Research Briefing

Obama’s Misguided, Partisan Attempt At Financial Regulatory Reform Institutionalizes “Too Big To Fail” At American Taxpayers’ Expense

“President Obama On Wednesday Will Meet With Democratic And Republican Lawmakers To Discuss Financial Reform.” (Jay Heflin, “President To Host Bipartisan Meeting On Financial Reform,” The Hill’s “On The Money” Blog, 4/10/10)

OBAMA SHOT DOWN BIPARTISAN TALKS ON FINANCIAL REGULATION THREE TIMES, IN ORDER TO USE THE ISSUE AS PARTISAN POLITICAL WEAPON

FEBRUARY: White House Pulled Sen. Chris Dodd (D-CT) Away From Negotiation With Sen. Richard Shelby (R-AL). “Just six days earlier, Dodd had said he hit an impasse with Senator Richard Shelby, the committee’s top Republican, in talks that have dragged on for more than a year over tightening oversight of banks and capital markets … Gregg said he believes Dodd and Shelby had an agreement on consumer protection before talks broke off. ‘If the white house hadn’t sort of pulled back the Democratic membership on that issue, we could all go forward in a bipartisan way.’” (Kevin Drawbaugh, “GOP’s Gregg Sees Progress On Financial Regulation,” Reuters, 2/12/10)

MARCH: White House Pressured Dodd To Abandon Bipartisan Negotiations With Sen. Bob Corker (R-TN). “Dodd announced Thursday he would schedule a committee markup the week of March 22 even though he and Sen. Bob Corker (R-Tenn.) had not struck a final deal… Corker said negotiations were on ‘the 5-yard line’ and blamed politics … for complicating the talks … ‘There is no question that White House politics and healthcare have kept us from getting to the goal line,’ …” (Silla Brush, “Banking Chairman Dodd To Go It Alone On Financial Overhaul,” The Hill, 3/11/10)

THIS WEEK: Sens. Blanche Lincoln (D-AR) And Saxby Chambliss (R-GA) Were Nearing Bipartisan Deal On Derivatives Until “White House Raised Objections To A Potential Compromise.” “White House officials have raised objections to a potential compromise between Democrats and Republicans on the Senate Agriculture Committee regarding rules governing derivatives trading … The pressure from the White House and Treasury Department could complicate the broader congressional effort to rework financial regulation, as it could derail a bipartisan deal. … The Senate Agriculture Committee proposal, spearheaded by panel chairman Blanche Lincoln and Saxby Chambliss was seen by many as one of the few parts of the bill that could attract bipartisan support.” (Damian Paletta, “Hurdle Emerges To Financial Revamp,” The Wall Street Journal, 4/13/10)

WHY? Bipartisan Negotiations Scuttled Because Dems Want To Use Financial Regulation Debate As Political Weapon. “[S]ome Democrats believe continued action after health care reform will show real momentum for their agenda. But others argue that the White House would be better off — politically, anyway — if Democrats could hit the campaign trail in the fall and blame … Republicans for blocking the reform bill.” (Manu Raju and Eamon Javers, “Dems Bristle At Reform Deadline,” Politico, 4/5/10)

BUT DEMS’ PLAN MAKES BANK BAILOUTS, “TOO BIG TO FAIL” PHILOSOPHY PERMANENT …

Head Of Obama’s Economic Recovery Advisory Board Admits Obama’s Plan Could Lead To More Bailouts. “Paul Volcker, the Democrat and former Federal Reserve chairman who worked with President Reagan to slay inflation in the 1980s, now leads President Obama’s Economic Recovery Advisory Board. He warned in Congressional testimony Thursday that the pending Treasury plan could lead to more taxpayer bailouts by designating even nonbanks as ‘systemically important.’” (Editorial, “Too Big To Ignore,” The Wall Street Journal, 9/26/09)

Obama Supports Dodd’s Bill That Contains “Permanent TARP Program” That Will Be Used For More Bailouts. “A new $50 billion fund that is to be used in ‘emergencies’ to settle the affairs of failing financial institutions. This fund is virtually certain to be used for bailing out politically significant financial institutions, and is nothing less than a permanent TARP program. And, although Dodd argues that this fund will be financed by fees on financial firms, not taxpayers, the real cost will doubtless be passed on to American consumers.” (President Barack Obama, “President Obama Urges Action On Financial Reform,” Weekly Address, 3/20/10; David John, “Senator Dodd and Financial Regulation: New Plan, Old Problems,” The Heritage Foundation’s “The Foundry” Blog, 3/15/10)

Obama Also Supports Similar Bill From Rep. Barney Frank (D-MA)l That Would Leave Our Economy “Exposed To The Risk Of Bubbles” By Expanding Definition Of “Too Big To Fail.”  “The US House of Representatives on Friday passed a bill aimed at preventing a repeat of the financial crisis that shook the global economy in the fall of 2008 … Although it drew immediate praise from the Obama administration and consumer groups, some financial experts warn that the economy will remain exposed to the risk of bubbles, busts, and firms that are ‘too big to fail.’ The bill spans many markets and regulatory activities: … Gives the government new powers to dismantle large financial firms that fail. Investors in those firms would be exposed to losses during such a wind-down process. But, as regulators will also be trying to protect the economy from spillover effects, some critics of the plan say large firms might receive government assistance rather than bankruptcy-style restructuring.” (Mark Trumbull, “Will House-Passed Financial Reform Bill Leave Big Risks?” The Christian Science Monitor, 12/11/09)

