Westmoreland bill takes aim at key portions of Dodd-Frank
Last Wednesday, the U.S. House Financial Services Committee passed H.R. 4894, which would repeal Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Georgia’s Third District Congressman Lynn Westmoreland (R) is behind the bill, and yesterday his office sent a press release about the need for it, Capitol Corner: What Repealing Title II of Dodd-Frank Means for Community Banks:
Georgia community banks were hit hard by the financial crash. In fact, we’re leading the nation in bank failures. Since 2008, 91 banks in our state have closed their doors to their friends and neighbors. As a knee-jerk reaction to the crash, the Democrats forced through Congress the Dodd-Frank Act and made matters worse. They introduced more big-government where it didn’t belong, and while some banks survived the crash, they continue to struggle from the bias regulations of Dodd-Frank.
Established under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act was the Orderly Liquidation Authority (OLA). True to Dodd-Frank’s form, OLA is another tool for bureaucratic DC insiders to have control over the designation and liquidation of failing financial institutions. The real problem with the OLA, is that it has continued to institutionalize the idea that a failing firm can be “Too Big to Fail”. As many of us remember from the 2008 crisis, the government chose to bailout some financial firms and not others. Even worse, during the bailouts there were firms whose creditors and counter parties were paid 100 cents on the dollar. When the federal government decides to step-in and provide such assurance to failing firms, they provide an unfair competitive advantage and incentive for other financial companies to do business with “Too Big to Fail” firms. The result is large banks are getting larger and small banks are getting smaller, and for Georgia, this aided in the loss of 91 community banks.
On April 13, the House Financial Services Committee passed my bill, H.R.4894, to repeal Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Repealing Title II, and with it, the Orderly Liquidation Authority (OLA), would ensure that the federal government is no longer involved in the process of seizure and receivership of failing financial institutions, which ultimately distorts the market and provides a backdoor bailout for creditors and counter parties at cost to taxpayers.
For six years, Dodd-Frank has put the government in charge of picking winners and losers. Above all, we must let the free market run its course. And that’s why we must repeal Title II and OLA.
Here’s how DSNews summarizes H.R. 4894 and its context in Republicans’ Assault on Dodd-Frank Continues:
H.R. 4894, sponsored by Rep. Lynn Westmoreland (R-Georgia), repeals Dodd-Frank’s “Orderly Liquidation Authority” that gives the FDIC authority to borrow money from Treasury to lend to a failing firm, purchase its assets, guarantee its obligations, and pay off creditors. Under Dodd-Frank, the FDIC has authority to potentially borrow trillions of dollars for these purposes.
Since 2009, when the financial reform debate began and when Dodd-Frank was still being drafted, Republicans have called for large, complex financial institutions to be resolved under the Bankruptcy Code rather than through Dodd-Frank. Earlier this week, the House passed the Financial Institution Bankruptcy Act with bipartisan support in order to create a new bankruptcy chapter for failing banks, according to the House Financial Services Committee.
Westmoreland cites the fact that 91 Georgia banks have failed since 2008, but it’s worth noting that none have failed in 2016, only two failed in 2015, only one failed in 2014, and only three failed in 2013. (Check out the FDIC’s Failed Bank List.) Yes, there are about 30 Georgia banks still on the unofficial Problem Bank List published at Calculated Risk, but recent trends suggest that the vast majority of those banks will survive. At the end of 2013, there were about 60 Georgia banks on that list. For sure, the collapse of so many community banks had far-reaching consequences on local economies — see the 2014 article How Local Bank Failures Crippled Georgia Economy in the Insurance Journal — but a) Georgia had seen a (probably unhealthy?) proliferation of new banks during the real estate boom and b) many Georgia banks failed because they just didn’t make sound decisions.
But none of those qualifications invalidate Westmoreland’s broader concern that Dodd-Frank has ultimately helped those institutions deemed “too big to fail” at the expense of smaller ones. These are complex issues, and it looks like Dodd-Frank will face significant challenges from the right, and from the left, for the foreseeable future.
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billdawers
I've been a freelance columnist for the Savannah Morning News since 2000. In 2011, I launched Savannah Unplugged as a place for news, analysis, and photos that weren't good fits for my newspaper columns. In fall 2013, I launched the music blog hissing lawns to fill a need for more music coverage in the Savannah area. I also teach English and journalism course at Armstrong State University, an under-appreciated gem here in Savannah.
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He’s wrong. Flat out.
Here’s a little context. Last week, the federal reserve released a report on the “living wills” of the Big 8 too-big-to-fail banks. “The agencies have jointly determined that each of the 2015 resolution plans of Bank of America, Bank of New York Mellon, JP Morgan Chase, State Street, and Wells Fargo was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, the statutory standard established in the Dodd-Frank Wall Street Reform and Consumer Protection Act. … The FDIC determined that the plan submitted by Goldman Sachs was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, and identified deficiencies. The Federal Reserve Board identified a deficiency in Morgan Stanley’s plan and found that the plan was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code. Neither agency found that Citigroup’s 2015 resolution plan was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, although the agencies did identify shortcomings that the firm must address.”
Basically, right now, today, if something crashed the economy again, at least seven of the big eight banks would create systemic risk when they failed. Tier 1 capital ratios have improved for these banks — though I think Bank of America is running a little light at 10.35 percent — but that’s really not the problem. Given how little derivative transparency we have right now, we don’t really know how much risk some of the smaller banks with weaker capital reserves have pushed into the broader market. Citi’s derivatives business alone should give nightmares to any regulator.
The rules under the Orderly Liquidation Authority are about the only thing right now that prevents banking executives from skating when the ship crashes. Under the OLA, bank executives are on the hook for some losses personally … and go to the end of the stack when paying obligations in a wind up. Ditch the OLA, and if a bank fails those executives get to keep the millions they earned while playing the lottery with shareholder — and depositor — money.
Westmoreland’s trying to get this stuff changed now, when there’s no (apparent) crisis, because when a crisis does hit, it will be impossible to protect wealthy bankers from the public screaming for their blood. Occupy Wall Street might have been four and a half years ago, but my memory is longer than that.
Notice how nowhere does Westmorland say WHY title II is a problem…just cause he says so. Sorry, thats not good enough. This is nothing but pandering to the know nothings. Have republicans not painted themselves in enough corners already. Obviously not.
When this bill is ready to come out of committee and/or scheduled to be on the floor for a vote, let’s talk. Until then it’s a fluff pice to say he’s fighting Dodd Frank. Related, according to Sen Isaskson’s Facebook “Isaskson is ‘the most’ conservative Senator.” Maybe our GA Senator can pledge to take this cause on in the Senate pending passage in the House??