The Capital Markets and Government Sponsored Enterprises Subcommittee gathered on Friday, June 24th for a hearing titled, "Oversight of the Mutual Fund Industry: Ensuring Market Stability and Investor Confidence". Subcommittee Chairman Scott Garrett stated the intent of the hearing was to “to focus …on different efforts and proposals meant to provide more certainty to policymakers about the long-term stability of money market funds.” Garrett noted that the hearing was all the more timely due to “attention in the media this week regarding how the Greek debt crisis may affect money market mutual funds.”

Garrett went on to say, “As safe as money market funds generally have been, unfortunately the proverbial genie was let out of the bottle in 2008 when Treasury stepped in to provide a temporary guaranty program for money market funds, potentially putting the taxpayer at risk.  This type of action definitely needs to be avoided in the future, and I think representatives of the industry on the panel before me today would agree with this point of view.”

Six witnesses testified for the subcommittee, including:

Among the witnesses, there was broad support for the existence and vitality of the mutual funds market. As explained by Mr. Stulz, “The failure of a player in that industry in performing its role does not create a systemic risk. If one player runs into trouble, another player can take its place. In general, difficulties with one player would not mean that the investors in the funds managed by that player would be at risk for regulated funds because the monies of the investors are segregated. Should a firm that manages mutual funds fail, the funds have boards that can replace the manager. There is no reason for that transition to be problematic.”

Ms. Stam gave another ringing endorsement for the strength of the mutual funds market when she testified, “Today, the fund industry overall has over $13 trillion9 in assets under management, which serves as a testament to the trust that investors continue to have in the mutual fund product. Despite the severe market pull back and a decade of mundane stock returns, the mutual fund industry is the healthiest of all the financial industries.”

Click here for the Archived Webcast of this hearing.

During the June 14^th Financial Institutions and Consumer Credit Subcommittee hearing that examined whether the Dodd-Frank Act really ended “too big to fail” (as some Democrats claim it did), Ranking Member Barney Frank said it is the Republicans’ fault for creating a “false perception” that “too big to fail” lives on:

 “The only people who are arguing that…if a large financial institution

gets in trouble the government will step in and bail it and let it continue

are some of the Republican critics of [Dodd-Frank]. They are the ones

creating that false perception.”

 Really?

 “Instead of breaking up banks, Dodd-Frank separates banks with more than US$50 billion in assets and certain other large financial institutions into a class of “systemically important” entities — too big to fail by another name...Inevitably, “systemically important” will come to mean “protected by Uncle Sam.” -  Eric Schurenberg, Fiscal Times

 “The Dodd-Frank Act deliberately did not end the era of too-big-to-fail institutions. Despite calls by top economists and academics, the Obama administration did not try to break up the big banks, apparently deciding that a $14 trillion economy needed to have large banking institutions.” - Steven M. Davidoff, University of Connecticut School of Law

 “The [Dodd-Frank Act] claimed to end the era of “too-big-to-fail” institutions and sought to address the fundamental structural weaknesses and conflicts within the financial system. To falsely declare an end to Too Big to Fail without actually accomplishing that end is more damaging to the credibility of U.S. markets than a failure to act at all... In fact, Dodd-Frank reinforces the market perception that a small and elite group of large firms are different from the rest.” - Josh Rosner, managing director of Graham Fisher & Co

“The Dodd-Frank bill now defines what a systemically important financial institution is, which makes it now a kind of broad notice that these are the institutions that are 'too big to fail.' That means we will further concentrate our financial system to these powerful few companies, and therefore make it even more fragile in the sense of financial vulnerability to the taxpayer. I don't think that's healthy.” - Thomas Hoenig, the President of the Federal Reserve Bank of Kansas City

"[T]here is nothing [in Dodd-Frank] that ensures our biggest banks will be safe enough or small enough or simple enough so that in the future they cannot demand bailout -- the bailout potential exists as long as the government reasonably fears global financial panic if such banks are allowed to default on their debts." – Simon Johnson, MIT

“In the future we may have to do exceptional things again if we face a shock that large.” – Obama Administration Treasury Secretary Timothy Geithner

“It was apparent to SIGTARP from the context of the interview, including the reference to doing something exceptional “again” in the face of a future financial crisis, that Secretary Geithner was referring to the possibility of future bailouts.”  -- Office of the Special Inspector General of the Troubled Asset Relief Program

The crushing burden of more and more regulations from Washington (400 new rule-makings due to the Dodd-Frank Act alone) has led one columnist to conclude that if the United States enters another depression, “the likely reason will be new financial rules.”

