WASHINGTON — Negotiations over the nation's budget are about to heat up, likely putting at least one major provision of the Dodd-Frank reform law back in the crosshairs.
The Federal Deposit Insurance Corporation's orderly liquidation authority, which gives the agency the power to wind down large financial firms, has been a perpetual thorn in the side of some Republicans, who argue that such powers enshrined "too big to fail" rather than eliminating it.
While the budget talks may seem like an odd place to re-fight that battle, House Republicans claim that the repeal of the new regulatory powers could save the government $20 billion over 10 years, pointing to a study from the Congressional Budget Office.
"Everybody is going to be looking for ways to reduce the deficit," said Aaron Klein, director of the Financial Regulatory Reform Initiative at the Bipartisan Policy Center. "The CBO is the scorekeeper, and if this appears to reduce the deficit according to the CBO, it will be an attractive idea for some."
House Republicans have repeatedly attempted to repeal the provision, including in the past two House budget resolutions. A repeal of OLA was also added to the Sequester Replacement Reconciliation Act that passed the chamber last May, which was later combined with House Speaker Boehner's failed "plan B" during the fiscal cliff negotiations in December.
A spokesman for the House Budget Committee declined to say whether the issue would come up again when the panel releases its budget resolution for fiscal year 2014 in the coming weeks. A spokesman for the House Financial Services Committee deferred to the budget panel on the issue, though he added that ending "too big to fail" remains a key priority for Chairman Jeb Hensarling, R-Texas.
But observers argued that the deficit savings estimated by CBO are misleading, in part because they are based on a finite time horizon.
"In the long run, as written and envisioned, Title II does not cost taxpayers money. When you try to snapshot specific windows, it may," said Klein. "I think there is a political agreement that the taxpayers should never again bail out the failure of large financial institutions. How do you practically implement that policy? Personally, I think in the long run if Title II is acted on as written, it could very well achieve that important goal. The question is in the short run with finite budget windows."
Even the CBO has acknowledged that its estimate is based on a low probability event - the failure of a mega-bank institution in the near future. If one occurred and the FDIC had to borrow money from Treasury to unwind the institution, the agency would also eventually recoup those costs through fees on other banks.
"Any losses incurred by the receivership, including administrative costs, would be recouped through proceeds from asset sales and assessments on large bank holding companies and other nonbank financial companies supervised by the Federal Reserve. … [T]he recoupment of expenses will ultimately equal the expenses, but not within the 10-year period," the agency said a cost estimate published last April.
Some observers said Republicans are just using the budget figures as an excuse to target the provision even though they know they are unreliable.
"It feels as though the whole Republican push is little more than a red herring," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. "Seizing on the budgetary aspect of the measure has been the de facto strategy for House Republicans, but I really believe the core objection in their minds is the legal authority granted to regulators, which is unprecedented."
Boltansky added that it's a relatively difficult issue for the GOP to present to the public, because the process of winding down a large institution is inherently complicated, more so than some of the party's attacks on other parts of the Dodd-Frank law.
"It is a necessarily busy concept. We're talking about very meaningful, sweeping decisions. There should be checks, balances and protocol, but those and a bevy of steps make it very hard to grasp the total impact," Boltanksy said. "When I look at paths for House Republicans to attack the White House or congressional Democrats, I really feel like [Richard] Cordray's recess appointment [to the Consumer Financial Protection Bureau] is a more successful path if only because it's simpler."
Still others noted that Democrats remain well positioned on the issue regardless of budgetary concerns, because it provides another opportunity to defend the financial reform law, which generally has strong public support.
"I don't think Democrats feel like they're in a tough spot on this at all - they think that a defense of Dodd-Frank plays well, that it's an opportunity to look tough on Wall Street and the banking industry," said Brian Gardner. "It doesn't have quite the political fizzle that it did two or three years ago, but it's still a good political position to be in."
Gardner added: "It's one of those issues that each side gets a little something out of it, politically."