[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
A LEGISLATIVE PROPOSAL TO CREATE
HOPE AND OPPORTUNITY FOR INVESTORS,
CONSUMERS, AND ENTREPRENEURS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
APRIL 26, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-17
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Kirsten Sutton Mork, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
April 26, 2017............................................... 1
Appendix:
April 26, 2017............................................... 89
WITNESSES
Wednesday, April 26, 2017
Allison, John A., former President and Chief Executive Officer,
Cato Institute................................................. 15
Barr, Hon. Michael S., Professor of Law, University of Michigan
Law School..................................................... 9
Cook, Lisa D., Associate Professor, Economics and International
Relations, Michigan State University........................... 12
Michel, Norbert J., Senior Research Fellow, Financial Regulations
and Monetary Policy, the Heritage Foundation................... 7
Peirce, Hester, Director, Financial Markets Working Group, and
Senior Research Fellow, Mercatus Center, George Mason
University..................................................... 14
Pollock, Alex J., Distinguished Senior Fellow, the R Street
Institute...................................................... 10
Wallison, Peter J., Arthur F. Burns Fellow, Financial Policy
Studies, American Enterprise Institute......................... 6
APPENDIX
Prepared statements:
Allison, John A.............................................. 90
Barr, Hon. Michael S......................................... 93
Cook, Lisa D................................................. 109
Michel, Norbert J............................................ 112
Peirce, Hester............................................... 130
Pollock, Alex J.............................................. 137
Wallison, Peter J............................................ 143
Additional Material Submitted for the Record
Hensarling, Hon. Jeb:
Coalition letter of suport for the CHOICE Act................ 182
Written statement of the Credit Union National Association... 185
Written statement of the National Association of Insurance
Commissioners.............................................. 200
Written statement of the National Association of Mutual
Insurance Companies........................................ 203
Written statement of the National Association of Professional
Insurance Agents........................................... 208
Capuano, Hon. Michael:
Written statement of William F. Galvin, Secretary of the
Commonwealth, Commonwealth of Massachusetts................ 211
Clay, Hon. William Lacy:
Written statement of Keith Mestrich, President and CEO,
Amalgamated Bank........................................... 215
Duffy, Hon. Sean:
Written statement of the Property Casualty Insurers
Association of America..................................... 217
Ellison, Hon. Keith:
Report of the Democratic staff of the House Committee on
Oversight and Government Reform entitled, ``An Examination
of Attacks Against the Financial Crisis Inquiry
Commission,'' dated July 13, 2011.......................... 225
Written responses to questions for the record submitted to
John A. Allison............................................ 262
Written responses to questions for the record submitted to
Peter J. Wallison.......................................... 264
Emmer, Hon. Tom:
Written responses to questions for the record submitted to
Hester Peirce.............................................. 272
Huizenga, Hon. Bill:
Written statement of Duff & Phelps........................... 299
Love, Hon. Mia:
Chart entitled, ``Average Value of Lending BEFORE Dodd-
Frank''.................................................... 303
Chart entitled, ``Average Value of Lending AFTER Dodd-Frank'' 304
Luetkemeyer, Hon. Blaine:
Written statement of the Electronic Payments Coalition....... 305
Written statement of the Independent Community Bankers of
America.................................................... 310
McHenry, Hon. Patrick:
Written statement of the Retail Industry Leaders Association. 312
Ross, Hon. Dennis:
Written statement of the Food Marketing Institute............ 314
Written statement of the Merchant Payments Coalition......... 317
Written statement of the National Retail Federation and the
National Council of Chain Restaurants...................... 319
Written statement of various undersigned national and state
merchant trade associations................................ 323
Royce, Hon. Edward:
Written statement of the National Association of Federally-
Insured Credit Unions...................................... 331
Trott, Hon. David:
Chart entitled, ``Rules Applicable to U.S. Financial Services
Holding Companies Since July 2010''........................ 335
Waters, Hon. Maxine:
Center for American Progress report entitled, ``President
Trump's Dangerous CHOICE, Will He Embrace House
Republicans' Plan to Gut Wall Street Reform?'' dated April
2017....................................................... 336
Letter to Chairman Jeb Hensarling stating that the Democrats
will hold a separate hearing on the CHOICE Act............. 374
Letters of opposition to the CHOICE Act...................... 377
Written statement of the North American Securities
Administrators Association Inc, and the Minnesota
Commissioner of Commerce................................... 516
A LEGISLATIVE PROPOSAL TO CREATE
HOPE AND OPPORTUNITY FOR INVESTORS,
CONSUMERS, AND ENTREPRENEURS
----------
Wednesday, April 26, 2017
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:09 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Royce, Pearce,
Posey, Luetkemeyer, Huizenga, Duffy, Stivers, Hultgren, Ross,
Pittenger, Wagner, Barr, Rothfus, Messer, Tipton, Williams,
Poliquin, Love, Hill, Emmer, Zeldin, Trott, Loudermilk,
MacArthur, Davidson, Budd, Kustoff, Tenney, Hollingsworth;
Waters, Maloney, Velazquez, Sherman, Meeks, Capuano, Clay,
Lynch, Scott, Green, Cleaver, Moore, Ellison, Perlmutter,
Foster, Kildee, Delaney, Sinema, Beatty, Heck, Vargas,
Gottheimer, Gonzalez, Crist, and Kihuen.
Chairman Hensarling. The Financial Services Committee will
come to order. Without objection, the Chair is authorized to
declare a recess of the committee at any time.
Today's hearing is entitled, ``A Legislative Proposal to
Create Hope and Opportunity for Investors, Consumers, and
Entrepreneurs.''
I now recognize myself for 5 minutes to give an opening
statement.
It has been almost 7 years since the passage of the Dodd-
Frank Act. We were told it would lift our economy, but instead
we are stuck in the slowest, weakest, most tepid recovery in
the history of the republic.
The economy does not work for working people. They have
seen their paychecks stagnate; they have seen their savings
decimated. We have seen millions who remain unemployed and
underemployed in an economy working at roughly half of its
potential.
Dodd-Frank has been a bigger burden to enterprise than all
other Obama-era regulations combined. There is a better way,
and it is the Financial CHOICE Act of 2017.
This bill replaces onerous government fiat with market
discipline, ends bailouts with bankruptcy, throws a
deregulatory life preserver to our community financial
institutions, replaces complexity with simplicity, holds both
Washington and Wall Street accountable, and unleashes capital
formation so the economy can move yet again for the betterment
of all of our citizens.
Under the Financial CHOICE Act there will be economic
opportunity for all and bank bailouts for none--again, bank
bailouts for none. Perhaps that is why press reports indicate
that most Wall Street banks oppose the Financial CHOICE Act.
