House Republicans Push Repeal of Dodd-Frank Resolution Power

Monday, 16 Apr 2012 07:49 AM

 

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A U.S. House panel will consider a repeal of the power established by the Dodd-Frank Act to seize and wind-down systemically risky financial firms, a move that will draw opposition from House and Senate Democrats who have made a point of protecting the law enacted in 2010.

Representative Spencer Bachus, chairman of the Financial Services Committee, has included the repeal in a measure aimed at finding nearly $30 billion in spending cuts. Committees in the Republican-controlled House are drawing up plans to cut $261 billion from the federal budget in an effort to avoid automatic reductions to the Department of Defense starting in January.

“Congress has an obligation to make tough choices that cut spending, reduce the deficit and do so in a way that does not imperil our nation’s defenses,” Bachus, an Alabama Republican, said today in a statement.

Republicans opposed the resolution authority during the 2009 and 2010 debate over the financial regulatory overhaul that would become Dodd-Frank. The law granted the authority to the Federal Deposit Insurance Corp., which could draw from the U.S. Treasury to resolve a firm and repay the taxpayer funds through an assessment on large financial firms.

Budget-Cutting Effort

The repeal is part of a broader measure the panel is required to produce that would cut at least $29.8 billion. Bachus is proposing to cut a total of $35.1 billion over 10 years through four actions: repeal of the resolution authority; ending the Obama administration’s Home Affordable Modification Program; a reauthorization with structural changes to the the National Flood Insurance Program; and placing the Consumer Financial Protection Bureau under the congressional appropriations process.

The panel is scheduled to consider the measure April 18. If approved by the Republican-led committee it will then go to the Budget Committee for use in the appropriations process, which is expected to begin soon. Senate Democrats have already said they will not advance the House budget adopted in March and the lawmakers, who control the chamber, have refused to make substantive changes to Dodd-Frank.

House lawmakers have already passed bills to abolish HAMP and extend the flood insurance program, none of which have had enough support in the Democratic-controlled Senate to reach the floor for consideration. House Democrats almost unanimously opposed changes last year to the structure and oversight of the consumer bureau, which is funded through requests to the Federal Reserve.

2008 Crisis

The resolution authority was drafted by lawmakers in the wake of the 2008 financial crisis that led to the failure of Lehman Brothers Holdings Inc. and a series of ad-hoc bank mergers and bailouts. The authority, signed into law by President Barack Obama in July 2010, was at the core of Dodd- Frank’s provisions to prevent future bailouts by giving the FDIC power to liquidate even the biggest insolvent firms.

“Developing a credible capacity to place a systemically important financial institution into an orderly resolution process is essential to subjecting these companies to meaningful market discipline,” Martin J. Gruenberg, the FDIC’s acting chairman, said in a March 13 speech. The agency last year finalized the implementation of the liquidation authority.

House Republicans, who were in the minority when the law was debated, proposed an alternative to resolution authority that would have expanded the bankruptcy process in order to better accommodate the failure of a multinational, multi- subsidiary financial firm.

Ending Provision

Now Bachus will look to cut down the provision, which allows the FDIC to borrow from the U.S. Treasury in order to maintain stability and then impose a fee on the largest financial firms to recoup any taxpayer dollars used in the process. The Congressional Budget Office estimated a repeal of the resolution authority would cut $22 billion over the next 10 years, the committee said.

The CBO said in 2010 that “most of” the direct spending to come from Dodd-Frank over the next decade would be the result of the implementation and operation of the resolution powers. The CBO said in total, Dodd-Frank would not add to the deficit, due to several revenue-raising measures included in the law that would offset any costs.

The Financial Services panel was required to identify the cuts by the Republican budget passed by the chamber last month, which instructed six House committees to find $261 billion in savings over the next decade. Those savings would be used in place of the automatic cuts that begin in January, which include a reduction of $55 billion from the Pentagon’s budget.

Automatic Cuts

The debt-limit agreement signed last year capped discretionary spending over the next decade with the threat of about $1 trillion in automatic cuts if a budget-cutting supercommittee didn’t agree on a deficit-reduction plan.

The automatic cuts were designed to force lawmakers to make difficult compromises to cut entitlements and raise taxes in order to avoid the defense reductions. The panel failed, and since then Republican lawmakers have criticized the defense cuts as being too deep and threatening to national security interests.

Ending the adminstration’s housing program, the CBO estimates, would save $2.8 billion over 10 years. The long-term extension of the flood insurance program would result in an increase of $4.9 billion in net income over the next decade, the CBO estimates. The budget office previously said that the increased income may be needed to maintain the solvency of the program.

Flood Insurance Extensions

House lawmakers approved the changes to the flood insurance program by a wide margin last year. The Senate has yet to finalize its proposal on the program, which has been operating under short-term extensions over the past three years.

Placing the consumer bureau under the congressional appropriations process would save $5.4 billion over the course of 10 years, according to the CBO estimate. That money would come from the Fed, which would transfer excess funds to the Treasury. The panel will recommend appropriators give the bureau $200 million to fund its operations.

Democrats pushed for the the consumer bureau to be independent from the appropriations process out of concern that Republicans would cut its budget if they control both chambers of Congress.


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