Update 175: Hensarling Bill Gains Weight
Unexpected Hrg. on Bill this Wednesday
When Congress returns next week from its two-week recess of town halls and special elections, its attention will turn to the tasks of extending the current FY 17 CR or risk a government shutdown when the CR expires at midnight on Thursday.
Less attention will be paid to a hearing quietly announced by House Financial Services Chair Jeb Hensarling on his now-massive financial deregulation bill scheduled for this Wednesday morning.
Good weekends all,
Hensarling 2.0 and the Future of DFA
In a surprise announcement a couple of days ago, House Financial Services Chair Jeb Hensarling said that the new CHOICE Act — weighing in at almost 600 pages to become a whopper of a bill, and often dubbed Hensarling 2.0 — will go to a hearing next week. With a busy legislative slate filled with health care, tax reform, and an infrastructure package, the Trump administration seeks to make good on the president’s promise to “do a number” on Dodd-Frank this year.
The hearing, which is set for 10:00 am ET next Wednesday, April 26, was announced with virtually no notice. The Committee has yet to make a list of witnesses available.
While Hensarling’s last bill (H.R. 5986) failed to get the 60 votes it needed in the Senate, his new bill will still have an uphill battle in Senate Banking made harder by the revisions Hensarling made to 2.0. It would have next to no chance of getting to a vote on the Senate floor.
Even if this bill is functionally dead on arrival in the Senate, it represents a template or roadmap for the GOP agenda on financial regulatory policy going forward. Hensarling’s changes to his last bill have amped up the fringe appeal instead of toning it down, and this bill continues in the same vein. Meanwhile, comments by Gary Cohn and Sec. Mnuchin at the IIF Summit yesterday shed some light on the administration’s plans.
Whatever the bill’s viability, it should be noted that there is currently no corresponding bill developed in the Senate, so Hensarling 2.0 is the name of the game for the time being.
The New Components
Much of Hensarling 2.0 deals with the DFA, but the Republicans’ appetite doesn’t stop there.
Components related to the DFA include:
- SIFI Off-Ramp — A favorite bone of contention, the “Hotel California” fate for SIFIs will be resolved with an off-ramp process. Whether or not this approach will be too broad and undo valuable protections, remains to be seen.
- Orderly Liquidation Authority (OLA) — Sec. Mnuchin seems to believe that the OLA enables “too big to fail” bailouts, and is set on repealing it. Gary Cohn won’t commit to that fully, saying: “Different regulatory agencies can’t agree whether it works or not.” Former Federal Reserve Board Chairman Paul Volcker defended the OLA (seemingly in response) in a speech this week, saying: “Under the provisions of OLA, the failing institution will, by any reasonable definition of the word, have in fact failed — there is no ‘taxpayer bailout.’”
- FMU Designation — The new bill aims to eliminate financial market utility (FMU) designation, which would release firms from oversight by the Federal Reserve. As a result, FMUs will lose their access to Fed lending in liquidation periods. The potential collapse of any one of these firms could be catastrophic to the financial industry and, as a result, the economy as a whole. This has people scratching their heads as FMUs themselves don’t seem to have an aversion to the regulatory standards set by Dodd-Frank.
- CFPB — If successful, Hensarling would dismantle the Consumer Financial Protection Bureau, hollowing it out to the extent that it would no longer operate as a consumer watchdog. Hensarling argues that consumer protection is on the consumers, not the federal government, saying, “True consumer protection puts power in the hands of consumers, not Washington bureaucrats. True consumer protection promotes competition and choice and ensures that consumers have access to transparent and innovative markets that are vigorously policed for fraud and deception.”
Notable (non-DFA) provisions:
- JOBS Act — Through the new bill, Republicans seem to be taking the opportunity to expand the JOBS Act, which turned five years old earlier this month. The JOBS Act formed Regulation A Plus, which paved the way for the crowdfunding provision that allowed companies to create crowdfunded equity. This is where companies like Kickstarter got their footing. Issuers of Regulation A Plus are allowed to sell up to $50 million worth of unregistered securities, but Hensarling’s bill aima to increase the threshold to $75 million. The donor-based crowdfunding created an industry worth well over a billion dollars annually. Hensarling 2.0, however, is looking to stifle crowdfunding, as it aims to increase the caps to entry by requiring more investments from individuals and fewer disclosure requirements from the issuers. The disclosures are important to investor protection, and repealing them should not be in investors’ interest.
- Chevron Deference — Turning the Chevron Deference doctrine on its head seems to be a priority of the Trump administration. The doctrine allows regulatory agencies to use discretion when designing and implementing a new rule at Congress’ direction.
- Taylor Rule — The Taylor Rule recommends that the Federal Reserve should raise interest rates when inflation is high or when employment exceeds full employment levels. Conversely, when inflation and employment levels are low, interest rates should be decreased. Some critics claim it cannot to account of sudden jolts or turns in the economy, such as a stock or housing market crash. Others say it can only constrain monetary policy makers, who have only limited and blunt instruments at their disposal. In 2015, financial manager Bill Gross said the Taylor rule “must now be discarded into the trash bin of history”, in light of tepid GDP growth in the years after 2009. Gross believed low interest rates were not the cure for decreased growth, but the source of the problem. However, the CHOICE Act 2.0 wants to tie the Federal Reserve to using the Taylor Rule as a guiding principle to replace regulation.
Hensarling will certainly not have an easy time convincing moderate Republicans (let alone Democrats) to vote in favor of his new bill. Much of the financial industry hesitates to advocate for a full repeal or dismantling of Dodd-Frank. In the event that this passes the House, the road to 60 votes in the Senate looks near impossible at this stage — and who will carry it on from there?
But for the time being, this colossal bill is the 64,000 pound gorilla. No one may want it in the end, and this may be an ugly place to start – — Sen. Sherrod Brown said of it: “… big banks and payday lenders… special interests and their lobbyists who are hell-bent on rewriting the rules in Wall Street’s favor couldn’t have drafted a better bill themselves, if indeed they didn’t” — but it may some be the only game in town.
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