The damage Dodd-Frank has done to consumers and business is
well known to every Member, but let me remind you of just a
few: 75 percent of banks used to offer free checking before
Dodd-Frank became law; by 2016 only 38 percent did. Minimum
balance requirements to qualify for free checking have almost
quadrupled, and average monthly fees more than tripled. This
helps explain why the number of households that are unbanked
and underbanked is up by more than 3 million since the passage
of Dodd-Frank.
Data show that there are 50 million fewer credit cards
available since 2008 and the remaining options cost more now,
hurting small businesses and struggling families. The Federal
Reserve reports that once Dodd-Frank's qualified mortgage rule
is fully phased in, an estimated one-third of Black and
Hispanic borrowers will be denied mortgages due to its rigid
debt-to-income ratio.
An overwhelming majority of community banks report that
Dodd-Frank's regulatory burdens are preventing them from making
more residential mortgage loans. And they have had to hire more
staff just to deal with the legal compliance issues.
The Dodd-Frank Act represents an even more dangerous
prospect, namely, politicized lending. Washington elites are
now allocating our capital to fulfill their agendas, devoid of
any checks and balances or due process.
And it is impossible to bring up the threat of politicized
lending without bringing up the CFPB. The Financial CHOICE Act
reestablishes this rogue agency as a civil enforcement agency
patterned after the Federal Trade Commission, one that is
responsible for actually enforcing the enumerated consumer
protection laws written by Congress instead of making up its
own law in an unfair, deceptive, and abusive manner.
True consumer protection is only to be had in competitive,
transparent, and innovative markets which are vigorously
policed for fraud and deception. That is what the Financial
CHOICE Act is all about.
The bill releases financial institutions from regulations
that create more burden than benefit in exchange for meeting
high, yet simple capital requirements--that is, loss-absorbing
capital, which is like an insurance policy against failure.
Instead of government bureaucrats overseeing banks that
plan their failures, the CHOICE Act will see banks plan for
their expansions by helping grow the economy for every citizen.
The Financial CHOICE Act repeals Washington's authority to
designate too-big-to-fail firms--or SIFIs, as they are known
going forward, and retroactively repeals previous nonbank SIFI
designations.
The bill recognizes that illegal activity by bad actors at
financial institutions can harm the financial well-being of
consumers and society and, therefore, imposes the toughest
penalty in history for financial fraud, self-dealing, and
deception.
The bill repeals the misguided, complex, and unneeded
Volcker Rule, as it has made capital markets less liquid, more
fragile, and threatens financial stability. Even a Federal
Reserve report now admits to this.
The bill would unleash opportunities for economic growth,
foster capital formation, and provide Main Street job creators
with regulatory relief so more Americans can go back to work at
good careers and give their families a better life.
Ending the bureaucratic nightmare that is Dodd-Frank and
replacing it with the simpler capital rules of the Financial
CHOICE Act is imperative. America has struggled for far too
long.
It is time again to hold Washington accountable; it is time
to hold Wall Street accountable. It is time for economic growth
for all; it is time for bank bailouts for none.
So I look forward today to our hearing, and to soon passing
the Financial CHOICE Act.
I now recognize the ranking member for 4 minutes.
Ms. Waters. Thank you, Mr. Chairman.
And thank you, to the witnesses, for being here today.
There is only one explanation for why we are here
discussing yet another dead-on-arrival version of the wrong
choice act. It must be that the foreclosure crisis and the
Great Recession somehow weren't enough for the Majority, and so
they irrationally want to clear the way for round two.
I want to be very clear for anyone who is watching: That is
exactly what this bill would result in.
The wrong choice act thoroughly dismantles Wall Street
reform, guts the Consumer Financial Protection Bureau, and
takes us back to the system that allowed risky and predatory
Wall Street practices and products to crash our economy.
During the Great Recession, because of the actions of
reckless financial institutions, Americans lost $13 trillion in
household wealth, 11 million Americans lost their homes, and
the unemployment rate climbed to 10 percent. The impact was
widespread and harmful to all.
The wrong choice act paves the path back to that kind of
economic ruin by rolling back the critical safeguards we put in
place in the Dodd-Frank Wall Street Reform and Consumer
Protection Act to protect American consumers, investors, and
the economy.
Today we have sensible Dodd-Frank rules and the Consumer
Financial Protection Bureau to prevent financial institutions
from peddling toxic products or abusing hardworking American
consumers. Since its creation the CFPB has returned nearly $12
billion to more than 29 million consumers who have been ripped
off by financial institutions.
With this financial cop on the block and with important
rules of the road in place, Wall Street reform has worked.
Since Dodd-Frank passage the economy has created 16 million
jobs over 85 consecutive months, and business lending has
increased 75 percent. Banks large and small are posting all-
time record profits; community banks are out-performing larger
banks; and credit unions are expanding their membership.
But here we are. And even though Wall Street reform has
made them safer and they are raking in profits, that is not
enough for the banks. They want to go back to the bad old days
of fewer protections, and they have shamelessly undertaken a
full-court press to get a long wish list of giveaways, most of
which have been compiled in this bill.
Democrats are going to fight against it and stand up for
Main Street. This bill must not become law. There is too much
at stake for consumers and for our whole economy.
And I will now yield to Mr. Kildee, the vice ranking
member.
Mr. Kildee. Thank you, Madam Ranking Member, for yielding.
This so-called Financial CHOICE Act ends the most important
aspects of Wall Street reform, which were designed and passed
to prevent another financial crisis. Pushing this bill puts
Wall Street ahead of Main Street once again.
The wrong choice for hardworking Americans, it puts Wall
Street back in charge and does away with those very protections
that were enacted after the financial crisis, and puts the
economy back at risk.
And let me be clear: I and other Members on this side
support improving some aspects of Dodd-Frank.
But have we forgotten the lessons of the financial crisis?
This takes us back to the days where Wall Street practices
nearly crippled our economy, back to the days where millions of
people lost their homes, lost their jobs, saw their retirement
savings wiped out. The people that I represent have not
forgotten these dark days, and the committee should not forget
them either.
Removing these important financial safeguards while at the
same time eliminating the Consumer Financial Protection Bureau,
designed to protect consumers against those abuses, is the
wrong choice and this committee ought to reject that.
With that, I yield back.
Chairman Hensarling. The Chair now yields 1 minute to the
gentleman from California.
Mr. Sherman. Mr. Chairman, this CHOICE Act takes some good
bills that passed this committee with overwhelming and
bipartisan majorities, puts them together with a lot more bad
bills that do not have bipartisan support, and gives Members no
choice. They are ultimately going to have to vote up or down.
Mr. Chairman, please break up this bill.
You say we don't have free checking anymore. You used to
pay for checking because your checking account got about 4
percent less interest than the passbook account. In a zero
interest rate environment or even a very low interest rate
environment, obviously banks got rid of free checking in many
cases, and in other cases they are trying to get it unfreezed.
