Opposition to Dodd-Frank regulations grows louder
11 Apr 2011
US Congressional Republicans are in truculent mood. Last week they were chiefly responsible for blocking agreement on the 2011 budget and, at time of writing, the US government stood poised to run
out of money on April 8.
So what might the Grand Old Party do if it were to command a majority in the Senate as well as the House, and, as might happen in 18 months, were it to regain the White House? Steps have also been
taken to overturn Dodd-Frank, approaching its first anniversary on the statute book.
On April 1, Republican Senator Jim DeMint, from South Carolina, introduced a bill to repeal Dodd-Frank, called the Financial Takeover Repeal Bill 2011. It has 18 Republican co-sponsors but no
chance of passing while the Democrats control the Senate. But it points to what might happen if the Democrats lose their majority.
Other opponents of Dodd-Frank have also been growing feistier. In the months leading to the passage of Dodd-Frank in July 2010, the banking industry, which clearly disliked the proposed
legislation, largely kept below the parapet. Criticism was generally expressed in a spirit of collegiate co-operation rather than outright opposition. In the wake of the worst financial crisis since
the 1930s, it would not have been politic for bankers to have openly attacked the Hill’s efforts, however maladroit, to prevent a recurrence.
Now, however, it seems an increasing number of senior bankers aren’t going to take it any more. At the end of last month, Jamie Dimon, chief executive of JP Morgan, opened fire on financial regulation and new, more rigorous capital standards. He said Dodd-Frank’s insistence that companies post collateral for trading a broad range of derivatives would “damage America”.
The upshot of Dodd-Frank was, he suggested, that it had replaced a system, which was already overcomplicated and had too many regulators, with an even more complex one that has yet more
regulators. “Rather than simplifying and strengthening, we added more,” he said.
In the same week, ex-Federal Reserve chairman Alan Greenspan wrote an article in which he warned Dodd-Frank could create the “largest regulatory-induced market distortion” in the US since wage and
price controls were imposed by the Nixon administration 40 years ago. He suggested intrusive regulation was never the right answer, as regulators can rarely get more than a partial picture of the
workings of an ever more complicated financial system.
But, he argued, the efforts to provide more safety buffers would only damage American growth. The previous system of lax regulation might have allowed the crisis, but it also allowed stable
exchange rates, interest rates, prices and wage rates.
Some might suggest any regulation that antagonises Alan Greenspan must have something going for it. After all, the former Fed chairman was the principal architect of low interest rates in the
1990s and 2000s, which arguably led to the US housing market overheating and the subsequent crisis.
When he visited Congress for his twice-yearly testimonies in the 1990s, he was given the rock-star treatment. Politicians from all sides fawned over the mystical seer of unparalleled growth and,
briefly, budgetary surplus. One suspects his reception would be less welcoming today.
Nonetheless, many Republicans would now line up alongside Greenspan in his disapproval of Dodd-Frank, particularly as memories of 2008 fade and its lessons seem increasingly open to debate.
Critics speak out
Spencer Bachus, Republican chairman of the House Banking Committee has blocked proposed increases in funding for the Securities and Exchange Commission and voiced opposition to the new Consumer
Financial Protection Bureau. He argues regulators are there to “serve” banks and has warned the Treasury not to harm shareholders of Goldman Sachs when implementing Dodd-Frank.
There is also growing end-user opposition to the Dodd-Frank requirement that all “standardised” (yet to be defined) derivatives should be cleared and traded on an exchange or “standardised
execution facility” (also yet to be defined). Users of foreign-exchange derivatives are particularly exercised about this aspect of the legislation. These instruments played no part in the crisis,
yet mandatory clearing and SEF trading will raise transaction costs paid by end users.
They add that foreign exchange forwards and swaps differ crucially from other derivatives, yet are being vacuumed up indiscriminately. For example, there are no contingent payments with FX
derivatives: payment flows do not depend on the behaviour of an underlying asset but are known at the commencement of a trade.
All in all, the opposition to the tenets of Dodd-Frank appears to be growing more vocal, while Republican criticism of the Obama White House and all it stands for is fierce. US voters rebuffed the
first two years of the incumbent administration last November and, by 2013, Republicans could control all three wings of the legislature. At that point, Dodd-Frank might be junked.
This would have effects beyond the US. European and US regulators have tried to agree on general principles and co-ordinate efforts to avoid regulatory arbitrage. If Dodd-Frank is scrapped,
European policymakers would have to start all over again.
And we all know how quickly they work. Stand by for Mifid III to coincide with the centenary of the 1957 Treaty of Rome.