The Dodd-Frank Act passed last year increases government control over the economy to an unprecedented degree, with hundreds of new regulations.  Americans realize that too many federal government regulations are a greater threat to our economy than too few.  The results of a recent Resurgent Republic poll find:

The growing concern Americans have about regulations comes at the same time the Obama Administration is dramatically increasing the number of regulations being imposed on America’s job creators:

When President Obama signed the Dodd-Frank Act into law last summer, he set in motion the most ambitious changes to financial institution regulation since the Great Depression.  The supporters of Dodd-Frank held out the promise that by increasing government control over the economy to an unprecedented degree, the Act would “end too big to fail” and “protect the American taxpayer by ending bailouts.” 

But is that true?

Let’s see what others are saying:

Dallas Federal Reserve Bank President Richard Fisher warned that Dodd-Frank could have the “perverse outcome” of exacerbating the “too-big-to-fail” problem and lead to an even more severe financial crisis in the future.  He added, “Dodd-Frank could intensify the tendency toward bank consolidation, resulting in a more concentrated industry, with the largest institutions predominating even more than in the past….A more consolidated industry would only magnify the challenge of dealing with systemically important institutions and offsetting their historically elevated too-big-to-fail status.”

Mr. Fisher’s warning appears to be coming true.  Kansas City Federal Reserve Bank President Thomas Hoenig noted six months ago that “the five largest financial institutions are 20 percent larger than they were before the crisis. They control $8.6 trillion in financial assets — the equivalent of nearly 60 percent of gross domestic product. Like it or not, these firms remain too big to fail.”

AEI’s Peter Wallison: “The bill authorizes the Fed to regulate all non-bank financial institutions that are ‘systemically important’ or might cause instability in the U.S. financial system if they failed.  These words mean something—that the companies designated for Fed regulation are too big to fail…Since these firms will be too big to fail, they will be seen in the market—as Fannie and Freddie were seen—as ultimately backed by the government and thus safer firms to lend to than small firms that are not government backed.  This will permanently distort the financial market, favoring large companies over small ones, and eventually force a consolidation of each market where these firms exist into a few large competitors operating under the benign supervision of the government.”

Viral Acharya, professor at the NYU Stern School of Business: “For all its ambition and copious attempt to crack down on taxpayer funded bailouts, it is somewhat unfortunate that the Dodd-Frank Act, the most ambitious overhaul of the financial sector regulation in our times, will be anachronistic….Implicit government guarantees for large parts of the shadow banking sector remain unaddressed.”

Ken Griffin, founder of the $15 billion hedge fund Citadel Investment Group, said that not only would the legislation not work as proposed, but it is “going to deeply entrench crony capitalism into the very fabric of our financial system, which I am terrified about.”

And finally even Treasury Secretary Tim Geithner in a December 2010 interview with the Special Inspector General for TARP acknowledged that “in the future we may have to do exceptional things again...”

The SIGTARP reported that it was apparent that the Secretary was “referring to the possibility of future bailouts.”

So there appears to be a consensus view on the answer to the question, “Does the Dodd-Frank Act end too big to fail?

And the answer is “no.”

June 3, 2011

“While the academics may suggest giving consumers a ’nudge,’ by the time Washington gets finished, this nudge has become a shove, if not a punch in face.”

Read the full story below.

By Carter Dougherty

June 3 (Bloomberg) -- When the U.S. Consumer Financial Protection Bureau officially begins work next month, it will set in motion what will become the largest field test to date of a set of ideas known as behavioral economics.

The Harvard University law professor in charge of setting up the bureau, Elizabeth Warren, used tenets of behavioral economics to propose creating the agency. Michael Barr, a former assistant Treasury secretary, said he was guided by some of its ideas as he helped write provisions of the Dodd-Frank Act’s overhaul of financial regulation. And last month, the bureau hired a Harvard economist steeped in the field, Sendhil Mullainathan, to serve as its head of research.

“The CFPB is almost certainly at the forefront of using behavioral economics for regulation and is the only agency I know of that has a significant player in this field on staff,” David S. Evans, a banking industry consultant and lecturer at the University of Chicago Law School, said in an interview.

