For eight years, President Bush and his Republican allies looked the other way as Wall Street and big banks exploited loopholes, ignored growing problems and, as a result, did not protect America’s families and small businesses. Even today, after millions of Americans have lost their jobs and taxpayers have been forced to bailout Wall Street, Republicans continue to deny that there is a problem. Instead, Republican leader John Boehner, Republican Whip Eric Cantor, and the rest of the Republican Party can be found on Capitol Hill begging Washington lobbyists to kill a bill that would finally bring accountability and integrity back to our financial system.
Now, the Republicans have offered a substitute bill, an alternative to H.R. 4173 that does virtually nothing to address the causes leading to last year’s financial crisis. In fact, the Republican “alternative” wholly rejects the notion that Wall Street should be held accountable or that consumers need more protections from deceptive banks and greedy lenders. If the Republican plan passes, it will mean business as usual on Wall Street, and it will increase the likelihood of more taxpayer bailouts.
Summary of the Republican Substitute to H.R. 4173, the Wall Street Reform and Consumer Protection Act
This amendment strikes H.R. 4173 in its entirety and substitutes it with eight titles, each described below, which do little or nothing to bring increased accountability and responsibility to Wall Street. The GOP fails to respond to the significant need for consumer protection and financial reform made clear by the current financial crisis. Significantly, the substitute is completely silent on reform to the largest contributor to the crisis: mortgage origination, including no provisions on mortgage reform and predatory lending. It leaves open the hedge fund loophole. It leaves Main Street America vulnerable.
No More Bailouts Act
Amends the bankruptcy code to resolve insolvent non-bank institutions. Amends the Federal Reserve Act to restrict the Fed’s ability to use its emergency authorities under Section 13(3), requires the Treasury Secretary to approve such authority while giving Congress the power to terminate assistance through a joint resolution of disapproval, and requires disclosure of expenditures through the Department of the Treasury.
Democratic Analysis: The name of this title should be changed to “Even More Bailouts Act” as it is not structured to prevent the past from happening again. The steepest plunge in financial markets last year was set off by the bankruptcy of Lehman Brothers. The chaos that followed convinced Republicans such as Ben Bernanke, Henry Paulson, and President Bush that the government had to come to the rescue. Title I of H.R. 4173 will prevent the need for future taxpayer-funded bailouts by providing a set of tools to ensure that no critical financial firm grows to the point that it threatens the financial system, the economy, and American jobs. This title also creates an orderly process in the event that a large interconnected firm actually fails. By shutting down the firm, wiping out shareholders, forcing creditors to take a significant hit, this title prevents any failure from endangering the financial system and the overall economy.
Title I of the Republican substitute offers an empty tool box to prevent failures, and it ensures that any failure goes through the same bankruptcy process that showed us the danger of financial contagion last year. If the Republicans are so intent on repeating the mistakes of the past, America should be prepared for even more expensive bailouts.
Financial Institutions Consumer Protection and Examination Council
Establishes a Council of Federal and state regulatory authorities to issue uniform consumer protection rules and examination practices to be adopted and enforced by prudential regulators. State regulators enforce rules on state-regulated institutions. A consumer complaint telephone hotline is created for referral and remedy of consumer complaints. Adds consumer protection to the mission statement of each banking regulator.
Democratic Analysis: After ignoring the problems of predatory lending and problems in the mortgage origination process for years, Republicans want to make sure the same regulators that ignored the same problems continue to do so. For example, Former Federal Reserve Chairman Alan Greenspan ignored the will of Congress and never implemented the Home Owners Equity Protection Act signed into law in 1994, which would have provided protection from subprime lending. House Republicans never said a word about the Fed’s inaction. After all we have been through with the problems that surfaced in the mortgage origination process and unscrupulous lenders taking advantage of borrowers with no money, income, or collateral, it is hard to believe that Republicans are so intent on repeating the mistakes of the past.
And what happened in May when the House passed the Mortgage Reform and Anti-Predatory Lending Act to end these abuses and require responsible lending? 114 House Republicans lined up to vote against it.
Attempts to strengthen anti-fraud enforcement by increasing civil and criminal money penalties, maximizing restitution for victims of fraud, improving surveillance of bad actors, and allowing regulators to share information with foreign regulators and enforcement agencies.
