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The Truth V. The National Journal: You have got to be kidding

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Washington, DC, November 20, 2009 | comments

Today, House Financial Services Committee Communications Director Steve Adamske released the following statement after reading the Nov. 21 National Journal article, “End of the Beginning,” written by John Maggs:

“You have got to be kidding.”

On page 54 of the November 21 edition, reporter John Maggs invents a “question and answer” article that discusses the status of financial regulatory reform. The article has several errors and misrepresentations that have been corrected below: 

National Journal: What's going on with financial regulatory reform? I know that Dodd has a new plan and that Frank is expected to move his plan out of committee soon, but I still can't tell what the administration's plan is. Why so many plans? Well, for starters, this re-regulation of finance is huge, so it is natural that everyone would want to drive the train. Primarily, though, the many approaches reflect a strategic decision by the Obama administration. Rather than come out with a fully formed plan and guide the negotiations, the president's advisers decided to let Congress work out the details.

HFSC: This is 100% false.  President Obama’s team did indeed produce a plan.  They delivered to the House Financial Services Committee and to the Senate Banking Committee a 13 title bill totaling several hundred pages, complete with legislative language, and that language is serving as the base text for our deliberations.

National Journal: But didn't Obama offer a comprehensive bill over the summer? It wasn't a bill; it was called a "blueprint." It was sketchy in its details, and many of its ideas have been changed or abandoned. House and Senate Democratic leaders, for example, now say that regulation by the administration's Consumer Financial Protection Agency should be limited to the largest 10 percent of banks. Other fundamental matters were left unmentioned, such as the way to discourage big banks from taking on too much risk -- how, exactly, to avoid fostering banks that are "too big to fail" and thus take reckless risks because they believe that the government will bail them out. No plan has settled on how to avoid this problem.

HFSC: 100% false again. As discussed above, while President Obama did release a blueprint in early June, he ordered his staff and the Treasury Department to produce a bill.  They did.  In addition, the National Journal is dead wrong to suggest that we abandoned the administration’s plan.  To the contrary, we are implementing the administration’s plans.

The National Journal is also wrong to say that the House Financial Services Committee’s bill, H.R. 3126, limits the reach of the Consumer Financial Protection Agency to 10 percent of the banks.  This is 100% false.  All banks will be subject to the rules and regulations of the Consumer Financial Protection Agency.  The committee only exempted independent examinations of community banks by the CFPA.  In addition:

  • The CFPA will write the rules for all institutions on credit cards, overdraft fees, and all other aspects of financial consumer protection– none of the covered banks will be exempt in any way from these stringent new rules.
  • The CFPA will receive and monitor all reports on consumer exams done by the prudential regulators at a covered institution, looking for signs of non-compliance by the institution or problems in the regulator’s conduct of exams.
  • The CFPA may at its discretion send an examiner on any exam of a covered bank, thrift or credit union.
  • This examiner will participate in all aspects of the exam, from design to final report writing
  • In an unprecedented move, the CFPA will be able to remove the prudential regulator and take over the exams itself if it finds that the regulator is not adequately pursuing or enforcing violations, or that there are other consumer problems at the bank.
  • Finally, the CFPA retains complete control of the consumer complaint process, and has authority to investigate and enforce against violations at any institution based on those complaints.  

National Journal: Isn't it typical to start with a blueprint? Isn't that how President Reagan did tax reform in the 1980s? Yes, but it's not typical to be as disengaged as the Obama administration seems to be this late in the game. The White House said all along that it wants to complete the reform process this year, and even though it has pushed Congress to vote on the legislation, it opposes some aspects of both chambers' bills. That rush apparently was at least partly responsible for a rift between Dodd and the top Republican on the Senate Banking Committee, Sen. Richard Shelby of Alabama.

HFSC: 100% wrong again.  The staff of the House Financial Services Committee has been in regular contact with White House staff and the Treasury Department.  It is a complete lie to say the Obama administration has been disengaged.

National Journal: Why did the White House proceed this way, without firm positions?  For reasons of style and necessity. On the style point, it should be clear from health care that in implementing his agenda, Obama seems to prefer leaving the details to Congress. His style simply differs from that of past presidents, who have led negotiations rather than let congressional leaders take charge. To cite Obama's predecessors, the Bush team was deeply involved in lining up votes and twisting arms to pass his 2001 tax cut; President Clinton did the same in ending Cold War trade restrictions on China. That doesn't seem to be how this White House likes to do things.

HFSC: Again 100% wrong.  They have firm positions and they have worked with us every step of the way — the National Journal just never bothered to find out.

National Journal: What about necessity -- why did the administration have to start out that way?  Because even as late as June, Obama's advisers hadn't decided what to do, and in many ways, they still haven't.

HFSC: Again 100% wrong.  The administration brought to us a bill composed of 13 titles and hundreds of pages which has served as the base text.  Of course we have changed things, but this is normal in the course of legislating.  We have worked with them every step of the way.

National Journal: You've got to be kidding.  As with every phase of the financial crisis, the government was improvising, trying to stay ahead of events. Arguably, Obama had good reasons for moving forward with something on financial regulation, even if the proposal was incomplete. He had to send the message to the global financial system that there was a plan, some process, to avert a recurrence of the kind of crisis that took hold in 2008 and shut down bank lending. Five months after the inauguration, after an $787 billion stimulus plan, and after deciding that health care would be his focus in 2009, it just wasn't possible to re-design financial regulation in a few weeks. On the other hand, deliberating for months internally, with rumors and details leaking out, could have destabilized the markets.