Finally, you say we don't have the economy we need. We need
a better trade policy. You can't have a half-trillion-dollar
trade deficit and then say, ``We are going to make up for that
by deregulating the banks and reinstituting the disasters that
we suffered in 2008.''
The idea that we can make up for bad trade policies and
restore the economy by letting Wall Street do anything they
want didn't work in 2008. It is not going to work now.
I yield back.
Chairman Hensarling. The gentleman yields back.
We will now turn to our panel of witnesses.
First, we welcome the testimony of Mr. Peter Wallison. He
is the Arthur F. Burns fellow in financial policy studies at
the American Enterprise Institute. He previously served as
General Counsel of the U.S. Treasury Department and as White
House Counsel to President Reagan. He received both his B.A.
and J.D. from Harvard University.
Second, Dr. Norbert Michel is a senior research fellow at
the Heritage Foundation. He was previously a professor at
Nicholls State University College of Business, where he taught
finance, economics, and statistics. Dr. Michel holds his B.A.
from Loyola University and a doctoral degree in financial
economics from the University of New Orleans.
Third, the Honorable Michael Barr is a professor of law at
the University of Michigan Law School, where he teaches
financial regulation, international finance, and financial
derivatives. He previously served as Assistant Secretary for
Financial Institutions at the Treasury Department. He received
both his B.A. and J.D. from Yale University.
Fourth, Mr. Alex Pollock is the distinguished senior fellow
at the R Street Institute. Previously he served as a resident
fellow at the American Enterprise Institute, and as the
president and CEO of the Federal Home Loan Bank of Chicago. He
received his B.A. from Williams College, a Master's in
Philosophy from the University of Chicago, and a Master's of
Public Administration from Princeton University.
Fifth, Dr. Lisa Cook is an associate professor of economics
and international relations at Michigan State University.
Previously, she was a senior economist on the Council of
Economic Advisors. As a Marshall scholar she received her B.A.
from Spelman College and a second B.A. from Oxford University;
she earned a Ph.D. in economics from the University of
California Berkeley.
Sixth, Ms. Hester Peirce is a senior research fellow at the
Mercatus Center. She previously served as staff for the Senate
Banking Committee, as well as the Securities and Exchange
Commission. Ms. Peirce earned her B.A. in economics from Case
Western Reserve University and her J.D. from Yale Law School.
And last but not least, Mr. John Allison is the former
president and chief executive officer of the Cato Institute.
Prior to his time at Cato he was the longstanding chairman and
CEO of BB&T Bank. Mr. Allison graduated from the University of
North Carolina Chapel Hill and received his Master's Degree in
management from Duke University.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony.
I think perhaps with one exception, you have all testified
here before, but as a slight refresher course, green means go,
yellow means you have 1 minute left, and red means you had best
wrap it up.
Without objection, each of your written statements will be
made a part of the record.
Mr. Wallison, you are now recognized for 5 minutes for your
testimony.
STATEMENT OF PETER J. WALLISON, ARTHUR F. BURNS FELLOW,
FINANCIAL POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE
Mr. Wallison. Thank you, Mr. Chairman, Ranking Member
Waters, and members of the committee. Thanks for the
opportunity to comment on the Financial CHOICE Act.
The act would repeal or substantially modify large portions
of the 2010 Dodd-Frank Act. As outlined in my prepared
testimony, there are two important things to know about Dodd-
Frank: It is primarily responsible for the historically slow
recovery of the U.S. economy since the 2008 financial crisis;
and it was completely unnecessary.
Enacted hurriedly, Dodd-Frank misdiagnosed the financial
crisis. Without serious investigation, the Obama Administration
and Congress assumed or wanted to believe that the crisis was
caused by insufficient regulation of Wall Street and the
financial system.
In 2009, before any committee hearings, Chairman Barney
Frank said that Congress would adopt a ``New New Deal.'' He was
correct. The Dodd-Frank Act was by far the most restrictive
financial regulatory law since the 1930s.
If, instead of jumping to pass new regulations, Congress
had stopped to consider why we had a financial crisis it would
have found government housing policies were the cause. In 1992
Congress enacted the Affordable Housing Goals, which required
Fannie Mae and Freddie Mac to meet certain quotas when they
bought mortgages from banks.
First, the quota was 30 percent: In any year, 30 percent of
the loans that Fannie and Freddie bought had to be made to
borrowers who were at or below the median income where they
lived.
HUD was given authority to increase these quotas and did so
aggressively through the Clinton and the Bush Administrations.
By 2008 the quota was 56 percent, meaning that more than half
of all mortgages they acquired in any year had to be made to
borrowers at or below the median income.
The purpose of the goals was to increase mortgage credit
for these borrowers, but it had the effect of forcing Fannie
and Freddie to reduce their underwriting standards. Although
they had traditionally accepted only prime loans, which require
10 to 20 percent downpayments, they couldn't find enough of
these loans among borrowers who met the quota.
By the mid-1990s they were accepting loans with 3 percent
downpayments; and by 2000, loans with zero downpayments.
What Congress did not understand when it adopted the goals
was that Fannie and Freddie, which were by far the largest
buyers in the market, set the underwriting standards for
everybody else. So their reduced underwriting standards spread
to the wider market. Banks and others made these risky loans to
compete with lenders who were also making risky loans and
selling them to Fannie and Freddie.
By 2008 more than half of all mortgages in the United
States were subprime. And of these, 76 percent had been bought
by Government agencies, primarily Fannie and Freddie.
That shows without question that the government created the
demand for these loans. Risky loans, in turn, created an
unprecedented 10-year housing bubble between 1997 and 2007.
When the bubble deflated, housing and mortgage values fell 30
to 40 percent nationwide, causing losses to many financial
firms and banks that held mortgages or mortgage-backed
securities. Fannie and Freddie themselves became insolvent and
had to be bailed out with $180 billion in taxpayer funds.
Because Congress did not know what really caused the
crisis, it was led to adopt a series of unnecessary
restrictions in the Dodd-Frank Act, detailed in my prepared
testimony. Among them are: first, costly regulations on
community banks, which prevented the growth of small business
and the employment small business produces, causing 7 years of
stunted economic and employment growth.
Second, the creation of the FSOC, with the power to
designate firms as SIFIs; among other things, this caused G.E.
to close down G.E. Capital, which had been a successful lender
to small business and other growth companies.
Third, an unnecessary orderly liquidation authority that
will make it likely to be difficult for very large financial
firms to find financing in the future.
Fourth, authority for the Fed to finance failing
clearinghouses, which would pave the way for another financial
crisis.
And fifth, the Volcker Rule, which has drastically reduced
liquidity in the financial markets, creating the potential for
another financial crisis.
The CHOICE Act can't be enacted too soon, Mr. Chairman.
Thank you for your attention.
