Jeb Hensarling Takes A Wrecking Ball To Financial Regulation by Americans for Financial Reform
Jeb Hensarling, Chairman of the House Financial Services Committee, touts his Financial CHOICE Act as legislation that would hold Wall Street accountable even as it dismantled the financial reforms of the Dodd-Frank Act.
That’s far from accurate. Not only would the Financial CHOICE Act demolish the new regulatory framework that builds on the lessons of the financial crisis, but it contains so many unprecedented gifts to the financial industry that it would make financial regulation even weaker than it was before the crisis.
At this year's Sohn Investment Conference, Dan Sundheim, the founder and CIO of D1 Capital Partners, spoke with John Collison, the co-founder of Stripe. Q1 2021 hedge fund letters, conferences and more D1 manages $20 billion. Of this, $10 billion is invested in fast-growing private businesses such as Stripe. Stripe is currently valued at around Read More
Under Hensarling’s control, the House Financial Services Committee has pushed through numerous bills backed by big banks and predatory lenders that would eliminate the power to enforce rules over Wall Street. His new plan looks like more of the same – and in fact it goes further. It would:
- Prohibit any significant new financial regulation from taking effect unless both Houses of Congress give their approval within 70 days – an unprecedented requirement that would make Wall Street oversight by administrative agencies subject to the same paralysis we see in Congress.
- Empower Wall Street lawyers to mount still more challenges to regulatory action, by eviscerating longstanding Supreme Court precedents requiring courts to defer to subject-matter experts in regulatory agencies when deciding anti-regulation lawsuits.
- Repeal numerous sections of the Dodd-Frank Act that limit the risks created by “too big to fail” financial institutions. The plan would specifically strip regulators of their power to take control of a failing megabank, eliminate the Volcker Rule ban on banks making proprietary gambles with depositors’ money, and eliminate rules that ban excessive short-term bonus pay and require Wall Street traders to return bonuses acquired through fraudulent or irresponsible acts.
- Eliminate regulators’ power to impose additional risk controls on large non-bank financial institutions like AIG – the recipient of the largest taxpayer bailout in US history.
- Gut the Consumer Financial Protection Bureau by attacking its funding; by greatly reducing its power to stop or punish abusive anti-consumer practices; by eliminating its examination and enforcement authority for more than half of the banks it currently supervises; and by replacing its single-director structure with a less effective five-member commission.
- Require the Federal Reserve to share the details of its risk models with banks before actually testing their risks – akin to showing a test to students before they take it.
If that’s not enough, the Hensarling plan also incorporates over fifty deregulatory bills supported by Wall Street lobbyists, including measures to block new rules protecting retirement investors from exploitation by brokers (H.R. 1090) and force regulators to roll back consumer and risk protections at numerous banks (H.R. 2896).
Supporters of the plan seem to suggest that these massive and in many cases unprecedented reductions in regulatory authority are counterbalanced by other provisions in the bill, such as new incentives for banks to meet “high but simple capital requirements” as well as new “enhanced penalties for financial fraud.”
But a closer look shows that these new provisions are just disguised deregulation:
- The plan specifies that if banks achieved a relatively weak 10 percent leverage capital level, they would be exempted from a broad range of safety and soundness requirements. Big banks are currently at 8 to 9 percent leverage capital, meaning that this requirement would be easy to satisfy and do little to make banks safer.
- By virtue of meeting this modestly higher capital requirement, banks would be exempted from many rules involving issues that leverage capital alone – especially at these levels – cannot address. These include requirements to maintain sufficient liquid cash on hand to pay upcoming liabilities, requirements to provide against specific asset risks, limits on bank size and concentration, limits on paying out capital to shareholders, and more.
- Higher bank capital standards would certainly be a good thing. But exempting banks from such a broad range of risk controls just for raising a small amount of additional capital would make big banks much more dangerous than they are today.
A closer look at the enhanced fraud penalties included in the legislation likewise shows that they are unlikely to make much if any difference. That’s because other provisions in the bill would make it far harder for the government to pursue fraud cases against Wall Street wrongdoers. For example, although the plan would increases the maximum penalty the Securities and Exchange Commission (SEC) can levy for administrative violations, it also contains a half a dozen provisions that would undermine the SEC’s ability to successfully mount such a case. So even though penalties could be higher if a case succeeded, the bill would make success even rarer than it already is.