WASHINGTON — As the Republicans’ signature Dodd-Frank reform bill approached a final vote in the House Thursday afternoon, the two parties were both assailing each other as proxies for Wall Street and painting themselves as defenders of community banking and the consumer.

The truth is a little more nuanced: In some ways both parties are right, and both are wrong.

House Financial Services Committee Chairman Jeb Hensarling, R-Texas, whose Financial Choice Act passed the House largely along party lines, said on the chamber's floor that the bill was designed to repair the bureaucratic morass created by Democrats' 2010 financial reform law.

Rep. Nancy Pelosi, D-Calif.
House Minority Leader Nancy Pelosi said the GOP-supported bill seems based on "privatizing the gain" for the financial sector while "nationalizing the risk" for consumers. Bloomberg News

Dodd-Frank is “harming working families, harming small businesses [and] crushing community banks,” he said on the House floor, while calling the Choice Act a shot across big banks' bow.

“We will end bank bailouts once and for all. We will replace economic stagnation with a healthy, growing economy,” Hensarling said. “We’re also going to hold Wall Street accountable. Toughest penalties they’ve seen, and no more bailouts — perhaps that’s the reason they oppose the Financial Choice Act and they support the status quo of Dodd-Frank.”

But Democrats attempted to heave the same charges at the GOP.

“Instead of advancing an economy that works for everyone, Republicans choose to help the special interest get richer and to stick working people with the bill for the bailout when it goes wrong,” House Minority Leader Nancy Pelosi, D-Calif., said at a press conference Thursday.

Pelosi said the Choice Act would actually do more to ensure future bailouts of wayward financial institutions while eliminating the consumer protection gains made by Dodd-Frank.

“With this bill the Republicans will undo the safeguards, eviscerate the Consumer [Financial Protection] Bureau, [and] take our country back to the days of massive taxpayer bailouts of these financial institutions,” she said.

It should come as little surprise that politicians will glorify their own legislative efforts while demonizing those of their opponents. Yet their rhetorical attacks in the regulatory reform debate have been nearly interchangeable. Some suggest both Democrats and Republicans might want the same things and merely differ in their preferences on how to get there. Those differences, it turns out, are dramatic.

“The reality is, legislators on both sides of the aisle agree on where the North Star is,” said Rep. Trey Hollingsworth, R-Ind., a member of the House Financial Services Committee. “We all want a safer, more prosperous America, but we just disagree on the mechanisms by which we get there. And I think this reflects that.”

Rep. Dan Kildee, D-Mich., who also serves on the House Financial Services Committee, agreed that both parties seem to want the same objectives, but said the plain language of the Choice Act makes it clear that Republicans are fixated on hurting consumers.

“Their talking points sound great, until you read the legislation,” Kildee said. “What you see is this is, at its face, an anti-consumer piece of legislation. It’s intended to go back in time to a point when banks were in charge and the consumer was on their own.”

Pelosi said the GOP-supported bill seems based on "privatizing the gain" for the financial sector while "nationalizing the risk" for consumers. Asked about the sincerity of the Republicans' pro-consumer stance, she said, "It's not only insincere, it's not true."

But both sides have some validity to their arguments, according to some observers.

When you peel back the slogans, the Republicans and Democrats alike have based their assertions in fact, though the conclusions are not as obvious as they might want their constituents to believe.

The Hensarling bill’s core innovation is giving banks the option of complying with a 10% leverage ratio in lieu of a wide swath of Dodd-Frank requirements, particularly capital and liquidity requirements.

Karen Shaw Petrou, managing partner at Federal Financial Analytics, said that the smaller the bank, the more likely it is to be able to easily comply with the 10% leverage ratio at the heart of the bill. That gives Republicans a legitimate claim to offering something to small banks that they want and that would have a positive effect on their bottom line.

“Worshiping at the altar of community banks is a very popular and populist call to arms,” Petrou said. “Claiming that what you want is good for community banks has taken on the aura of saying what you want makes America great again. Who could argue with your objective?”