[The prepared statement of Mr. Wallison can be found on
page 143 of the appendix.]
Chairman Hensarling. Thank you.
Dr. Michel, you are now recognized for your testimony.
STATEMENT OF NORBERT J. MICHEL, SENIOR RESEARCH FELLOW,
FINANCIAL REGULATIONS AND MONETARY POLICY, THE HERITAGE
FOUNDATION
Mr. Michel. Thank you.
Chairman Hensarling, Ranking Member Waters, members of the
committee, thank you for the opportunity to testify today. I am
a senior research fellow in financial regulations at the
Heritage Foundation, but the views that I express in this
testimony are my own and they should not be construed as
representing any official position of the Heritage Foundation.
My testimony argues that Dodd-Frank needlessly increased
borrowing costs and that removing this excess burden will
markedly increase sustainable economic growth. Dodd-Frank
worsened the too-big-to-fail problem, expanded the command-and-
control type of financial regulations that have harmed people
for decades, and pointlessly addressed issues that had nothing
to do with the 2008 financial crisis.
My remarks will provide one example of each of these three
Dodd-Frank failures.
The first is the new Dodd-Frank resolution process that
keeps large failing financial firms out of bankruptcy after
Federal regulators certify that no viable private alternatives
exist. This is unequivocally the wrong approach.
The very theory behind a legal bankruptcy process is that
it provides for orderly resolution of a distressed firm. It
offers a financial timeout so that the company can remain a
viable business while staving off a mad rush of creditors
trying to get their claims settled first.
Bankruptcy provides protection to debtors, which is why
creditors don't like bankruptcy. So it is no surprise that over
time these protections have been whittled down.
The main problem with the Bankruptcy Code after 2005 was
that it provided nearly all derivative and repo agreement
counterparties safe harbors from key bankruptcy protections,
such as the automatic stay. These safe harbors were justified
on the grounds that they would prevent counterparties from
running, thus worsening a systemic crisis, but that theory has
now been proven wrong.
The Financial CHOICE Act implements an improved process--
bankruptcy process--for large financial firms by adopting the
Financial Institution Bankruptcy Act of 2016, legislation that
subjects derivatives and repos to an automatic 48-hour stay.
The temporary stay is a welcome improvement, and the
elimination of the safe harbor and all other bankruptcy safe
harbors or derivatives and repos would be optimal.
The second major policy mistake is that Dodd-Frank created
an unaccountable Federal agency based on a flawed concept of
consumer protection. I am referring, of course, to the Consumer
Financial Protection Bureau and so-called abusive acts and
practices.
The United States did not need and does not need either.
The CFPB is unaccountable to the public in any meaningful way
and raises serious due process and separation-of-powers
concerns.
Most importantly, there was no shortage of consumer
protection prior to the Dodd-Frank Act. Title X of Dodd-Frank
created the CFPB by transferring enforcement authority for 22
specific Federal statutes to the new agency. These Federal
statutes were already layered on top of State laws and local
ordinances, and this framework has for decades outlawed
deceptive and unfair practices even in financial products and
services.
The CHOICE Act greatly improves the status quo by making
the CFPB Director removable at will, putting the agency through
the regular appropriations process, eliminating the abusive
behavior concept, and relegating the CFPB to an enforcement-
only agency. These changes would provide an enormous benefit to
U.S. citizens, but Congress can do even better by eliminating
the CFPB and consolidating its enforcement authority at the
Federal Trade Commission.
The third major policy mistake that I will discuss is the
Durbin Amendment. Section 1075 of Dodd-Frank implemented price
controls on the interchange fees charged in debit card
transactions, and it did so based on the premise that banks and
card networks had colluded to fix prices. If, in fact, banks
and card networks are guilty of these actions then merchants
and any other aggrieved parties have a remedy in Federal court.
The issue is actually quite simple. Long before 2010
Congress had done its job by creating anti-trust law. It should
never have jumped into the middle of a legal dispute as if it
were the Judicial Branch.
Congress should repeal the Durbin Amendment and restore the
rule of law, letting the courts decide if, in fact, there was
collusion and price-fixing.
Thank you for your consideration, and I am happy to answer
any questions that you may have.
[The prepared statement of Dr. Michel can be found on page
112 of the appendix.]
Chairman Hensarling. Mr. Barr, you are now recognized for 5
minutes for your testimony.
STATEMENT OF THE HONORABLE MICHAEL S. BARR, PROFESSOR OF LAW,
UNIVERSITY OF MICHIGAN LAW SCHOOL
Mr. Barr. Thank you, Mr. Chairman, Ranking Member Waters,
and distinguished members of the committee. It is my pleasure
to appear before you today.
The Dodd-Frank Act was passed in response to the worst
financial crisis since the Great Depression. In 2008 the United
States plunged into a severe financial crisis that shuttered
American businesses and cost millions of families their jobs,
homes, and livelihoods.
While American families have not forgotten the pain of the
financial crisis, a kind of collective amnesia appears to be
now descending on Washington. Many seem to have forgotten the
causes of the crisis and the brutal consequences for American
families.
Instead of offering hope and opportunity to American
families, the legislation being considered by this committee
would needlessly expose taxpayers, workers, businesses, and the
American economy to fresh risks of financial abuse and
financial collapse. That is not a risk we can or should take.
While the draft legislation has many serious flaws, I want
to focus here on three key problems: first, weakening oversight
of the financial system; second, eliminating orderly
liquidation; and third, undermining consumer and investor
protection.
First, weakening oversight of the financial system. The
proposed legislation would weaken oversight of the financial
system by eliminating the ability of the Federal Reserve to
supervise systemically important nonbank financial companies,
undermining the Financial Stability Oversight Council,
abolishing the Office of Financial Research, and fundamentally
weakening oversight of banks.
The designation of systemically important nonbank financial
institutions is one of the cornerstones of the Dodd-Frank Act,
and a key goal of reform was to create a system of supervision
that ensured that if an institution posed a sizeable risk to
the financial system it would be regulated, supervised, and
have capital requirements that reflected its risk, regardless
of its corporate form, whether a bank holding company,
investment bank, insurance conglomerate, finance company, or
whatever. Shadow banking gets a free pass today.
The bill would also weaken Fed oversight of the biggest
banks. The Fed provides for a graduated, tailored system of
enhanced prudential measures that increases in stringency with
the size of the firm.
None of these enhanced measures apply to about 95 percent
of banks, the category commonly described as community banks,
those with under $10 billion in assets. Exempt are more than
6,000 banks in communities all across the country.
Yet, to benefit huge Wall Street titans the proposed
legislation offers up a simple option to be exercised at the
discretion of Wall Street firms. A 10 percent leverage ratio
gets big firms like Goldman Sachs and Wells Fargo out of
heightened supervision by the Fed.
