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Romney's Muddled Message on Dodd-Frank

TAMPA, Fla. — For a candidate who is vowing to repeal the Dodd-Frank Act, Mitt Romney sure seems on board with a significant number of its provisions.

In an interview with Time magazine last week, the Republican presidential candidate suggested that the proper response to the financial crisis would have established tougher capital requirements, stricter limits on leverage, and risk-retention rules.

The problem? All of those ideas are already part of Dodd-Frank.

It's possible that Romney was citing pieces of the law that he agreed with, or implying that implementation of those measures is proceeding poorly. But if so, he didn't say that.

Instead, he spoke mostly in broad strokes, seeming to endorse the kind of bank regulatory system that we have today.

"We do need to have regulation in the banking industry," Romney said. "Extensive regulation is appropriate in an industry that has such an impact on the overall economy. We have to look at what the causes were of the last crisis and take action to prevent those causes from reappearing."

Romney, who has made over-regulation a key theme of this week's Republican convention in Tampa, then proceeded to cite specific ideas aimed at preventing the next crisis.

"What kinds of things come to mind include capital requirements, levels of leverage which are appropriate and inappropriate, banks maintaining risk in assets which they gather," he said. "Specifically, I'm referring to the idea [that] if a bank originates a loan or a mortgage that it should be on the hook for some portion of the loss if that loan or mortgage fails. These kinds of provisions, I think, would be directly applicable to the kind of crisis that we experienced before."

But much of that plan sounds identical to ideas that are already part of the Dodd-Frank law.

One of the few congressional Republicans who voted for Dodd-Frank, Maine Sen. Susan Collins, authored a provision that requires banking agencies to establish minimum capital and leverage requirements for banks and systemically important non-bank financial companies. The process of turning those requirements into concrete regulations is now well under way.

Moreover, Dodd-Frank requires banks that securitize loans to retain some of the risk in their own portfolios.

Ironically, the risk-retention provision is one of Dodd-Frank's most controversial measures, and its implementation has met strong resistance from the housing industry as well as both Democrats and Republicans in Congress.

Romney's comments would appear to indicate he sides with the Obama administration's side in that debate or, at the very least, supports the idea behind risk retention.

Elsewhere, Romney has spoken favorably about other aspects of Dodd-Frank.

He's said that in the wake of the financial crisis, derivatives needed to be regulated, and that there was a need for better regulation of mortgage lending — both ideas that are already part of the reform law.

To be sure, no one believes that Romney is exactly on the same page as President Obama when it comes to financial reform, but since his statements have been frustratingly vague, it's hard to know exactly where the GOP hopeful stands. To date, Romney has said only that he wants to repeal Dodd-Frank and replace it with a "streamlined regulatory framework," a proposal that could mean just about anything.

It's not even clear, for example, whether Romney would favor eliminating the Consumer Financial Protection Bureau — one of the most politically popular parts of the reform law yet the most contentious for financial institutions.

Indeed, the only part of the financial reform law that Romney has specifically rejected is the designation of certain banks and nonbanks as systemically important. Like House Republicans, Romney argues that the systemic designation effectively makes those firms "too big to fail."

In the Time interview, he suggests this ensures the government will bail out those companies in the event of a crisis - a notion that a strict reading of Dodd-Frank would appear to reject (Under the law, regulators cannot bail out an individual firm, but now have the power to seize and unwind it).

"The right course was not to say that this handful of banks will be protected by the government, implying therefore that all the rest of the banks are on their own, because smart depositors will all move toward the banks that are protected by government," Romney said.

"It had the opposite effect of what was advertised. What was advertised was that we would keep the too-big-to-fail banks from getting bigger, but the result of the legislation is just the opposite."

Romney is also not the only member of his campaign to endorse a piece of Dodd-Frank. Rep. Paul Ryan, before becoming the GOP's vice presidential candidate, told voters in his home state of Wisconsin that banks should not engage in proprietary trading.

"If you're a bank and you want to operate like some nonbank entity like a hedge fund, then don't be a bank," Ryan said. "Don't let banks use their customers money to do anything other than traditional banking."

That comment appears to support the Volcker Rule, a Dodd-Frank provision that is designed to stop exactly such conduct.

Some have also suggested that Ryan's words indicate he is a proponent of breaking up the big banks.

For his part, however, Romney has not gone that far. In the same Time interview, Romney said he opposes reviving the Glass-Steagall Act's separation of commercial banking and investment banking. Advocates of that idea argue that it would be a simple way to combat the too-big-to-fail problem.

"There are others who suggest, 'Well, let's go back to Glass-Steagall,'" Romney said. "But interestingly, that was not a cause of the last crisis. Trying to solve problems that did not exist may be counterproductive."

Once again, however, that position puts Romney close to the Obama administration's view. On several occasions, Treasury Secretary Timothy Geithner has rejected calls to break up the big banks and restore Glass-Steagall.

"I would not support reinstating Glass-Steagall," Geithner said in 2009.