Rep. Carolyn Maloney (D-NY) Expressed Concern That Obama’s Financial Regulation Legislation Gives Banks That Are “Too Big To Fail” An “Implicit Guarantee” Of A Bailout. “The Obama administration’s plan for ‘systemic risk’ regulation, the heart of the package, has been taking fire from an unlikely source. Manhattan Rep. Carolyn Maloney is a reliable liberal who chairs Congress’s Joint Economic Committee and is an influential member on Financial Services. … But she’s not buying the Obama plan to give the government new authority to rescue large institutions, saying recently, ‘We now have a blueprint that in many ways looks like the problems that we confronted. Many people say that Fannie and Freddie, with their implicit government guarantee, caused many of the problems. So what are we going to come back with? An implicit guarantee that . . . too-big-to-fail banks are going to be guaranteed.’” (James Freeman, “A Blueprint For More Bailouts,” The Wall Street Journal, 8/9/09) 

LEAVES FANNIE, FREDDIE UNCHANGED DESPITE THEIR ROLE IN FINANCIAL MELTDOWN …

President Bill Clinton Admitted His Policies Regarding Fannie, Freddie Paved The Way For Current Financial Crisis. “Clinton ... said that Democrats weren’t entirely blameless, stating that they should have highlighted problems with Fannie Mae and Freddie Mac and ‘tried more aggressively to regulate derivatives.’ He also acknowledged that there was possible danger in his administration’s policy of pressing Fannie Mae, the mortgage company, to lower its credit standards for lower- and middle-income families seeking homes. ‘I think, through the lens of this, it looks like that was true,’ Clinton said.” (Walter Alarkon, “Clinton Rejects Blame For Financial Crisis,” The Hill, 9/25/08)

But Obama Praised Sen. Chris Dodd’s Bill As A “Strong Foundation For Reform” Even Though It Leaves Fannie Mae And Freddie Mac “Untouched.” “[A]fter months of bipartisan work, Senator Chris Dodd and his committee have offered a strong foundation for reform, in line with the proposal I previously laid out ...”; “Home lending giants Fannie Mae and Freddie Mac will be left untouched for now by financial reform legislation, Sen. Bob Corker (R-Tenn.) said Tuesday. Corker … said that the legislation under consideration wouldn’t deal with the two government-administered companies … ‘I would have liked to have seen the Fannie and Freddie reforms in this bill,’ Corker said during an appearance on CNBC. ‘They’re not going to be in this bill.’” (President Barack Obama, “President Obama Urges Action On Financial Reform,” Weekly Address, 3/20/10; Michael O’Brien, “Corker: Fannie And Freddie Left Out Of Financial Reform Bill,” The Hill “Blog Briefing Room,” 3/9/10)

And Obama Administration Admitted Taxpayers Will “Absorb Unlimited Losses” Associated With Fannie And Freddie In The Coming Years. “The government took over Fannie and Freddie nearly 18 months ago as rising loan defaults burned big holes in the companies’ balance sheets. The government has agreed to absorb unlimited losses for the next three years and up to $400 billion after that. So far, the companies have taken a combined $127 billion in Treasury support, making this bailout one of the most expensive from the financial crisis.” (Nick Timiraos, “Fannie Posts $72 Billion Loss For ‘09,” The Wall Street Journal, 3/1/10)

AND KILLS JOBS, STUNTS ECONOMIC GROWTH

Obama’s Financial Regulation Reform Plan Includes Consumer Financial Protection Agency That Would Reduce Businesses’ Ability To Invest, Cutting “Net New Jobs Created In The Economy By 4.3 Percent.” “Under plausible yet conservative assumptions the CFPA would… increase the interest rates consumers pay by at least 160 basis points… reduce consumer borrowing by at least 2.1 percent… reduce the net new jobs created in the economy by 4.3 percent.” (David S. Evans and Joshua D. Wright, “The Effect Of The Consumer Financial Protection Agency Act Of 2009 On Consumer Credit,” 10/7/09)

Dodd’s Financial Reform Bill Could Limit Credit Available To Consumers, Make Lending More Expensive And Cause Some Companies To Flee States Altogether. “Although tougher standards on banks could benefit many consumers, they could also lead to tighter credit conditions in certain states or for certain borrowers. ‘The cost to fully understand and comply with rules changes is hundreds of millions of dollars, which we will all subsidize to a great extent,’ says John Ulzheimer, president for educational services at Credit.com. Issuers and banks could wind up fleeing certain states to avoid compliance, he adds.” (Diana Ransom, “How Financial Reform Could Affect Your Credit,” The Wall Street Journal’s “SmartMoney” Blog, 3/23/10)