The House just passed the biggest bank deregulation bill in a generation
On Thursday, Capitol Hill was consumed by former FBI Director James Comey’s testimony. But just after the high-profile hearing played out in the Hart Senate Office Building, House Republicans passed a mammoth, 580-page bill that would do more to deregulate the banking industry than any single piece of legislation in a generation.
The Financial Choice Act, approved in the House by a 233 to 186 margin, now heads to the Senate. Every House Democrat voted against it, and they were joined by just one Republican defector, Rep. Walter Jones (R-NC).
The Wrong Choice Act is a deeply misguided measure that would bring harm to consumers, investors and our whole economy, said Rep. Maxine Waters (D-CA), the highest-ranking Democrat on the financial services committee, in a statement. The bill is rotten to the core and incredibly divisive.
Because the Choice Act has unified Democrats in opposition, it has very little chance of crossing the 60-vote threshold it would need to pass the Senate without a filibuster. But some of its key measures—including defunding several key banking regulatory agencies—could be advanced through budget reconciliation, and would thus only require 51 votes.
“I think this has a very good chance of passing. There are a lot of Democrats who are going to be supporting this,” Sen. Jim Inhofe (R-OK) said in an interview this May. “Even Democrats have bankers in their districts.”
What does Republicans’ Dodd-Frank repeal bill do?
Spearheaded by House Finance Chair Rep. Jeb Hensarling (R-TX), the Choice Act begins by throwing out much of the banking oversight passed under President Barack Obama’s administration, mostly through the Dodd-Frank Act signed in 2010. But it goes further than that, rolling back oversight in a way that could dramatically exacerbate the likelihood of another financial crisis, according to experts in financial regulation.
“It’s a little hard to get your mind around everything this bill does, because there’s almost no area of financial regulation it doesn’t touch,” says Marcus Stanley, policy director for Americans for Financial Reform. “There’s a bunch of very radical stuff in this bill, and it goes way beyond repealing Dodd-Frank.”
It could also expose the hollowness of Trump’s campaign promises. Trump ran on slamming Wall Street for “getting away with murder” and arguing that Goldman Sachs had bled our country dry.
But the bill looks to some like a wish list of what advocates and lobbyists for the banking industry have demanded. Among the provisions that have most alarmed progressives on the Hill is its proposed elimination of the “Volcker Rule,” which prevents commercial banks from making certain kinds of speculative and risky trades.
The Choice Act would also gut the Consumer Finance Protection Bureau, the brainchild of Sen. Elizabeth Warren (D-MA). As Mike Konczal wrote for Vox, the CFPB has won millions from big corporations by suing those who use “deceptive practices” for their customers. Hensarling’s bill wouldn’t get rid of CFPB entirely, but advocates say it would effectively render the agency powerless by letting Congress control its funding, allowing the White House to fire the agency’s director at will, and, perhaps most importantly, stripping it of a broad range of rulemaking authority.
Then there’s a bunch of stuff in the bill that targets financial regulatory agencies that try to ensure the big Wall Street banks don’t put themselves in positions like the ones they did in 2007. For instance, Republicans want to allow banks that meet certain capital requirements to be exempted from a huge number of the regulations that govern their behavior; they would make it far more difficult for federal regulators to issue new regulations by imposing strict new standards for doing so; and Congress would make it much easier for banks to pass the “stress tests” that gauge whether a bank could survive an economic shock.
“The Choice Act goes still further, splitting the Federal Reserve in half and preventing it from coordinating financial regulations and monetary policy, something that will make bubbles more likely — and more dangerous to the economy,” Konczal writes. “It would reduce the deference given to regulatory agencies, making regulations harder to pass, and harder to interpret.”
Why Republicans are selling this bill as a blow to “too big to fail”
But for all of the real impact repealing these provisions would have, nothing in the Choice Act may be as fiercely contested as how it would hamstring the government’s ability to respond to a financial panic on Wall Street.
In defending the Choice Act, House Republicans have said it will free midsized and community banks from onerous regulations, while also getting the taxpayer off the hook for “bailing out” Wall Street banks like Goldman Sachs and Morgan Stanley.
“Taxpayer bailouts of financial institutions must end, and no company can remain ‘too big to fail,’” said Hensarling, the bill’s lead author, in a statement. Big banks on Wall Street aren`t supporting [the Choice Act]. Perhaps that`s because it ends Wall Street bail outs.”
Hensarling isn’t just making this stuff up: His bill would get rid of what’s called the Orderly Liquidation Authority, a key part of Dodd-Frank that controls what happens when financial firms that could sink the whole economy go belly-up.
Under OLA, the Federal Deposit Insurance Corporation can step in during a panic to immediately take control of the bank. So if JPMorgan is on the verge of going bankrupt, the federal government can declare an emergency and essentially take control of it overnight, to make sure its collapse doesn’t spread throughout the financial sector.
Having a bank go through OLA—which has never happened, since we haven’t had a real bank panic since Dodd-Frank was passed—also ensures that the emergency funding doesn’t come from taxpayers, since the law requires other financial firms with a stake in the failing bank to pay back the costs. OLA also allows the government to immediately fire all of the bank’s managers and forces its employees to pay back bonuses.
Hensarling wants to get rid of all that. He argues that OLA gives unelected bureaucrats far too much power to spend taxpayer money without congressional oversight, and that it encourages banks to take unnecessary risks knowing they will have the feds as a backstop.
Dodd-Frank’s defenders counter that the biggest banks already know the federal government will not let a collapse cause a widespread financial panic, with or without OLA. They add that what made the last financial crisis so dangerous is that the federal government had no means of managing the failure of Lehman Brothers, because regulators didn’t think they had the authority to take it over.
“[Eliminating] the OLA would be a major mistake, imprudently putting the economy and financial system at risk,” Ben Bernanke, the former Federal Reserve chair, wrote in a recent op-ed for the Brookings Institution.
Facing a global financial collapse, President George W. Bush and Congress quickly rallied behind an $8 trillion package to save the financial system — a package that didn’t allow the federal government to fire the bank’s managers or immediately take back its executive bonuses. Dodd-Frank’s defenders say Hensarling’s bill would put the next White House facing a bank panic in the position of having to go back to Congress, rather than having the means to both act quickly to avert catastrophe and ensure taxpayers recoup their spending.
Does this thing have any chance of passing?
Progressive activists have long been mobilizing to stiffen the spines of congressional Democrats who may be entertaining ideas of cooperating with Republicans’ banking overhaul.
If we sense any hesitation from any members of Senate Democratic caucus to defend Dodd-Frank and oppose this bill, we will go after them,” said Murshed Zaheed, head of the progressive group CREDO.
Still, even unified Democratic opposition may not be enough to bring down every element in the Choice Act. Republicans have signaled a willingness to use the budget reconciliation procedure to cripple OLA, and they could similarly strip funding for the CFPB and FSOC without needing a filibuster-proof majority.
There are 52 Republican senators, so it would only take two defections to kill a reconciliation package that neuters Dodd-Frank. But whether those two defections are likely, particularly given how much money banking lobbyists spend on Capitol Hill, is anyone’s guess.
“A lot of what we’d call ‘center-right’ bankruptcy experts are very nervous about pulling OLA without a replacement, but I don’t think they’ll have a lot of influence in the House,” Konczal said in an interview. “But can they yield two [Republican] votes in the Senate? Maybe.”
Photo: Rep. Jeb Hensarling, chair of the House Financial Services Committee and the leader of House Republicans’s. Source: CHOICE Act Photo by Zach Gibson/Getty Images.