Over-the-Counter Derivative Markets
Does not require clearing, or trading on exchange or trade execution platform, for any swaps or security-based swaps. Requires the reporting of uncleared swaps and securities-based swaps to trade repositories or the CFTC or SEC, as appropriate. The repository shall make information available to regulators and disclose swap-related information to the public on an aggregate basis. Directs regulators to impose margin for swap and security-based swap transactions between swap dealers, security-based swap dealers, major swap participants and major security-based swap participants. Also provides for the segregation of margin. Regulators are to take the swap and security-based swap positions into consideration when determining capital levels for the entities they regulate. After one year, the regulator shall report to Congress on the swap and security-based swap market and make recommendations if they jointly find further regulation of the market is required.
Democratic Analysis: Where real reform and regulation are needed to limit potential systemic risk from the $600 trillion swap market, the Republicans offer simple window dressing. Rather than requiring centralized clearing and exchange trading for standardized swaps in order to minimize risk to the financial system, the Republicans would simply have market participants “report” their positions. At the same time, they would pay lip service to clearing by directing the regulators to “set targets” in this area and kick the can down the road by requiring a report back to Congress a year after enactment on the need for further swap market regulation. The Republican substitute would do nothing to prevent another AIG from threatening the financial systems or guard against the chaos in the markets that could follow the bankruptcy of a heavily intertwined swap counterparty like Lehman Brothers.
Corporate and Financial Institution Compensation Fairness
While similar to executive compensation provisions in H.R. 4173, the substitute provides for a non-binding shareholder “say on pay” vote only once every three years rather than annually and allows shareholders to vote to opt out of ongoing “say on pay” vote requirements. Further, the substitute allows state laws to preempt the independence requirements it establishes for compensation committees of public companies. Finally, the substitute is markedly dissimilar from the executive compensation provisions in H.R. 4173 in that the substitute includes no provisions to address excessively risky, incentive-based compensation structures that could threaten the safety and soundness of financial institutions and have adverse effects on overall financial stability.
Democratic Analysis: The Republicans should be given some credit here for agreeing with Democrats. Three years ago, they flatly rejected Democratic requests to hold hearings on the issue of abuses in excessive executive compensation. Now they agree with Democrats. First, they agree with President Obama that compensation committees should be independent. Second, they adopt Barney Frank’s “say on pay” provisions by requiring a shareholder vote on executive compensation.
But Republicans leave shareholders holding the bag if and when an executive is hired, given the opportunity to pile on all sorts of short-term risk, make hundreds of millions of dollars, and then leave the company two and half-years later and avoid any responsibility or accountability to the owners of the company.
Credit Rating Agencies
Changes the name/meaning of a NRSRO from “Nationally Recognized Statistical Ratings Organization” to “Nationally Registered Statistical Rating Organizations” and removes all references to ratings in Federal law/regulation. Includes none of the improvements in supervision included in H.R. 4173.
Democratic Analysis: The fact the credit rating agencies gave out Triple-A ratings to every security or bond that walked in is lost on the Republicans. The poor performance of these entities and their contribution to the crisis mandates the need for tougher regulations to protect America.
Government-Sponsored Enterprises Reform
Phases out taxpayer subsidies of Fannie Mae and Freddie Mac and privatizes the entities over a number of years. Sunsets the current conservatorships and places both institutions in receivership if they are not financially viable. If they are viable, requires wind down of agencies if their charters are not renewed in three years. Requires reductions in the portfolios of the two companies, emphasizes the promotion of housing affordability, and requires SEC registration as well as reverses all tax exemptions. Lowers conforming loan limit in high cost areas and prohibits GSEs from buying any loan that is above the area median home price in its area - effectively lowering conforming loan limits in much of the country.
Democratic Analysis: Let’s review the pitiful record of Republicans and the GSE. First they ignored the problem for years, having never passed reform legislation for the first 10 years (1995-2005) of Republican rule in the House of Representatives. Second, the only Republican reform bill to ever get a vote in Congress was opposed by a Republican President. Third, President Bush, over the objections of House Democrats, pushed Fannie and Freddie into riskier and riskier mortgages with a philosophy of homeownership at any cost. And finally, President Bush bails them out. When Democrats took over in 2007, Barney Frank worked with the Bush Administration and over the objections of most Republicans in the House passed Fannie and Freddie reform within 5 months of taking over the majority. The only Fannie and Freddie reform bill signed by President Bush was authored by Barney Frank and Chris Dodd.
Republicans want you to believe that they are serious about the problems associated with Fannie and Freddie, but it is smoke and mirrors. House Democrats are committed to addressing the Fannie and Freddie issues with substantive, thoughtful reform when Congress convenes next year.
Federal Insurance Office (FIO)
Federal Office of Insurance created in substitute is identical to FIO created in H.R. 4173.