as they can be without being exploitive. In so much as preemption hurts our ability to do those things and all we get in return is that shareholders of the largest national banks get a slightly better return, it is a terrible deal.

Others agree. Former Americans for Financial Reform Director Heather Booth considered preemption the biggest threat to the CFPB during the financial reform effort. As Rep. Brad Miller has said: "The states did a much better job in the last decade in protecting consumers than federal regulators or Congress did. The industry controlled every federal regulator, and when the industry said 'bark,' Congress barked. Consumers would be better off with no bill than with a bill that hobbles the states' power to protect consumers."

And as we are seeing with the foreclosure fraud crisis, the best hopes are at the state and local levels.

And yet the most obvious contribution Melissa Bean made to the consumer protection portion of the financial reform debate was this preemption.

Shouldn't we assume that pushing for this would be her main contribution as head of the CFPB?

Mike Konczal is a fellow at the Roosevelt Institute. He blogs about finance, economics and other topics at Rortybomb and New Deal 2.0, and you can follow him on Twitter.

By Mike Konczal  | November 8, 2010; 2:05 PM ET
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Ezra and new BFF Mike:

I think you're on overload on this one. Not many money people I have spoken to view this package as a serious problem. In fact the financials went up immediately AFTER it's passage, because there was a general sigh of relief.

Let me know when you start quoting Felix Rohatyn instead of Felix Salmon. We both know THAT will never happen. LOL

Posted by: 54465446 | November 8, 2010 2:54 PM | Report abuse

Ezra and Mike:

Did you notice the dollar is up today in spite of Bernanke's best efforts? This must be like one of those horror films to him. He keeps trying to kill it but it-just-won't-die.

Posted by: 54465446 | November 8, 2010 2:56 PM | Report abuse

It pays to shop around for a mortgage refinance. Mortgage rates have gone down like anything. My brother in law just got a 30-year fixed loan at 3.76% He told me search online for "123 Mortgage Refinance" for the lowest rate.

Posted by: davinnick | November 9, 2010 3:30 AM | Report abuse

The banks are still not lending, and jobs are suffering as a result. And anyone that is lending will likely face more bureaucracy standing in their way. The consumer is paying the price for reform, just like we did for the bailout.

Posted by: onexister | November 12, 2010 12:45 PM | Report abuse

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