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House Banking Panel Cynically Uses Scare Tactics, Symbolic Votes

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The surest sign that you are losing an argument is when you resort to making things up.

By that standard, the House Financial Services Committee is losing pretty badly.

In the past 24 hours, it has passed a bill that it says will reduce the deficit by $22 billion and unveiled a video that equates the Office of Financial Research with George Orwell's Big Brother.

But the promised government savings are totally illusory and the OFR claim is both disingenuous and dishonest.

To be clear, I'm not saying the Dodd-Frank Act is perfect or that there shouldn't be efforts to guard against some of the unintended consequences from its enactment.

But the way the Financial Services Committee seems to be approaching these problems is senseless. If the panel wants to be taken seriously, this isn't the way to go.

Let's take the two issues separately.

Late Wednesday, the panel passed a bill along party lines that would repeal the government's authority to wind down large, failing financial institutions. The bill has absolutely zero chance of actually becoming law—the Senate would never approve it and President Obama would never sign it.

But this was a symbolic vote meant to show that the GOP was serious about reducing the deficit and ending government bailouts of banks. On paper, the Republicans were bolstered by the Congressional Budget Office, which estimated that the Dodd-Frank resolution authority would cost the government $22 billion over 10 years.

The problem? The bill wouldn’t actually save the government anything. The CBO estimate is based on the idea that if a large firm fails, the Federal Deposit Insurance Corp. must borrow money from Treasury to ensure its orderly resolution.

During debate on Dodd-Frank, then FDIC Chairman Sheila Bair wanted to create a resolution fund – maintained by assessments on banks – that would be used for precisely this purpose. But Republicans at the time objected to the fund, and in an effort to secure GOP votes in the Senate, it was scratched.

Instead, the final law allows the FDIC to borrow from Treasury, but then requires the agency to assess banks after the fact, recouping all costs. The CBO said last year this provision would cost the government $22 billion – but only because it was looking at the issue from a 10-year time frame, not because it did not think the government would be repaid eventually. In other words, the CBO never said that the government wouldn't get its money back, just that by the time a large failure occurred and the industry was assessed, it wouldn't happen within a decade.  (The Wall Street Journal reaches the same conclusion here.)

This does not appear to matter to Republicans on the House Financial Services Committee. Even though analysts referred to the whole thing as "budget gimmickry," GOP lawmakers are actually crowing about the fact that the bill will save the government $22 billion.

Leaving aside the issue of government savings, however, the bill is still terrible policy. Republicans claim that the legislation somehow stops government bailouts, but it's likely to engender the exact opposite or spur a market panic instead.

If the FDIC cannot seize a failing firm, regulators are left with two choices: let a firm go bankrupt, a la Lehman Brothers, or try and find a way of bailing it out.

Both choices are equally bad. Lehman’s bankruptcy nearly caused the entire financial system to melt down and directly led to government bailouts of the largest banks. Dodd-Frank was enacted to give regulators a third option: an orderly wind-down of a firm.

Republicans have now voted to repeal that part of the bill and replace it with … nothing.

That's right. If this bill became law tomorrow and a firm was failing, regulators could either try and mount a bailout – which would be more difficult now thanks to restrictions placed on the Federal Reserve Board by Dodd-Frank – or they could let it go into bankruptcy, potentially wreaking havoc on the financial system.

Does this sound like sound policy to you? If the existing bankruptcy process worked well, Lehman Brothers would have been a non-event.

As if that weren't bad enough, the Financial Services Committee followed up on Thursday by launching an attack on the Office of Financial Research.

In a YouTube video, the Republicans repeatedly compare OFR – which was created to collect and sift data from large banks and their regulators – to the totalitarian regime known as Big Brother in Orwell’s novel, "1984."

This video would be funny if it weren't so outrageous.

It shows photos of mysterious men taking pictures (presumably of average citizens) and a man standing in front of a series of television screens showing people's lives. It warns darkly of OFR's subpoena powers and concludes with the message, "The Office of Financial Research is Watching."

The average person – who has never heard of OFR before – would probably conclude that Dodd-Frank created another spy agency tasked with overseeing average Americans. Clearly this is the intent of the video.

It's also completely insane. The OFR was not created to – nor does it – oversee normal Americans. It is not spying on people, as both the title of the video and its imagery would suggest.

It is an agency designed to collect bank data and detect problems in the system. In theory, had it been in place before the financial crisis, it might have helped regulators recognize the explosive growth of subprime products and what a danger they posed. 

The subpoena power mentioned in the video is against banks, not citizens, in order to enable it to have all the information it requires to find systemic risk. That doesn't mean it’s going to be rooting through your trash.

