House Republicans are preparing to vote on a new bill that would roll back many of the Wall Street regulations passed in the aftermath of the financial crisis.
The bill, which is called the Financial CHOICE Act and would gut the 2010 Dodd-Frank legislation, passed the House Finance Committee earlier this month without any Democratic votes. Republican leaders in the House are planning to whip votes this week; the bill’s chief proponent, Texas Rep. Jim Hensarling gave the Republican conference a pep-talk about the legislation in a Tuesday’s closed-door meeting, telling members it would be a boon for the economy and free financial institutions from burdensome regulations.
Progressives are lining up against the bill. The CHOICE act "is about rolling back the protections that decrease the likelihood that financial giants will blow up our economy again," Sen. Elizabeth Warren told TIME in an interview, and "keeping the big guys from juicing their profits by putting the rest of America at risk."
The bill would have an enormous impact on the finance industry if it passed, and would likely have broader effects on the economy, too.
Here are some of its major provisions:
End the new process for winding down dying banks
During the 2008 financial crisis, failing Wall Street institutions like AIG and Lehman Brothers were so enmeshed with financial markets with products such as pension funds, municipal bonds and mortgages that their failure threatened global economic stability. There was no tested government framework to make sure they didn’t also tank the whole economy at the same time.
The prevent this danger happening again, lawmakers created a provision in Dodd-Frank bill that allowed the government to wind down large, failing, and systemically important institutions, in a mechanism called the “Orderly Liquidation Authority.” This allows federal regulators to step in when they see a major financial institution spiraling downward. The Federal Deposit Insurance Corporation may give a short-term cash infusion to the financial institution to keep it afloat as regulators dismantle it and then hold its officers and directors accountable. The shareholders and creditors are ultimately responsible for the company’s losses.
This was praised by financial experts and progressives who viewed it as a key safeguard for the economy. “When you have major bank failure, it can shut the whole economy down,” said John Coffee, professor of law at Columbia Law School. “You want to have some way for regulators to minimize the losses. The earlier you intervene, the smaller it’ll be.”
But some conservatives disliked this provision, saying it was wrong to let such questions be decided by federal regulators, and that the short-term cash infusion amounted to a bailout. The government should instead make sure consumer banks meet certain capital requirements. "T he right way to deal with this to focus entirely on the capital of the underlying subsidiary bank and make sure that it has adequate capital," said Peter Wallison, a fellow at the conservative American Enterprise Institute.
The Republican bill gets rid of the Orderly Liquidation Authority and replaces it with bankruptcy proceedings handled by a regular court. This is essentially the system that was in place before Dodd-Frank.
Critics say this provision of the Republican bill will make it more likely that a single financial institution can bring down the economy in the future.
Weaken the Securities Exchange Commission
The SEC has the power to sue financial entities for misleading investors or conducting insider trader. For example, after the financial crisis, the SEC settled a case with Goldman Sachs for $550 million for allegedly misleading investors over subprime mortgages.
After Dodd-Frank, about 80% of enforcement actions happen in SEC administrative proceedings before SEC judges, instead of as civil suits in federal district courts. That allows for a speedier and cheaper resolution of disputes and gives the SEC a home-court advantage against the banks.
The Financial CHOICE Act would move these proceedings to regular courts if the bank chooses. If the company decides to stay in SEC administrative proceedings, the bill will make the standard of proof much harder for the SEC to meet. All this would slow down the process and deter enforcement; supporters of the current system say this would have a chilling effect on oversight of stock trades.
Weaken the Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau is a federal agency created as part of Dodd-Frank to improve transparency in auto loans, student loans, mortgages and other consumer-facing financial transactions. It has the power to fine bad actors: last year, for example it charged Wells Fargo $185 million for creating fake accounts and withdrawing fees from customers. The CFPB says that it has returned almost $12 billion to customers who’ve been cheated by financial institutions. The CFPB also has a public database of complaints about bank and credit issuers' financial services, and helps resolve consumer-bank disputes.
Republicans believe the CFPB is unaccountable, as its director cannot be arbitrarily fired by the president, and the agency is not subject to congressional appropriations. To remedy their disagreements with the agency, they’ve written Financial CHOICE Act to weaken the CFPB, replacing its director with a bipartisan governing structure. The bill would also eliminate its current revenue stream, instead requiring Congress to chose whether or not to fund it every year.
The agency was conceived of by Warren when she was still a professor at Harvard Law School. The Massachusetts senator is incensed. “The consumer agency is the watchdog to make sure that families don't get cheated on credit cards, mortgages, payday loans and other financial products,” Warren tells TIME. “The Republican bill is about leashing up the watchdog so it can’t do its job.”
Repeal the Volcker Rule
Before the financial crisis, many of the major financial institutions put huge tranches of money into risky trades like commodities and derivatives. The Volcker Rule in Dodd-Frank prevents banks from participating in those kinds of trades and in tying themselves to hedge funds and private equity funds, which many experts say contributed to the financial crisis.
In the past five years, Goldman Sachs, JP Morgan and other banks have reoriented away from investments in order to comply with the Volcker Rule. The Republican bill would repeal the Volcker Rule.
Repeal the fiduciary rule
The fiduciary rule requires that financial advisors work in the best interest of their clients when offering financial advice; critics say it increases costs for financial advisers. The Republican bill would repeal the rule.
Allow banks to opt out of regulations
The Republican bill allows banks that have a certain leverage ratio—their mix of equity to debt—to opt out of Dodd-Frank requirements that they have certain amounts of capital, and avoid engaging in certain financial activities. That means that banks could meet a certain standard and not have to abide by certain federal standards.
Critics of this provision say it will encourage gaming by the banks to shift their leverage ratio on the last day of every financial quarter, which is the day when their balance sheets are analyzed under the Republican law. It also means they could flock to riskier assets, since the safety of their assets wouldn't be measured under the law. The outcome, critics say, would be a less secure banking system.