That is a big mistake. It lets Wall Street choose whatever
approach is the least constraining even if it means bigger risk
for the rest of us. That is choice for Wall Street, pain for
American families.
None of these changes will help hometown banks. Instead,
small banks could benefit from safe harbor rules and plain-
language versions of regulations that do apply to them, as well
as longer exam cycles and streamlined reporting requirements.
Second, eliminating orderly liquidation. At the height of
the crisis Lehman collapsed in bankruptcy, AIG was bailed out,
and President Bush and Congress stepped in to pass the Troubled
Asset Relief Program.
In response, Dodd-Frank authorized an orderly liquidation
authority so that our economy would never again be exposed to
those horrible choices. Whatever the merits of bankruptcy
reform, the bill would foolishly rely solely on the hope that
bankruptcy judges could manage the failure of a firm like
Lehman.
Orderly liquidation has three essential features not
replicable in bankruptcy: first, it is part of an ongoing
system of supervision; second, the FDIC can provide liquidity;
and third, the FDIC can coordinate globally to deal with the
failing financial firms. Bankruptcy just can't match that.
Last, undermining consumer and investor protection.
Congress created the consumer agency to protect people from
harmful and abusive financial practices. In just 6 years the
agency secured $12 billion in relief for more than 29 million
consumers. Yet, the bill would cripple the agency, needlessly
harming American families.
In sum, the proposed legislation crushes investor hope, it
mocks investor opportunity, and it undermines the transparency,
honesty, and trust essential for capital formation.
Thank you very much.
[The prepared statement of Mr. Barr can be found on page 93
of the appendix.]
Chairman Hensarling. Mr. Pollock, you are now recognized
for 5 minutes for your testimony.
STATEMENT OF ALEX J. POLLOCK, DISTINGUISHED SENIOR FELLOW, THE
R STREET INSTITUTE
Mr. Pollock. Thank you, Mr. Chairman, Ranking Member
Waters, and distinguished members of the committee.
Of the many provisions in the CHOICE Act, my discussion
will focus on three key areas: accountability; capital; and
congressional governance of the administrative state.
Mr. Barr mentioned community banks. We should hear from
them.
A good summary of the results of the Dodd-Frank Act is
supplied by the Independent Community Bankers who say,
``Community banks need relief from suffocating regulatory
mandates. The exponential growth of these mandates affects
nearly every aspect of community banking. The very nature of
the industry is shifting away from community investment and
community-building to paperwork, compliance, and examination.''
Now, that is certainly not what we want, but it is what we
have because when Dodd-Frank was enacted the urge to overreact
was strong and Dodd-Frank expanded regulatory bureaucracy in
every way. This was in spite of the remarkably poor record of
the government agencies as they helped inflate the housing
bubble--a vivid lesson of crisis so well pointed out by Peter
Wallison--and in spite of the obvious fact that the regulatory
agencies have no superior knowledge of the financial future, as
all of us know, because nobody does.
Accountability is a central concept to every part of the
government. To whom are financial regulatory agencies
accountable? Who is their boss?
The answer to both these questions is, of course, the
Congress.
All of these agencies of the government, populated by
unelected employees with their own ideologies, agendas, and
ambitions--and the CFPB is the best example of that--must be
accountable to the elected representatives of the people who
created them, can dissolve them, and have to govern them in the
meantime. All must be part of the separation of powers and the
system of checks and balances, and this includes the Federal
Reserve, as appears in the CHOICE Act.
As the president of the New York Federal Reserve Bank
testified on the 50th anniversary of the Fed, ``Obviously the
Congress which set us up has the authority and should review
our actions at any time they want to and in any way they want
to.'' And that seems to me entirely correct.
Under the CHOICE Act such reviews would happen at least
quarterly. The chairman mentioned in his opening statement that
people have seen their savings decimated. I would like to
suggest that for the Federal Reserve reviews with Congress, the
Congress should also require the Fed to produce a savers'
impact statement quantifying and discussing the effects of its
monetary policies on savers and saving.
The most classic and most important power of the
legislature is, of course, the power of the purse. The CHOICE
Act, accordingly, puts all the financial regulatory agencies
under the democratic discipline of congressional
appropriations. This notably would end the anti-constitutional
direct grab of public funds which was granted to the CFPB and
which was designed precisely to evade the democratic power of
the purse.
I believe the CHOICE Act is an excellent example of the
Congress asserting itself at last to clarify that regulatory
agencies are derivative bodies accountable to the Congress.
They cannot be sovereign fiefdoms--not even the dictatorship of
the CFPB and not even the money-printing activities of the
Federal Reserve.
Turning to banking, the best-known provision of the CHOICE
Act is to allow banks the very sensible choice of having
substantial equity capital--to be specific, a 10 percent or
more tangible leverage capital ratio--in exchange for the
reduction in onerous and intrusive regulation. Such regulation
becomes less and less justifiable and less and less sensible as
capital rises, and more capital for less intrusive regulation
is a rational and fundamental tradeoff.
It seems to me the 10 percent leverage capital ratio,
conservatively calculated, as proposed in the CHOICE Act, is a
fair and workable level.
As a final comment, the CHOICE Act makes positive changes
to the FSOC, but FSOC or anybody's forecasts of the unknown
financial future are hard to get right and are unreliable. So
higher capital is a better protection than another 10,000 pages
of regulations.
I hope the committee will promptly advance the CHOICE Act,
and thank you for the chance to be here.
[The prepared statement of Mr. Pollock can be found on page
137 of the appendix.]
Chairman Hensarling. Dr. Cook, you are now recognized for
your testimony.
STATEMENT OF LISA D. COOK, ASSOCIATE PROFESSOR, ECONOMICS AND
INTERNATIONAL RELATIONS, MICHIGAN STATE UNIVERSITY
Ms. Cook. Chairman Hensarling, Ranking Member Waters, and
members of the committee, thank you for the opportunity to
testify today about the Financial CHOICE Act of 2017.
In the winter of 2008, when I was teaching macroeconomics
at Michigan State University, I looked out my window one
evening and saw a line of students snaking around the corner
and down the street from the building across the way. It was
not a typical line of boisterous students waiting to purchase
something like football tickets. The mood was somber and no one
was talking.
I approached a colleague to ask what was happening. He said
it was a line for the food bank.
Students who lost their jobs and funding were going hungry.
No wonder the scene was so jarring. It was straight out of
Dorothea Lange's iconic photos of the Great Depression.
Many of these students had to drop out of MSU to support
their families. And this was happening in my lifetime, on my
campus, to my students and their families.
It was also happening to many students and families across
the country.
Recall that the recession began in December 2007. This is
the time when the auto industry was bleeding jobs. It lost 31
percent of its workforce between 2008 and 2009.
In Michigan the number of foreclosures nearly doubled
between 2008 and 2009, and that was after having quadrupled
between 2005 and 2008.
