Four years on, is the GOP right about Dodd-Frank missing its biggest target – financial services institutions that are “too big to fail?” Are Republicans and many Democrats correctly concerned that Dodd-Frank has come to mean a blank check for Wall Street?
In a new report timed for the fourth anniversary of the passage of the Dodd-Frank Act, House Financial Services Committee Chairman Jeb Hensarling (R-TX) and Oversight and Investigations Subcommittee Chairman Patrick McHenry (R-NC) say that DFA has actually instituted “ ‘too big to fail’ as official government policy.’
The report, “Failing to End Too Big to Fail: An Assessment of the Dodd-Frank Act Four Years Later,” reviews the origins of the Great Recession and the bailouts from Washington that were intended to keep Wall Street afloat.
“In no way, shape or form does the Dodd-Frank Act end ‘too big to fail,’ ” says Hensarling in a prepared statement. “Not even Timothy Geithner believed his talking points on that.” The committee chairman was referring to the former Treasury secretary’s recent assertion that “too big to fail” has unfortunately endured.
“Dodd-Frank officially designates an entire category of Wall Street firms as ‘too big to fail’ and then creates a taxpayer-financed bailout fund for their use,” Hensarling adds.
The report takes aim at the Financial Stability Oversight Council (FSOC), described as “an unwieldy conglomeration of regulatory officials charged with identifying risks and taking steps to mitigate them.”
The authors of the report argue that FSOC has failed “to identify and mitigate systemic risk,” mistakenly signaled that some “nonbank financial companies” are “too big to fail,” has a voting structure that “displaces regulatory expertise,” and has a flawed “governance structure and statutory mandate.”
In addition, “FSOC’s record-keeping practices undermine public and congressional oversight, reducing FSOC’s accountability and increasing the likelihood that FSOC will not remedy deficiencies in its operations,” according to the report.
The committee report also lambasts the Office of Financial Research (OFR), which collects financial data from Wall Street to sift out systemic risks.
“OFR has taken some steps to carry out its mission, but its progress has been unsatisfactory and its data collection efforts risk imposing substantial costs in return for speculative benefits,” according to the report. “OFR failed its first high-profile test in identifying sources of ‘systemic risk,’ issuing an analysis of the asset management industry that most experts have criticized as superficial and uninformed.”
Officials at the Treasury Department, which oversees FSOC, were not immediately available for comment.
In another key criticism, the report says that Dodd-Frank “misses some obvious problems and creates new ones” such as government-sponsored enterprises (GSEs) that fall into the “too big to fail” category. “Firms designated as Financial Market Utilities under Dodd-Frank are the next generation of GSEs,” the report stresses. “As amended by Dodd-Frank, Section 13 (3) of the Federal Reserve Act remains a powerful bailout tool. Dodd-Frank does not rein in other bailout authorities possessed by regulators.
The report also points to regulatory requirements of Dodd-Frank that “create compliance burdens that distort the free market by making it harder for small-to-medium sized financial institutions to compete with larger firms, further entrenching ‘too big to fail.’ ”
Amid the flurry of words in the report, Hensarling says that he fully intends to introduce legislation “to repeal Dodd-Frank’s bailout fund and take other steps to end ‘too big to fail’ once and for all.”
Depending on how the Republicans play it, it’s possible that a coalition of some kind could agree that cutting the gravy train for firms that are in the “too big to fail” category is a good idea. Given that Dodd-Frank will never be totally repealed and that too many changes are underway, this fund-cutting gesture might be a rare opportunity for compromise.
Although it’s a long shot, if “too big to fail” truly becomes a thing of the past, it would compensate somewhat for the endless flow of new regulations that have dominated but barely improved Wall Street for the past four years.
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