The consumer bureau will write and enforce rules for a broad array of credit products, including mortgages, credit cards and payday loans. Lenders are likely to have to alter their products, marketing and business models to comply.

As a result, business groups are beginning to study up on behavioral economics. The Financial Services Roundtable recently invited Mark Calabria, director of financial regulation studies at the Cato Institute, a Washington-based policy research group, to brief lobbyists about how behavioral economics influences the consumer bureau. The roundtable includes major retail financial services players including JPMorgan Chase & Co., Bank of America Corp. and U.S Bancorp.

Rational Decisions

Behavioral economics emerged in the last two decades in reaction to the prevailing assumption that consumers are fundamentally rational, making decisions that maximize their economic interests. Behavioral economics, influenced by psychology, asserts that consumers are often irrational or unable to make the optimal decisions.

Daniel Kahneman, a professor of psychology at Princeton University, won the Nobel Memorial prize in economics in 2002 for his work in the field.

Some behaviorists say patterns of irrational decision- making can be observed empirically, and policies designed to help consumers make more economically rational choices.

Credit Cards

One example of a recent policy based on ideas from behavioral economics was the Credit CARD Act of 2009. Behavioral research suggested that consumers tend to overestimate the savings from credit cards with no annual fees, and underestimate the costs of carrying a balance. In response, Barr said, federal officials revamped credit card statements to require issuers to tell consumers how much it would cost them in fees and interest to carry their balance for a certain length of time.

“That lets the consumer more rapidly adjust behavior to what they want,” Barr said.

One behaviorist is already in a prominent position in the Obama administration: Cass Sunstein, head of the White House Office of Information and Regulatory Affairs. Sunstein, a legal scholar, published a book with University of Chicago economist Richard Thaler in 2008 called “Nudge: Improving Decisions About Health, Wealth and Happiness.”

Critics contend that whatever the value of behavioral insights in economics, it may be unwise to apply its lessons to law, policy and regulation.

‘Nudge’ versus ‘Shove’

“While the academics may suggest giving consumers a ’nudge,’ by the time Washington gets finished, this nudge has become a shove, if not a punch in face,” Calabria, a former staffer for U.S. Senator Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, told the lobbying group on May 11.

Evans argued in testimony before a House Oversight and Government Reform subcommittee last week that Thaler and Sunstein represent “soft paternalism” among academics.

Warren’s writings, he said, show a preference for “hard paternalist interventions.”

Robert Lawless, a University of Illinois law professor and longtime academic collaborator with Warren, said her main interest in behavioral economics stems from its emphasis on collecting data and testing potential solutions.

“I don’t think Elizabeth has preconceived theories, contrary to the way she is often portrayed,” Lawless said in an interview. “She has always liked the data.”

Paternalism

Raj Date, the CFPB’s associate director of research, markets and regulations, said that the long-running debate on paternalism is one reason why legislators limited the new agency’s powers.

“That debate will rage on long after we are all dead,” Date said in an interview. “Congress set out guidelines and constraints as to what the bureau can and cannot do.”

For example, the House rejected a proposal by Barr, a professor of law at the University of Michigan, that would have required financial institutions to offer “plain vanilla” products, such as the 30-year fixed-rate mortgage.

Date, a former executive with Capital One Financial Corp. and Deutsche Bank AG, pointed out that credit card companies routinely run tests before rolling out new products or advertising campaigns. “That kind of test-and-learn discipline can be imported into policy-making,” Date said.

Barr said that other Dodd-Frank provisions also reflect the influence of behavioral economics, particularly Title X, which created the CFPB. “The basic structure of the bureau is designed around having the agency do consumer testing and empirical analysis,” Barr said in an interview.

‘Genius’ Award

Barr, together with Mullainathan and Eldar Shafir, a professor of psychology and public affairs at Princeton University, wrote a 2008 paper called “Behaviorally Informed Financial Services Regulation” that helped guide his work in the Treasury Department.  Mullainathan received a so-called genius fellowship from the John D. and Catherine T. MacArthur Foundation in 2002, and has conducted research on aspects of consumer finance including mortgages, marketing and insurance.

Barr and others wrote provisions in the law directing the bureau to create a new mortgage disclosure form, combining two separate ones that had been developed by the Federal Reserve and the Department of Housing and Urban Development.