With one in seven jobs tied to the auto industry, the
country was more broadly losing more than 700,000 jobs per
month. Ultimately, the economy would shrink by 8.9 percent that
quarter--the last quarter of 2008.
Anyone witnessing this would have said ``never again'' to
the job losses, ``never again'' to the disruption in families
and communities, and ``never again'' to the irresponsible
lending and financial practices accompanying these undesirable
outcomes.
Among those irresponsible financial practices was that
banks were placing bets with public money. If they won, bank
profits would soar and bank managers and owners would be paid;
if they lost, American taxpayers would pay through deposit
insurance or direct government bailouts.
The banking system, the banking business model, and their
impact on people and the economy all required the examination.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
was one legislative response intended to reassure taxpayers and
to signal to regulators and financial institutions that this
would never happen again.
As a law constraining lending and therefore economic
growth, my calculations suggest that this is not the case. If
higher capital requirements constrain lending and, therefore,
economic growth, we should see a fall in both since the passage
of Dodd-Frank in 2010.
Instead, we see both increasing. According to the latest
data available, commercial and consumer loans grew between 0.5
percent and 12 percent annually since 2012. Household debt at
the end of 2016 stood at $12.6 trillion, which is only 0.8
percent shy of its $12.6 trillion peak in the third quarter of
2008. The economy has expanded 0.2 percent and 6.7 percent each
quarter since the first quarter of 2011.
Does the Federal Reserve require more oversight? No.
The kinds of provisions being proposed in the Financial
CHOICE Act resemble financial reforms implemented in many of
the emerging markets in developing countries I have advised or
researched to disastrous effect and would undermine the
credibility of the Federal Reserve.
This would be okay if we were a small island nation with no
financial transactions and no interaction with the outside
world. But we are the largest economy with extensive financial
ties to the rest of the world, and this would not be
appropriate for us.
In conclusion, this body should say ``never again'' to the
wild, bleak days of unfettered consumer and bank finance. It
should say ``never again'' to the losses in houses, firms,
communities, hope, and opportunity that the recent financial
and economic crisis brought. It should declare ``never again''
by engaging in thoughtful financial reform and rejecting many
provisions of the Financial CHOICE Act.
[The prepared statement of Dr. Cook can be found on page
109 of the appendix.]
Chairman Hensarling. Ms. Peirce, you are now recognized for
your testimony.
STATEMENT OF HESTER PEIRCE, DIRECTOR, FINANCIAL MARKETS WORKING
GROUP, AND SENIOR RESEARCH FELLOW, MERCATUS CENTER, GEORGE
MASON UNIVERSITY
Ms. Peirce. Chairman Hensarling, Ranking Member Waters, and
members of the committee, thank you for the opportunity to be
part of today's hearing.
As Dr. Cook's poignant description of the financial crisis
illustrates, what the financial system does and how it is
regulated really matters for the rest of the economy. And so it
makes sense periodically to look at the financial system and
look at how it is regulated and take another look to see
whether it is working as it should.
I think that improvements can be made and the CHOICE Act
offers a number of improvements that will make the financial
system work better for the rest of the economy. I will talk
about some of the improvements today.
First of all, good rules require good process. Without good
process and without accountability you don't get good rules.
The CHOICE Act makes a number of improvements to make sure
that rules that are imposed on our economy are done through
notice and comment rulemaking. It also takes an important step
of requiring that the financial regulators conduct economic
analysis.
This exercise is designed to ask, ``What problem are we
trying to solve,'' to look at different potential solutions to
solve those problems, and then to look at the costs and
benefits associated with each of those potential solutions; and
to build into a rulemaking metrics so that you can go back 5
years later and say, ``Is this working as we intended it to
work? Is it achieving the goals that we intended it to
achieve?''
And the Financial CHOICE Act also builds on the economic
analysis requirement by then requiring that Congress take a
look at rules when they are final and consider again whether
they want those rules to go into effect. The value of doing
this, especially with an economic analysis in hand that might
alert Congress to unintended consequences, is huge. This gives
an important measure of accountability.
Another important measure of accountability is the new
requirement that financial regulators be appropriated as other
agencies are. It is very important to have this level of
accountability.
Another important piece of the Financial CHOICE Act is the
attempt to shut off avenues for bailouts.
One such example is the elimination of Title VIII of Dodd-
Frank. Title VIII was the companion to Title VII, which deals
with over-the-counter derivatives. Title VII moved a lot of
over-the-counter derivatives into central clearinghouses, and
as the drafters of Dodd-Frank realized, doing this might just
create the next too-big-to-fail entity.
And so the solution to that concern was to create the
Federal Reserve as backstop for these clearinghouses. That
creates terrible incentives.
So eliminating the backstop will force regulators and
market participants to concentrate on risk management and to
also think about the important questions of recovery and
resolution. What happens when there is a problem at a
clearinghouse? There are some discussions of this issue
already, but taking away Title VIII would focus the mind on
these discussions further.
And then another important part of financial regulation,
which the CHOICE Act recognizes, is the need to allow the
capital markets to work. We need to allow investors and
companies to meet in the capital markets in ways that are
mutually beneficial, and the CHOICE Act opens up new avenues
for investors and companies to come together.
It also addresses another important problem, which is that
many companies don't go public anymore, which means that
investors can't participate in the growth unless they are
accredited. The CHOICE Act makes a change in this by allowing
more investors to qualify as accredited, but it also looks at
the problem of why companies aren't going public, and it seeks
to reduce some of the burdens associated with being public.
These burdens are not associated with a benefit to investors,
and so the CHOICE Act pulls them back.
The bottom line is that regulatory reform needs to work for
consumers, investors, and Main Street companies. That is the
objective of financial regulatory reform. And I believe the
CHOICE Act has many elements that further these objectives.
Thank you very much.
[The prepared statement of Ms. Peirce can be found on page
130 of the appendix.]
Chairman Hensarling. Mr. Allison, you are now recognized
for your testimony.
STATEMENT OF JOHN A. ALLISON, FORMER PRESIDENT AND CHIEF
EXECUTIVE OFFICER, CATO INSTITUTE
Mr. Allison. Thank you, and good morning. I appreciate
being asked to testify.
At the time of the most recent financial crisis I was the
longest-serving CEO of a major financial institution in the
United States: BB&T. My company went through the financial
crisis without a single quarterly loss. I had the unique
experience of being in a key decision-making position in a bank
during the last three financial crises: the early 1980s; the
early 1990s; and the most recent crisis.
Unfortunately, in my view government policy unquestionably
was the cause of the financial crisis. Two primary components
of the government action created the crisis.
First was housing policy, which Peter Wallison described
well. Second were errors by the Federal Reserve--two
categories: one, monetary policy; and two, regulatory policy.