In an e-mail to me, a spokesman for the committee defended the video, insisting the panel had concerns about possible data breaches at the agency. That's actually a legitimate issue—too bad the video is so busy trying to panic people it barely mentions that concern.

I'm not saying anyone has to like the agency. I've heard sound arguments that it won't work, that more data doesn't necessarily mean better risk detection.

There's no doubt the agency is untested, and we have to wait to see just how helpful it's going to be.

But one thing it's not is some ominous government creation worthy of a James Bond adventure. Arguing that it is doesn't make you seem serious, it makes you appear either paranoid or silly—take your pick.

Dodd-Frank, like any big piece of legislation, offers plenty of choice targets for the House Financial Services Committee to tackle, from interchange fee restrictions to bans on proprietary trading to push-out provisions for certain activities.

But the panel is losing credibility by engaging in pointless symbolic votes and employing scare-tactics in the absence of substantive arguments.

Rob Blackwell is the Washington bureau chief of American Banker. The views expressed are his own.

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Comments (4)
I wonder which approach is less defensible, to pass bills to amend DFA that have little chance of being enacted (as it is claimed that the House is doing), or to insist that no changes to DFA shall be passed (as the Senate seems to be doing)?

It is true that better information shared among the regulatory agencies is a good thing, but making that statement is hardly enough to justify creating a whole new bureaucracy like the OFR that has no constraints on size or budget and very little constraints on its mission. It becomes even less defensible when it is tasked with gathering information for the same purposes that the Federal Reserve and the FDIC do, but without the same accountability that those agencies have. Yes, by all means facilitate the sharing of information among the agencies, but do not create yet one more bureaucracy to gather it yet again in its own particular way. Yes, yes, OFR officials say that they will collect only what they say that they need, and I believe that they are sincere, but they are their own judges as to what they need, with no accountability and no limitation on that judgment either as to definition or cost for implementing it. Mission creep is a fixed law of bureaucratic life, with examples that everyone can cite.

If you do not like the term "Orwellian" (which has a long history of describing intrusive governmental authority with little accountability), then choose your own to describe this situation: a government agency has full authority (ultimately backed by ample enforcement powers) to demand of any financial services firm any information that it believes that it needs in any format and at any time, and by the way the financial firms get the privilege of paying for providing the information as well as for all of the operations of the agency that demands it.

There are also interesting Constitutional questions. The first is the taxing authority that DFA would seek to pass on to the OFR. A second is this carte blanche access to information. A fundamental principle of the Constitution is that you own your possessions, and that extends to "persons, houses, papers, and effects" and places fairly stringent limitations on government's access to that. DFA, in a way that seems inconsistent with the Constitution, would seem to blow through those limitations with regard to the OFR. The OFR would supposedly be able to obtain information that other agencies would have difficulty getting with a subpena.

Which is to say, you may disagree with the House Financial Services Committee's action, but it does not seem justified to call it "senseless."
Posted by WayneAbernathy | Friday, April 20 2012 at 9:16AM ET
You're right about the posturing; the idea that lying, and lying politicians, are protected by free speech is difficult to stomach. However, you are mostly wrong about the underlying issues, including Dodd-Frank. A thoughtful, incremental extension of the anit-trust/monopoly framework could have better addressed "too big to fail" issues, allowed pre-emptive action to prevent costly, market disturbing wind-downs, allowed the legal system to adjudicate regulator-FI disagreements over size and market power issues, and avoided the high and unnecessary costs and unintended consequences of DF. In regards the the OFR comment: the rampant expansion of data collection by bank regulators has in fact progressed to loan level and the latest proposal includes submission of taxpayer ID and personal financial information (e.g., income--through a trivial calculation) as well as non-public commercial financial statement info. If the intent is not "overseeing normal Americans", the ability to do so is clearly present. You should ask yourself a question: even if every bit and piece may individually appear acceptable, does that ensure that the overall result will be? Whether, how, and by whom this capability is used is uncertain. It therefore seems unwise to provide it to the State.
Posted by micha | Friday, April 20 2012 at 12:17PM ET
Bravo Rob, you hit the nail on the head. Spot on!
Posted by commobanker | Friday, April 20 2012 at 2:08PM ET
Rob, I watched that YouTube video and I figured out the problem. There's been a big misunderstanding. The House Financial Services Committee made an honest mistake -- they confused the OFR with the NSA: http://bit.ly/HW671F
Posted by Marc Hochstein, Executive Editor, American Banker | Friday, April 20 2012 at 5:29PM ET
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