Wall Street's Revenge: How Republicans Plan to Cripple Financial Reform

Last Updated Mar 15, 2011 3:17 PM EDT

Republican lawmakers are waging a three-pronged campaign against financial reform. The goal is to:
  • Block parts of the new Dodd-Frank law
  • Deprive government regulators of the required funding to oversee the financial industry
  • Thwart a proposed mortgage-servicing settlement.
"Assault" on Dodd-Frank
House Republicans on Wednesday will introduce a slew of bills aimed at blunting Dodd-Frank, which President Obama signed into law this summer as a first step in strengthening the financial system. The legislation includes a proposal to exempt corporate users of over-the-counter derivatives from having to conduct such transactions over regulated clearinghouses.

Two other bills would block efforts to hold credit rating agencies legally liable for their ratings and make publicly traded companies disclose information comparing a CEO's compensation to that of other employees, while another would exempt private equity firms from having to register with the SEC.

One congressional aide describes the Republican package as "the first direct assault" on the financial reform law, adding:
Up until now it's been about trying to deprive the agencies of what they need to implement Dodd-Frank.
Funding blockade
Indeed, congressional Republicans are seeking to sharply curb funding for the SEC, Consumer Financial Protection Bureau and Commodity Futures Trading Commission. Under Dodd-Frank, all three agencies are assigned enormous new regulatory duties. Despite those increased responsibilities, the SEC's budget may be frozen at last year's levels. The agency has requested $1.4 billion, up from $1.1 billion in 2010.

SEC Chairman Mary Schaprio warned last week that failing to increase the agency's budget would prevent it from hiring new, or even replacing departing, staff and from upgrading its technology systems. Noting that the SEC doesn't add to the federal deficit because it is funded by financial industry fees, she added:
[D]espite the growth of our responsibilities and market complexities, the SEC's resources have not kept pace. This capacity gap places our markets and America's investors at risk.
Commodity Futures Trading Commission chief Gary Gensler has also been left begging for resources at a time his agency is charged with taking the lead in monitoring trade in derivatives, which most experts agree helped trigger the financial crisis. The agency, whose staffing levels have fallen by nearly one-fourth over the last decade, has recently been unable to hire new personnel and had to cut back its technology expenditures. The futures and swaps markets are largely electronic, so the latter could hamper the CFTC's mission, he noted.

At the nascent CFPB, Republicans are to trying to slash funding by roughly 40 percent. They also want to take the unusual step of requiring the bureau, which was formed to shield consumers from financial abuse, to ask lawmaker for funding each year. Under Dodd-Frank, the CFPB is funded through the Federal Reserve. Exposing the watchdog group to annual appropriation fights would increase congressional leverage over the bureau.

Shaking down Wall Street?
Another element of the campaign against financial reform comes in the form of opposition by key Republican lawmakers to the proposed mortgage settlement. The connection? Foreclosures are at record levels today not only because of banks' reckless lending, but also because of their predatory loan-servicing practices. So reforming the banking system requires setting basic standards for mortgage servicers.

To this end, state and federal officials are proposing rather modest ground rules, along with financial restitution for borrowers who have been wrongly denied a loan modification. These include ensuring that banks and servicers process mortgage payments promptly and accurately -- the least a homeowner might reasonably expect, in other words.

Remarkably, however, Republicans have derided the settlement as tantamount to extortion, with Sen. Richard Shelby of Alabama actually calling it a government "shakedown" of the financial industry. Similar disinformation is going out in all the usual places, such as the op-ed pages of the WSJ and conservative think-tanks.

It's a breathtaking, if predictable, act of political subservience to an industry crying out for reform.

Image from Wikimedia Commons, CC 3.0; thumbnail from Nuno Tavares via Wikimedia Commons

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  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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