[StBernard] Republican Response to the Worst Financial Meltdown since the Great Depression: "What, There's a Problem?"

[Westley Annis]

December 10, 2009                                                  

 

Republican Response to the Worst Financial Meltdown since the Great
Depression: "What, There's a Problem?"

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 <http://www.rollcall.com/news/41311-1.html>  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.  

 Anti-Fraud Provisions

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.

 

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