HFSC: No, you have got to be kidding.  As has been discussed in several parts of this rebuttal, the Obama administration within five months of taking office produced a blueprint for reform, and two months after that, produced an extensive, 13 title bill that has served as the base text for our deliberations. 

National Journal: Wasn't politics a big reason for the haste? Without some plan, Republicans would have spent the past five months complaining that "Obama is wasting time on socialist health care and neglecting financial reform." Of course politics was a big factor. History will have to judge whether Obama's push on health care led him to neglect more-important matters. With or without health legislation, however, it would have been impossible for Obama to decide fundamental questions of financial regulatory reform so quickly. For one thing, the financial industry was unprepared and hadn't sorted out what it would and would not accept. The White House couldn't take a final stand on matters without getting the banks and other financial institutions on board. The months since June have really been a feeling-out process for both sides.

HFSC: 100% wrong again.  The Obama administration has been engaged on all issues of financial regulation reform, producing direction and producing a bill.  The Obama administration has not neglected this effort.

National Journal: So banks are holding up this process?  That's too simplistic. In our system, where banks and other moneyed interests finance every congressional campaign, banks have a seat at the table. There are other considerations, but it would be silly to pretend that such a large industry has no role. As with health care, the Obama team needed time to determine which parts of the financial industry could kill the process and which parts could be co-opted. For example, after the House's hearings it became clear that smaller banks, with a presence in every congressional district, weren't willing to go along with the consumer protection agency proposal. Administration officials could see that the largest 10 percent of banks accounted for 80 percent of lending, so they let the bottom 90 percent off the hook. It took time to make this judgment, and there are many more to make.

HFSC: 100% wrong again.  Banks are not “off the hook” when it comes to consumer protection.  As discussed above, all banks are subject to the rules and regulations of the Consumer Financial Protection Agency.  We only exempted independent examinations of community banks and credit unions from the CFPA.  All other rules apply to all banks.

National Journal: Well, where is the process now? Isn't the House going to be voting on the Frank bill in a few weeks?  Obviously, the bill won't be finished this year, considering that the Senate plan was unveiled a week and a half ago and is fundamentally different from the House version. The question is whether the process is near the end or much closer to the beginning, and there are signs that it is much closer to the beginning.

HFSC: The House will vote on the reform in mid-December and the Senate is currently marking up their version.

National Journal: What signs? Among the differences between the chambers' proposals, the Senate plan is predicated on a really big change--taking all bank regulation away from the Federal Reserve Board and creating a powerful agency to assume the Fed's role in managing the stability of the financial system, both domestically and internationally. Fed Chairman Ben Bernanke is against this, and so are Treasury Secretary Timothy Geithner and White House economics adviser Lawrence Summers. This conflict is too fundamental to sort out in routine conference negotiations. Other issues aren't as complicated -- whether to merge two small agencies or four, for example. But some other basic matters remain undecided.

HFSC: Issues are too fundamental to sort our in routine conference negotiations?  Says who? You?  How else will the differences between the House and Senate be decided? 

National Journal: Such as? Such as the whole point of financial regulation. Before the crisis, the government implicity guaranteed that it would do whatever was necessary to prevent the collapse of the financial system. Today, that guarantee is explicit, and it will be codified in this financial regulatory overhaul. The problem is, no one has decided how to guarantee the solvency of giant banks without encouraging the kinds of risky behavior that caused the crisis. How do you prevent the emergence of banks that are too big? There are ideas -- Dodd would use an exotic kind of bond to keep banks in line -- but no decisions. Likewise on derivatives, the privately traded securities that allowed insurance giant American International Group to almost wreck the global financial system. To sum up the House and Senate action on derivatives, the government is still in the early stages of determining how derivatives will be regulated.

HFSC: On the too big to fail issue, I would encourage you to read the excellent coverage by Bill Swindell in today’s (Nov. 20) CongressDaily of our committee’s deliberations on the Kanjorski amendment, and continue reading CongressDaily on page 8 on the Gutierrez amendment. Our whole effort, from regulating subprime mortgages to reining in derivatives and ending bailouts, is to ensure that the taxpayers never again have to foot the bill for other people’s lousy business decisions. 

National Journal: When is this going to get done?  A bill could be enacted by June, but it is also easy to see action slipping past the fall 2010 election. Obama wants to get reform done to claim credit for Democrats, but Republican opposition is arguably as strong as it is on health care, and the GOP is confident that it will have larger numbers in 2011. The president was able to shorten the customary reform timetable when it came to health care, and perhaps he can do so on financial regulation as well. Big reforms usually take time, however -- Reagan embraced tax reform in 1984, but it was 1986 before it came to a vote. Ironically, as the financial system recovers, the pressure for reform lessens. Dodd, in a tough re-election fight, could be crucial if he seeks to finish action in time to impress voters. He might force a partisan vote this fall to get the issue off his plate, but that might hinder compromises in the final stages.

HFSC:  Wrong.  Chairman Frank and Chairman Dodd are committed to making financial reform a reality as soon as possible.  The American people have waited long enough for meaningful reforms, and they do not deserve to wait any longer.

National Journal: It sounds like I should bet on this taking a lot more time.  With big reforms, that's usually a good bet.

HFSC: We certainly wish the National Journal would take its time to do some quality reporting.


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