Likewise, there may also be some validity to saying Dodd-Frank has benefited large banks over small banks.

Dan Ryan, Banking and Capital Markets leader at PricewaterhouseCoopers, said there is some truth to the Republicans’ argument that Dodd-Frank has unwittingly given the largest banks something of a home-court advantage. By imposing on the industry the post-crisis capital restrictions and compliance burdens — burdens that the largest banks have essentially already met — it creates a barrier to entry for any competition that might otherwise arise.

“To say [big banks are] happy with Dodd-Frank is probably the wrong word, but they’ve come to accept it,” Ryan said. “In many cases they’re coming to look at it as a competitive barrier to entry. They raised capital levels that other people can’t compete with. Their competitive position is stronger than it’s ever been.”

But the Democratic statements also ring of some truth. Besides the 10% leverage ratio, other aspects of the Choice Act would clearly benefit businesses, including Wall Street. It restructures — and even renames — the CFPB, eliminates the single-director structure in favor of a commission, subjects the agency to congressional appropriations and limits its ability to police unfair and abusive practices.

It also eliminates the orderly liquidation authority, which had been enacted in Title II of Dodd-Frank. That move forms the basis of Republicans’ claims that the bill ends "too big to fail" because of the presumption that OLA amounts to a government bailout. The Choice Act would also eliminate the Chevron Doctrine — a Supreme Court precedent that gives federal agency determinations an advantage in litigation — and subject the Federal Reserve to a rule-based monetary policy.

Democrats say that removing the government's ability to resolve failing firms without systemic consequences would increase bailouts. Their argument is, without OLA, the government would again be forced to choose between a disruptive and potentially catastrophic bankruptcy process for a megabank and an ad hoc bailout. They would likely opt for the bailout, Democrats say.

Petrou said it is true that the largest banks do not especially love the Choice Act, but that is less because it holds them accountable than because it simply doesn’t do anything for them at all. And the Title II repeal is generally seen in the industry as a pointless elimination of a regulatory backstop that markets generally don’t interpret as a bailout and don’t price as such.

“The thing that big banks worry about, I think quite rightly, is the Title II repeal,” Petrou said. “That’s not because they’re now 'too big to fail,' it’s because they rightly feel that bankruptcy reform, even as proposed, would not be sufficient to prevent Lehman-style repeats.”

It is widely assumed that the Choice Act will not be taken up in its entirety in the Senate, though some individual items may gain the 60 votes necessary for passage. Democrats have been vocal about the bill’s uncertain future for months, and Republicans seem to acknowledge that the piecemeal approach may be all that is in the offing.

Hollingsworth, a GOP House member, said the Republican caucus wants to help the economy as much as it can, and if that means doing it piece by piece, then so be it.

“We have got to get back to an economy that is more prosperous, and the beating heart of a prosperous economy is efficient capital markets,” Hollingsworth said. “The answer to me is to move in that direction as quickly as possible. Do I want the whole thing? I certainly do. Will I take an advance in the right direction? I certainly will.”

In an interview Thursday, Hensarling said that he had hoped when he began drafting the bill that Democrats would offer amendments and hope to make the bill better, but said instead they opted to oppose it from the beginning, which is why it ended up being such a partisan bill.

“We never turn down the ability to work on a bipartisan basis, but it was clear the Democrats had no interest here,” Hensarling said. “They didn’t offer their own bill; they didn’t offer their own amendments. Unfortunately it was long on rhetoric and short on action.”

Ryan at PwC said the simple fact is that the passage of the Choice Act was essentially an opportunity for political theater on the part of both parties, and its true purpose was not to benefit small banks or stick it to Wall Street but to gain an advantage in the 2018 elections. Much of what the bill seeks to do that affects banks’ bottom lines can be achieved by regulation, he said, and much of those changes are advancing without Congress.

“If what you care about is getting the provision of the Choice Act enacted or in place, the way you do it is not through legislation,” Ryan said. “About 80% of the provision in the Choice Act can get enacted through regulatory action. It’s a bit of a show for the electorate.”

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