Tags: House | bank | Dodd-Frank | Senate

House Passes Regulation Relief for Banks

By    |   Thursday, 15 January 2015 09:16 AM

The House of Representatives completed action Jan. 14 on H.R. 37, the "Promoting Job Creation and Reducing Small Business Burdens Act," which passed 271-154 after failing to achieve a two-thirds vote the previous day that would have allowed it to pass by an even more expedited procedure used for non-controversial bills.

In an extraordinary maneuver, the House Financial Services Committee, chaired again by Rep. Jeb Hensarling, R-Texas, has compiled 11 bills from the last Congress and put them on the fastest track ever toward the president's desk.

From one point of view, this reflects a realization that Republicans might only have two years to put their stamp on financial legislation. Since the White House has already threatened to veto the bill, time will tell whether the tactic will ultimately save time or make the best use of the political capital available to Hensarling and his Senate counterpart, Richard Shelby, R-Ala., who would have to give up his chairmanship even if Republicans somehow manage to retain control.

For this writer the debate over H.R. 37 will bring attention to the process of the "limplementation" of Dodd-Frank that began during the debate on that legislation back in 2010. One of the centerpieces of Dodd-Frank, the Volcker rule, was supposed to prevent the "too big to fail" banks from using depositors' funds guaranteed by the federal safety net to support risky bets through derivatives and creative so-called "structured finance" products that are cooked up by financial wizards to fit a specific circumstance when counterparties can be convinced to take the other side of the deal. If circumstances change and the derivatives plunge in value, eventually the Federal Reserve may buy them so that banks won't have to recognize the losses.

The Volcker rule was doomed from the start because it made exceptions for activities such as market making that are arguably conducted for the benefit of clients, a loophole that has confounded the Fed and other regulators whose inability to regulate the largest, riskiest financial institutions was demonstrated again during the 2008 episode of the ongoing, permanent financial crisis.

The debate over H.R. 37 focuses new attention on one particular structured product called collateralized loan obligations (CLOs). This market is on the order of $300 billion, of which a chunk of $80 billion or so is held by too big to fail banks, and perhaps 5 percent of this has found its way onto the books of community banks.

Banks that hold CLOs would have to divest these instruments, but in order to avoid having to sell at "fire sale" prices have been granted an extension until 2017 that would be further extended to 2019 under the bill. Not only that, but opponents contend the bill is drafted in such a way that banks could continue to issue these instruments even as they are supposed to divest them.

In effect, banks will have had at least nine years to divest CLOs, dating back to the enactment of Dodd-Frank, but of course, they have used the first five years to fight the rule instead.

During the floor debate the senior Democrat, Rep. Maxine Waters of California, put into play the argument that CLOs have been used to finance takeovers of companies by private equity interests that load these companies with debt, fire employees and flip the companies to other investors in reorganized form.

In fairness, most of the elements of H.R. 37 passed the House last year with overwhelming bipartisan support. In testimony before the House Rules Committee, Rep. Scott Garrett, R-N.J., lamented that the bill does not, in fact, dismantle Dodd-Frank, and he expressed hope that eventually the White House will listen to the Democratic supporters and allow some of the provisions to become law.

The next step will be to observe how the Senate Banking Committee sets its priorities, and the results will feed into the brewing 2016 campaign in which financial regulatory issues will play a prominent role in both party primaries. Senate Banking has scheduled its first hearing for next week on the topic of Iran Sanctions.

(Video of the House floor proceedings can be found here.)

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The House of Representatives completed action Jan. 14 on H.R. 37, the "Promoting Job Creation and Reducing Small Business Burdens Act," which passed 271-154 after failing to achieve a two-thirds vote the previous day.
House, bank, Dodd-Frank, Senate
Thursday, 15 January 2015 09:16 AM
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