Representatives of the agencies that regulate financial institutions testified on Thursday at an oversight hearing of the Senate Banking Committee on the steps they are taking to implement the Dodd-Frank Act more than 2 ½ years after the law was enacted. The official title of the Act is the Wall Street Reform and Consumer Protection Act, which may be a Freudian title denoting that the bill was written by and for Wall Street’s lawyers.
An observer of the hearing might be struck by the sheer number of regulators participating, seven in all:
• Mary Miller, under secretary of finance at the Department of the Treasury
• Daniel Tarullo, governor of Federal Reserve Board
• Martin Gruenberg, chairman of the FDIC
• Thomas Curry, Comptroller of the Currency
• Richard Cordray, director of the Consumer Financial Protection Bureau
• Elisse Walter, chairman of the Securities and Exchange Commission
• Gary Gensler, chairman of the Commodity Futures Trading Commission
The Dodd-Frank Act eliminated the Office of Thrift Supervision, which botched many important supervisory cases, including Washington Mutual and AIG, by folding it into the Office of the Comptroller of the Currency (OCC).
After considering the issue during the hearings on Dodd-Frank, the sponsors failed again to strip the Federal Reserve of its bank supervision authority, bowing to the enormous political influence the agency enjoys, in spite of its spotty record as a bank supervisor.
Years ago, former Fed Chairman Alan Greenspan was asked how many banks the Fed supervises, and he had to turn to staff to get the answer. It’s not a particularly significant function for the Fed, but it clings zealously to its turf. Several experts, including former Fed Vice Chairman Alice Rivlin, rebutted the argument that the Fed’s monetary policy deliberations are informed by the information it gleans from supervising banks, as she testified that minutes of the Federal Open Market Committee do not reveal that supervision is ever discussed.
In his opening statement, Committee Chairman Tim Johnson, D-S.D., noted that much work remains to be done to promulgate the many regulations mandated under Dodd-Frank and that the Government Accountability Office has issued a report at his request that estimates the cost of the 2008 episode of the financial crisis at $13 trillion. (I have made a back-of-the-envelope estimate of $15 trillion, and the Federal Reserve Bank of Dallas has arrived at the same figure. When it comes to the financial crisis, any guess within a few trillion is good enough for government work.)
Johnson and the new ranking Republican, Mike Crapo, R-Idaho, both referred to a letter they have sent jointly to the regulators complaining about the impact of Basel III capital regulations on community banks and insurance companies. Crapo raised issues concerning the “cumulative effect” (a phrase from JPMorgan Chase CEO Jamie Dimon) of Dodd-Frank regulations on competitiveness, credit availability and job growth.
Viewing a hearing like this one is like eavesdropping on exchanges between senators and regulators to which one is normally not privy. By this means, it is possible to gain insight into the thinking of the parties. Here are some examples:
• Corker finds loophole.
Bob Corker, R-Tenn., who has criticized Dodd-Frank as codifying the very policy of bailing out “too big to fail” banks that it purports to end, asked whether the regulations on “orderly liquidation” don’t enable banks to shield debt from the process by issuing it through subsidiaries, because the rules only apply to holding company debt.
FDIC Chairman Gruenberg responded that there needs to be sufficient unsecured debt at the holding-company level. Corker then explained to Gruenberg that all of the debt should be at the holding-company level (in order to avoid bailing out unsecured creditors, as the authorities are wont to do.)
A follow up question as to whether there are any institutions that pose systemic risk elicited first a long silence and then answers from the Treasury and Fed that were by no means reassuring.
• Menendez on mortgage servicing settlement.
Robert Menendez, D-N.J., who has recently been in the news for other reasons, complained to the regulators about their handling of what he called the “mess” created by the settlement for only $8.5 billion of charges brought against the largest mortgage servicers that will cost the banks only the token amount of about $1,000 each for claims that might be worth closer to $10,000. He asked whether there’s any way the claimants, most of whom could not afford to sue, could refuse the small checks in return for a review of their files by the regulators.
The OCC’s Curry curtly explained that the settlement does not provide for this, but that the proceeds are meant to be allocated toward “the most grievous cases.” He defended the settlement on the ground that $2 billion had been spent on a “flawed” process without getting any relief at all, so it was decided to estimate the amount.
As regulators often do, he acknowledged that the settlement isn’t “perfect,” but he claimed it was “the best possible outcome.” (Perhaps it was the best possible outcome that could be achieved by a captured regulator.)
• Brown on breaking up megabanks.
Sherrod Brown, D-Ohio, spoke for himself and David Vitter, R-La., about the issue raised by some liberals and even conservatives advocating limits on the non-depository liabilities of the largest banks.
In a convoluted answer, the Fed’s Tarullo mentioned several ways of doing this, but then offered only a patronizing concession that the senators have drawn attention to the issue.
• Warren criticizes token settlements by regulators.
Elizabeth Warren, D-Mass., may have been the star of the day, as she promises to be on many days, for asking the regulators if they ever take cases against banks to trial rather than settling for only a portion of the profits banks have received.
None of the regulators could cite offhand a case that has gone to trial. The OCC’s Curry again responded in the tone of a captured regulator, “We don’t have to bring them to trial to achieve our supervisory goal.”
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