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A House United: GOP Set to Begin Assault on Financial Reform

With Republicans gaining control of the House, expect efforts to fix the financial industry to stop in their tracks. Wall Street firms will expect nothing less for the millions of dollars they poured into GOP coffers in the run-up to yesterday's midterm elections. Reports Bloomberg:

Taking control of the House and bolstering their position in the Senate will increase Republicans' sway over the direction and independence of the Consumer Financial Protection Bureau and over any technical fixes Congress makes in rules governing the trading of derivatives. Networks projected that Republicans won the seats needed to claim a majority of the House.

Republicans say they will use the House Financial Services Committee to ensure that regulators such as the Commodity Futures Trading Commission and the new consumer protection bureau do not write rules that lawmakers consider too restrictive to the banking industry.

A full repeal of Dodd-Frank is unlikely. Democrats kept hold of the Senate, while President Obama could veto any legislation aimed at eliminating key parts of the law. Yet incoming Republicans could do much to blunt financial reform because they will oversee the government agencies charged with implementing Dodd-Frank. Among other tactics, they could try to limit funding agencies such as the CFPB, SEC and CFTC; block regulatory appointees who are considered hostile to banking industry interests; and pressure regulators to soften rules they're required to develop under the law.

Certainly, House Speaker-elect John Boehner and other top Republican lawmakers have made their intentions clear. Rep. Spencer Bachus, R-Ala., who is expected to replace Massacussetts Democrat Barney Frank as head of the powerful House Financial Servcices Committee, in July described Dodd-Frank as nothing less than a "government takeover of the economy."

More specifically, Bachus has pledged to eliminate the part of Dodd-Frank that gives regulators the authority to close big financial firms. He may also want to weaken the "Volcker rule," which limits banks' use of proprietary trading; ease restrictions on derivatives; and even make it harder for investors to hold credit rating agencies liable. Speaking of the swaps and ratings agency rules, Bachus told the WSJ today:

Both of those could retard lending and need some immediate action.

Rep. Jeb Hensarling of Texas, another Republican who sits on House Financial Services and on the House Committee on Budget, recently had this to say about regulators' approach to watching over banks:

We don't want them to regulate capriciously, arbitrarily, without engaging in a cost-benefit analysis.

That's code for the kind of free-market fundamentalism that animated a three-decade campaign to deregulate the banking industry, culminating in a global financial crisis. The "fatal flaw" in this thinking, as Barry Ritholtz notes,

... is that it fails to include the expenses and impact of high cost events -- like the 2007 recession, 2008 credit crisis and 2009 market collapse. It is, in effect, a mathematical cheat -- one that ignores probabilities with extremely expensive outcomes. And who is pushing the ignore-the-risk cost/benefit analysis? Who stands to benefit from defanging Dodd-Frank? Look no further than Goldman Sachs (GS), JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC).

Right. Or as Richard Hunt, president of the Consumer Bankers Association, an industry trade group, had to say shortly before the election about the shifting balance of power in Washington:

At this juncture, gridlock is good. It's time we take a breather from all the excess of regulation and Congressional legislation.

Image from MorgueFile