The House of Representatives is expected to soon vote to repeal most of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Passed in the wake of the devastating financial crisis that cost 8.7 million jobs, $19 trillion in wealth and almost 10 million homes, Dodd-Frank put in place consumer and financial stability safeguards to respond to the clear and unmistakable lessons learned during the crisis. The bill being considered by the House, the Financial CHOICE Act, would eviscerate these safeguards, putting the U.S. economy and taxpayers in the same perilous position as prior to the financial crisis.
Thanks to Wall Street reform, U.S. banks have a greater capacity to absorb losses during periods of stress, increasingly rely on stable sources of funding, undergo rigorous stress testing, plan for their orderly failure and don’t make swing-for-the-fences bets. Large, complex nonbank financial companies that pose financial stability risks, such as AIG, now face enhanced regulation and oversight. Consumers are now better protected from toxic products in the financial marketplace, and perverse incentives and predatory practices in the housing and securitization markets have been significantly curtailed.
Regulation is cleaning up the fee-stripping abuses and financial stability risks that had dominated many markets, helping to protect pension investors in private funds and asset-backed securities and the farmers, ranchers and manufacturers who use the swaps market to hedge risks.
Collectively, the provisions included in Dodd-Frank have helped provide the financial stability that the U.S. economy needs to grow. As a result, the unemployment rate has steadily declined over the past 7 years and is at its lowest level in a decade. And if that wasn’t enough, banks are as profitable as ever and have increased lending significantly since the crisis. Corporate bond issuance and overall bond market liquidity are strong, and in some cases stronger than prior to the crisis.
The CHOICE Act would undo this progress and more. The bill represents a thorough dismantling of Wall Street reform, and targets even the most commonsense provisions of Dodd-Frank.
For instance, the CHOICE Act would eliminate the new tool given to regulators to avoid taxpayer-funded bailouts. During the financial crisis, when a large complex financial institution was on the brink of failure, regulators had two terrible options: disastrous bankruptcy or bailouts. On Sept. 15, 2008, regulators let Lehman Brothers fail through bankruptcy, severely aggravating the financial crisis. The very next day, the U.S. government bailed out AIG.
Dodd-Frank gave regulators a third option: Orderly Liquidation Authority. This option enables regulators to wind down a firm in an orderly manner, removing executives and forcing losses on shareholders rather than on taxpayers.
The CHOICE Act also allows banks of any size to opt out of a suite of crucial regulations—such as stress testing, living wills, risk-based capital requirements, liquidity requirements and more—if they maintain a leverage ratio of 10 percent. And it repeals the Volcker Rule’s ban on risky proprietary trading bets. A 10 percent leverage ratio is not nearly enough capital to justify such drastic deregulation.
Furthermore, the CHOICE Act shreds the authority and resources of the Financial Stability Oversight Council, the council of financial regulators tasked with looking at risks across the financial system. FSOC would no longer have the power to address dangers that emerge outside of the traditional banking sector, putting taxpayers at risk. The bill also eliminates the Office of Financial Research, which provides data-driven research support to FSOC to help identify emerging risks.
The bill even targets protections put in place to prevent the predatory mortgage lending practices that sparked the housing crisis. The CHOICE Act allows a financial institution of any size to once again make mortgages without regard to a consumer’s ability to repay the loan. Holding a loan in portfolio does not prevent it from being dangerous or predatory. The CHOICE Act would also expose buyers of manufactured housing—some of the most economically vulnerable homebuyers—to deeply predatory practices.
If that weren’t enough, the bill guts the authority and independence of the Consumer Financial Protection Bureau—America’s successful consumer watchdog—and ravages investor protections in many ways. From crushing shareholder proposal rights to eliminating bad actor accountability, the list is long and brazen.
Although the CHOICE Act is perhaps the pillar of the GOP-led financial deregulatory agenda, it is only one part of that effort. The Senate is also currently moving a bill, the Regulatory Accountability Act, that would tie the hands of financial regulators and other regulatory bodies in the rulemaking process—effecting a going-forward shutdown of the tools needed to prevent and respond to future challenges.
Far too many families and communities still carry the devastating scars of 2008. Unwinding financial reform through the Financial CHOICE Act will only make similar economic calamity more probable. It’s a dangerous display of historical amnesia.
Gregg Gelzinis is a special assistant on the economic policy team at the Center for American Progress.
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