Warren has made this requirement her signature issue in setting up the bureau, which recently released model disclosure forms. It has also hired Kleimann Communication Group, a Washington-based research firm, to test the forms with consumers.

‘Poorly Informed’

Warren herself relied heavily on behavioral economics for her 2008 paper, “Making Credit Safer,” in which she and Oren Bar-Gill, the primary author, made the first detailed case for the creation of what became the consumer bureau. “Indirect, behavioral evidence reinforces a vision of poorly informed consumers,” the two wrote.

Date said that the research division Mullainathan will head at CFPB could employ experts from a range of fields including psychology, marketing, sociology, law, and especially economics.

In addition to consumer decision-making, it will have to develop expertise in credit, finance, marketing, and capital markets.

“If you understand those five things, you get it,” Date said. “If you don’t understand all of them, you don’t.”

Recently, Democrats have claimed in speeches and media interviews that the Dodd-Frank Act ended “too big to fail” and the bailouts. However, the facts show the Dodd-Frank Act sets up a permanent bailout authority that will continue to privatize profits, and socialize losses.

The Special Inspector General for the Troubled Asset Relief Program (SIGTARP) released a report in January 2011 in which he describes an interview with Treasury Secretary Tim Geithner. During the interview, Secretary Geithner admits to SIGTARP that future bailouts are possible:

“In the future we may have to do exceptional things again if we face a shock that large. You just don’t know what’s systemic and what’s not until you know the nature of the shock. It depends on the state of the world – how deep the recession is. We have better tools now, thanks to Dodd-Frank. But you have to know the nature of the shock.”

            –Secretary Geithner
            SIGTARP report, Jan. 2011

In the report, SIGTARP Confirms “Too Big To Fail” Was Enshrined Into Law:

“It was apparent to SIGTARP from the context of the interview, including the reference to doing something exceptional ‘again’ in the face of a future financial crisis, that Secretary Geithner was referring to the possibility of future bailouts. While Treasury has not disputed the quotation attributed to Secretary Geithner or the context in which it was presented in SIGTARP’s audit report ‘Extraordinary Financial Assistance to Citigroup, Inc.,’ a Treasury spokesperson has reportedly suggested that Secretary Geithner was actually referring to using the tools of the Dodd-Frank Act to wind down an institution. …. Secretary Geithner’s candor about the difficulty of determining ‘what’s systemic and what’s not until you know the nature of the shock,’ and the prospect of having to ‘do exceptional things again’ in such an unknowable future crisis is commendable. At the same time, it underscores a TARP legacy, the moral hazard associated with the continued existence of institutions that remain too big to fail.”

            — Neil Barofsky
            SIGTARP report, Jan. 2011

During debate over financial regulatory reform, Committee Republicans raised concerns about two provisions in the Dodd-Frank Act that allow regulators to continue AIG-style bailouts. The Dodd-Frank Act makes the government bailout regime permanent by giving government bureaucrats the authority to pay off the creditors of failed “too big to fail” institutions, and to treat similarly situated creditors differently, perpetuating a system in which government officials pick winners and losers in the marketplace.  For example:

·         Section 204  of the Dodd-Frank Act permits the FDIC to lend to a failing firm; purchase the assets of a failing firm; guarantee the obligations of a failing firm; take a security interest in the assets of a failing firm; and/or sell or transfer assets that the FDIC has acquired from the failing firm

·         Section 210 authorizes the FDIC to borrow up to 10% of the book value of the failed firm’s total consolidated assets in the 30 days immediately following its appointment as receiver.  After those 30 days, the FDIC is authorized to borrow up to 90% of the fair value of the failed firm’s total consolidated assets.  For Bank of America, that’s $2 trillion in bailout authority alone, to be paid for by the taxpayer

The taxpayer liability from these two provisions is shown in the chart below.

John Solomon, a former Associated Press reporter who is now at the Center for Public Integrity, recently wrote about an issue for the Daily Beast that deserves more attention than it gets:

Over the last two years, the Obama administration has approved a

whopping $34.4 million in compensation to the top six executives of

the financially troubled Fannie Mae and Freddie Mac mortgage giants,

and lacks the necessary protections to ensure such compensation is

even warranted.

Astounding, isn’t it? The top executives of these failed companies -- bailed out courtesy of American taxpayers -- receive multi-million dollar pay packages -- again, courtesy of American taxpayers.  These are many of the same American taxpayers, remember, who are having a difficult time making ends meet these days.