Unless Romney gets more specific in the near future, it will remain unclear exactly what he would seek to change if he wins in November.


(9) Comments



Comments (9)
The problem with Dodd Frank is all the bad things that came along with whatever good it did. It was rammed down the American public's throat by that "post-partisan great hope" who has ruined our economy and our industry, and who has failed at preventing a repeat of the 2008 industry meltdown. And while Dodd Frank was happening, your publication and the trade groups either went along with it or protested meekly (even though arguably, there wasn't much the industry could do about it). In 2008, America put in place an anti-capitalist president along with a veto proof Congress; I hope we have learned the importance of checks and balances in our government.

Once again, the American Banker shows its anti-bank bias in the angle of this story. Why don't you just call yourselves MSNBC/Banking? At least that would be more intellectually honest.
Posted by formrbanker | Thursday, August 30 2012 at 9:26PM ET
Folks, the government is not the answer to the problems. Let the market decide.
Posted by Johnny Tremaine | Thursday, August 30 2012 at 10:39AM ET
We need regulation. No one knows exactly how it should "look", but there needs to be a fundamental change from profit at all costs (interesting word play)to profit that won't "break the bank" or the country's economy again.

Dodd-Frank even if it is altered is needed to control an out of control industry. Banking seems so staid that no one has looked behind the curtains for years. No one knew there was a curtain. Over there it an ugly greedy world where profit is king. If it's isolated from the rest of the economy no one cares. If it puts me out of work I care.

Whether it's Glass-Steagall (conceptually) or Dodd-Frank with implementation regulations we need a governor on the engine. The Repub have campaign on eliminating regulation to free the economy. Nothing is free - and the cost of another stumble is chaos. Maybe, after some stability is in place we can "design" appropriate regulations.

Richard Isacoff
Posted by riisacoff | Wednesday, August 29 2012 at 6:23PM ET
Come to reason. We know that legislation was necessary after the Crash to keep Wall ST Banks, (Not community, small regionals and local banks), from trading and creating derivative structures that would destroy the banking Industry and the dollar once again. But, in panic probably to prevent meaningful language from coming forward that would prevent Wall ST from doing it all over again, we have this idiotic damaging and basically meaningless Bill. Let's issue the latest changes in Dodd frank to everybody that signs in for one (Put a site up) then let's have a debate as to whether this Bill protects against derivative trading of the kind that blew up using huge leverage! Let's really see how much of this bill does that. We have enough audit bills and reporting bills. We need to not crash again from derivative trading!!
Posted by hedger | Wednesday, August 29 2012 at 11:31AM ET
What a shame that no one seems to understand the tremedously damaging effect Dodd-Frank has on Community Banks, including our Senators and Congressman who not only drafted but voted to enact this crazy law. At a time when banks should and could be a vital part in getting this economy back on track they are having to deal with Regulators on the Federal level who are fearful of their own jobs and are running rampant over the community banks, with seemingly unbridled authority! Ken D. Hammonds
Posted by kenham | Wednesday, August 29 2012 at 10:12AM ET
The regulators haven't even finished the rule writing implementation of Dodd-Frank. They don't even know what the legislation will do ultimately although we have an idea given all the problems created for the Community Banking Industry by this mess inclusive of the CFPB! My interpretation of this commentary is that the American Banker appears to be embracing Dodd Frank just because it is there and happens to have been crafted by an Administration the editors clearly prefer (why I don't know, but there it is). Throw out the whole mess and start all over again with an Administration friendly to the industry and capable of writing something that makes sense based upon a rational evaluation of lessons learned over the last six years.
Posted by rmartin47 | Wednesday, August 29 2012 at 9:38AM ET
Honestly, if my choice is between the guy who actually signed this damaging legislation into law and a guy whose message the American Banker deems "muddled", I say "muddle away". How about focusing on the ones who actually did the damage?
Posted by Johnny Tremaine | Wednesday, August 29 2012 at 9:30AM ET
Our bank has to have a current 5 year capital plan, 1 year operating plan and current forecast of earnings, a long term strategic plan, disaster recovery plan, enterprise risk plan, management succession plan, asset liability stress tests, loan portfolio stress tests and a myriad of other crystal ball type documents. In additon, Basel III will be another challenge once the rules are defined.

Obamacare is murky and we have 275 employees to do the right thing for.

We really need loans to improve our earnings, but it sure is hard to find the time.
Posted by rharmon | Wednesday, August 29 2012 at 9:25AM ET
I think the difference is between the Dodd-Frank that did not do what it promised (but does much of what its advocates do not admit), and a "Dodd-Frank" that actually achieves its goals of making the financial system better. The latter is the Dodd-Frank we might have had if Dodd and Shelby had succeeded in finishing their work of designing a bipartisan bill (following the decades of banking legislative tradition in the Senate). Hopefully when Dodd-Frank is at last subject to meaningulf review in the next Congress we will get more of the latter.
Posted by WayneAbernathy | Wednesday, August 29 2012 at 9:21AM ET
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