In terms of monetary policy, in the early 2000s we were
having a minor correction that we needed. Unfortunately, in
response, the Federal Reserve created negative real interest
rates. You could borrow less than the rate of inflation which
was a huge incentive for people to borrow.
It created bubbles in housing, but it also created bubbles
in the commodities market, in the stock market, and in car
finance that led to the failure of the car industry. You can't
have all those bubbles without the Federal Reserve making
mistakes on monetary policy.
On regulatory policy the Fed incented risk-taking. You
could have half as much capital for a loan to a subprime lender
as you could for Exxon. Nothing could incent risk-taking more
than that.
In addition, the Federal Reserve and other regulatory
agencies did a terrible job handling this crisis in comparison
to the other two. They made two meta-mistakes.
First, they created a huge amount of ambiguity. In the past
they had strategies. This time was totally arbitrary.
They saved Bear Stearns, failed Lehman Brothers; they
failed Wachovia, they saved Citigroup. When Washington Mutual
failed they covered the uninsured depositors and they took it
out of the hide of the bond-holders instead of out of the FDIC
insurance fund. Markets can't deal with ambiguity.
Secondly--and this is huge and under-discussed--how they
handled the credit issue was big during this crisis. In the
past what they did was cause small banks that were in trouble
or big banks that were in trouble to fail. They let the bad
banks fail but they let healthy banks like BB&T keep doing
their lending.
This time they saved the unhealthy banks and forced the
healthy banks to stop making loans. It was bizarre.
What happened? BB&T was forced to put thousands of
borrowers out of business that we would not have put out of
business, that would be creating jobs today. But unfortunately,
tragically, they have continued with this pattern after the
correction.
It has particularly been destructive in what I call venture
capital small business lending, because they are obsessed with
mathematical modeling. In venture capital small business
lending, a lender makes a judgment of the individual's
character, not just the numbers.
That is what I started out doing in the banking business.
And fortunately, I helped a number of companies get started
that have created hundreds of thousands of jobs.
We can't make those kind of loans today.
That doesn't start out as a big loan because it doesn't get
to a big loan until the company gets big. So these loan growth
numbers are very distorted because what is happening--you can
study the numbers--is there has been a massive increase in
assets going to large companies and the government at the
expense of small companies and lower-income and moderate-income
consumers.
Dodd-Frank has caused consolidation in the industry--it has
deprived startups of capital; it has destroyed innovation; it
has led to less competition; deterred small business, low-
income, and average consumers; and slowed economic growth.
For those of you who are concerned about safety and
soundness, why would you believe regulators know how much risk
we ought to take? They just caused this last crisis.
In my career, regulators always overreact. They encourage
too much risk in good times, and too little risk in bad times,
which is what they are doing today. They don't have any magic
wand.
Markets do a much better job of risk management. I think it
is ironic that the regulators have actually increased systems
risk by trying to reduce risk at individual institutions. Some
banks should be failing. Businesses are failing all the time.
They are forcing everybody to take the same risk, which
increases systems risk.
Capital is a far better protector of risk. Highly
capitalized banks very seldom fail, primarily because it puts
some real skin in the game. You know, I had a lot of BB&T
stock. I cared how BB&T did.
When people put capital in the game, they care. And if you
allow institutions to have little capital, like Citigroup
basically had no capital when they effectively failed, they are
going to take a lot of risk.
I think it is ironic that the institution that caused the
biggest trouble, the Federal Reserve, has more power out of
this crisis. And I also think it is ironic that a lot of people
who are concerned about consumers are on the same side as Wall
Street banks.
Listen, the Wall Street banks love Dodd-Frank because they
have achieved regulatory capture. In my career they always
capture the regulators, and that is exactly what they have done
in this case.
Thank you for listening.
[The prepared statement of Mr. Allison can be found on page
90 of the appendix.]
Chairman Hensarling. Thank you, Mr. Allison.
And thank you all, members of the panel.
The Chair now yields himself--
Mr. Cleaver. Mr. Chairman?
Chairman Hensarling. --5 minutes for questions.
Mr. Cleaver. Mr. Chairman, a parliamentary--
Chairman Hensarling. Who seeks recognition?
For what purpose does the gentleman from Missouri seek
recognition?
Mr. Cleaver. A parliamentary--
Chairman Hensarling. The gentleman will state his inquiry.
Mr. Cleaver. Mr. Chairman, because a lot of people are
coming in and out trying to go to other committee hearings, I
am just--well, first of all, let me thank you for having the
hearing. We have had other major pieces of legislation, that
have gone through didn't go through regular order, so I
appreciate this.
But this is a huge piece of legislation, and I am just
hoping that we could have more than just one hearing--
Chairman Hensarling. If the gentleman would state his point
of order?
Mr. Cleaver. The point of order is--
Chairman Hensarling. Parliamentary inquiry.
Mr. Cleaver. Yes. I'm sorry. It was a parliamentary
inquiry.
And my inquiry is will there be additional hearings due to
the significant nature of this legislation and how huge the
bill is? We had--I can't remember--40-something, I think,
hearings on Dodd-Frank and--41--and I would hope that we could
have--we probably don't need 41, but I hope we can have more
than just this hearing.
Chairman Hensarling. I am not sure the gentleman has stated
a proper parliamentary inquiry. Nonetheless, by the chairman's
count, over the last 3 Congresses we have now had 145 different
hearings on the Dodd-Frank Act and aspects of the CHOICE Act.
Having been here during Dodd-Frank, I don't remember a
single hearing on the combined Dodd-Frank Act, but I assure the
gentleman from Missouri that we expect to have even further
hearings in this Congress to monitor all aspects of banking, of
financial capital, the Dodd-Frank Act, and the CHOICE Act.
So, yielding to--
Ms. Waters. Will the gentleman yield? Will the gentleman--
Chairman Hensarling. For what purpose does the ranking
member seek recognition?
Ms. Waters. To seek a clarification of whether the
gentleman asked about Dodd-Frank or the CHOICE Act. Are you
saying you have had 145 hearings on CHOICE? Are you combining
the two? What are you referring to?
Chairman Hensarling. Again, the gentlelady doesn't pose a
parliamentary inquiry. So if the gentlelady wishes to pose a
parliamentary inquiry, the Chair will entertain it.
Ms. Waters. Thank you very much, Mr. Chairman. I shall
continue with the gentleman's question about whether or not
there will be additional hearings based on the complexity of
the wrong choice act?
Chairman Hensarling. Okay. Well, again, by our count, we
have had a 145th hearing on the problems of the Dodd-Frank Act,
and I plan to have dozens more hearings on the negative impact
of Dodd-Frank on the American people and the economy, and the
Minority will certainly be noticed on these hearings.
The Chair now yields himself 5 minutes for questions.