Earlier this year, Financial Services Committee Chairman Spencer Bachus re-introduced legislation he first proposed during the 111^th Congress to suspend these extravagant pay packages at Fannie Mae and Freddie Mac.  The Chairman’s bill also places the pay of employees at these two Government Sponsored Enterprises more in line with that of Federal employees and expresses the sense of the Congress that the pay packages provided to Fannie Mae’s and Freddie Mac’s senior executives were excessive and that the money should be used to help reduce the national debt.

Chairman Bachus’s bill, H.R. 1221, was approved by the Subcommittee on Capital Markets and Government Sponsored Enterprises by a vote of 27-6 on April 6.

Awarding lavish pay packages to the heads of companies that have accepted more than $150 billion in taxpayer bailout cash cannot be defended and must be stopped.

In order to get our economy growing, Congress must reduce government spending.  Our nation faces a record-breaking deficit of $1.4 trillion dollars and a record-breaking debt of more than $14 trillion.  We must get America’s fiscal house in order and stop spending money we don’t have.

Republicans on the Financial Services Committee understand this fact and have worked since the 112th Congress began in January to identify government spending programs that are ineffective and need to be terminated.

We identified billions of dollars in spending reductions in our Committee Oversight Plan in February, and we followed up with legislative action to terminate four failed programs.

The Committee held hearings on four of the Obama Administration’s spending programs that are supposed to help struggling homeowners.  The hearings showed that none of these four costly programs is meeting its objectives and that, in some cases, they are making things worse for many homeowners.

In response, Committee Republicans sponsored four separate bills to terminate each of the programs.  Over the course of the next few weeks, Republicans on the Committee led debates on the floor of the House and succeeded in getting all four bills passed and sent to the Senate.  [See H.R. 839, H.R. 836, H.R. 830, H.R. 861]

If enacted into law, these four bills would stop more than $40 billion of the taxpayers’ money from being wasted on these failed programs.

A Wall Street Journal story published on May 6^th details how the programs are failing to meet the Administration's stated goals.

Obama Anti-Foreclosure Efforts Still Falling Short

Wall Street Journal

By: Alan Zibel

May 6, 2011, 3:57 PM ET

The Obama administration’s efforts to tackle the foreclosure crisis have long been troubled, and data released Friday show that, despite some modest successes, they are still failing to meet expectations.

The administration’s signature initiative, known as the Home Affordable Modification Program, has helped about 587,000 U.S. homeowners complete loan modifications despite an initial goal of reaching three to four million homeowners.

The White House started HAMP in early 2009 as an attempt to reverse the rising number of home foreclosures by reducing families’ mortgage payments, typically by lowering the interest rate and extending the term of a loan. Mortgage servicing companies receive incentive payments to enroll borrowers. But strict and complex regulations for who qualifies have combined with problems at mortgage servicing companies to hinder participation.

The program has faced intense criticism — both from advocates and critics of government programs to help troubled homeowners. Nevertheless, enrollment has grown, albeit at a plodding pace. Enrollment in permanent loan modifications through HAMP as of March was up more than 5% from about 557,000 in February, according to Treasury Department data. (Read the report.)

Another 137,000 homeowners were still in a trial phase and awaiting word on whether their modifications will be made permanent as of March. The number of homeowners in this phase was down more than 3% from about 142,000 in February.

Since spring 2009, about 1.6 million modifications have been started under the plan. More than half of those — about 835,000 — have been canceled.

Two newer pieces of the Obama administration’s foreclosure-prevention plan are also assisting relatively few borrowers.

Only about 21,000 homeowners have received modifications for second mortgages such as home equity loans, the Treasury said. At the same time, about 12,000 borrowers entered into agreements with mortgage servicers in another program that provides banks with incentives to allow consumers to complete so-called short sales — in which banks agree to let homeowners sell their homes for less than the total mortgage amount.

Only about 5,400 homeowners have completed the short-sale program, which also was launched a year ago and pays homeowners up to $3,000 if they complete a short sale or agree to hand back the keys to their homes.

The administration’s efforts to combat foreclosures have come under fire on Capitol Hill, with House lawmakers voting earlier this year to end the HAMP program and several other efforts. Senate lawmakers, however, have shown no interest in taking up those bills.