Mr. Wallison, since the passage of the Dodd-Frank Act, the
big banks have become bigger and the small banks have become
fewer, as I think you well know. Something I am particularly
concerned about is a Federal Reserve report entitled, ``Bailout
Barometer,'' which indicates that since the financial crisis
and the passage of Dodd-Frank, a whopping 62 percent of total
liabilities of the financial system are now backstopped by the
Federal taxpayer, either implicitly or explicitly.
If I recall right, that is up about a third since the
crisis. I am thinking specifically of Title I and Title II, the
OLA and SIFI designation process of Dodd-Frank.
Has the designation of too-big-fail-to firms made the
economy more stable or less stable, in your opinion?
Mr. Wallison. In my view, it has made the economy less
stable. There are so many reasons why a firm that is declared
to be a SIFI is going to cause difficulties for our economy,
one of which, of course, is that it gives the impression that
the government has declared this firm to be too-big-to-fail,
which means that the firm will then be treated by the market as
though lending to that firm is without possible adverse
consequences, just like Fannie Mae and Freddie Mac, which were,
many of us said for many years, treated as backed by the
government even though formally they were not.
Because these firms are seen as too-big-to-fail, they will
be able to get credit for their activities without having to
take the kinds of steps that the market would normally require
them to take under market discipline to reduce their risks.
So simply designating firms as SIFIs does increase the
potential risk in the economy and in the financial system, and
that is one of the reasons why I oppose the designation
process. There are several others, but that is one.
Chairman Hensarling. Dr. Michel, under Title II of Dodd-
Frank, the orderly liquidation authority gives the FDIC new
broad, sweeping discretionary powers in bailing out financial
institutions. It is my understanding that under Dodd-Frank we
could look at another AIG-like bailout, where foreign banks
could receive 100 cents on the dollar. Is that your
understanding, and did you have any concerns on this regarding
the orderly liquidation authority?
Mr. Michel. That is my understanding. That is a big
concern.
I think from a broader perspective, if you want to end
bailouts you don't formalize a process where the government can
say, ``There is no other private alternative so the FDIC is
going to handle this.'' And somehow that is supposedly not a
government bailout, not government-funding.
It just doesn't make any sense if you want to end that
process, so I have major concerns with that.
Chairman Hensarling. Mr. Allison, you have the most banking
experience on this panel. You mentioned earlier that you were
speaking of the role that capital really played in financial
stability.
Basel III sets up a risk-weighted asset regime, versus the
simple leverage ratio of the CHOICE Act. In your decades of
experience as a banker and living through three different
financial panics, can you kind of contrast and compare the two
different models?
And I believe I have seen FDIC data that indicates that 98
percent of all banks at at least a 10 percent simple leverage
ratio survived the second-worst financial crisis in America's
history, which I suppose would suggest some level of financial
stability. But could you expound on your views here, please?
Mr. Allison. Yes, sir.
First, I think Basel can be gamed. Before the financial
crisis these banks were doing all the risk modeling, the banks
that got in trouble, and they gamed the system. And you could
easily game the system by how you use the mathematics, what
probabilities you put on certain kinds of losses.
Second, it is self-defeating because it puts more capital
in certain kind of assets, which means banks are getting more
of those assets which drives the risk up in the assets. And the
classic example is subprime lending. Banks were required to
have half as much capital in subprime loans so you had a lot of
subprime lending.
In Europe no capital was required for loans to Greece so
Greece got a lot of money.
So when you try to risk-weight the assets you defeat the
outcome. For example, up to a few months ago energy lending had
less capital and now it has more capital after the fact. The
regulators always figure it out after the fact.
Chairman Hensarling. My time has expired.
The Chair now yields to the ranking member for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman.
Mr. Pollock, in his statement, said that the community
banks and States need relief from suffocating regulatory
mandates. And I am concerned about whether or not Mr. Pollock
and others who talk about community banks are as concerned
about community banks as they are about the too-big-to-fail
banks.
Mr. Barr, let me ask you, the wrong choice act 2.0 would
eliminate restrictions on mergers, acquisitions, and
consolidations of banking organizations that choose the off-
ramp to regulation as long as the banking organization
maintains a quarterly leverage ratio of at least 10 percent.
Would this provision, in addition to the other de-
regulatory efforts under the wrong choice act 2.0, potentially
allow the largest banks to grow exponentially larger and even
more interconnected, which would leave the banking system open
to greater vulnerabilities that would trigger another financial
crisis?
Mr. Barr. Yes. I believe that provision will further
increase concentration at the very top of the financial sector.
It will permit the very largest firms to grow significantly
bigger. It may stifle competition both in the mid-sized market
and the smaller market, and I believe it will increase systemic
risk.
Ms. Waters. So this is not about protecting community
banks. This is about allowing the biggest banks in this country
to have that kind of off-ramp.
Ms. Cook, the wrong choice act 2.0 would provide a so-
called off-ramp for banks of all sizes, including the trillion-
dollar banks on Wall Street, to opt out of all enhanced
prudential standards under Dodd-Frank for stronger capital,
liquidity, and risk management, as well as Basel III capital
and liquidity requirements if they meet a 10 percent leverage
ratio requirement. Because regulators recently noticed that
they are working--regulators have already said that they are
working on simplifying capital requirements for community
banks.
Is it appropriate to roll back these important rules for
Wall Street at this time? What are we doing here?
Ms. Cook. I didn't quite hear the end of your question but
I think I got the gist of it.
Certainly giving the supervisors and the regulatory
authorities less power, having them collect less data, I think
would be detrimental to our financial system not just in the
United States but to avert the next global financial crisis.
Again, I was saying that the provisions of the CHOICE Act would
be appropriate if we were a small island nation that didn't
interact financially with other nations, but for the largest
financial system for the largest economy in the world this
would be inappropriate.
Ms. Waters. Mr. Barr, getting back again to this discussion
about community banks, we hear a lot about wanting to protect
community banks, wanting to get rid of the regulations that are
causing them so much pain. But we find they are doing quite
well. Their profits are up, et cetera, et cetera, et cetera.
Would it be reasonable to conclude that this is really
about the big banks in America and providing them the
opportunity to not have the oversight and regulation that we
have put together in Dodd-Frank reform that would avoid another
recession, almost depression, that we went through?
Mr. Barr. Yes, I completely agree with that. I think if the
issue were a focus on community banks we would be debating in
front of us a bill on community banking. But that is not the
bill we are debating.
We are debating a bill that takes on really all the post-
financial crisis reforms, that weakens oversight of the biggest
banks, it weakens oversight of the shadow banking system, it
makes it much more difficult for consumers to get their day in
court, it blocks consumer protection that helps families across
the country. So this is not a community banking bill that we
are discussing today.
Ms. Waters. And does this open up the door for more
acquisitions and reduces the big banking community to instead
of five or six banks maybe three in this country?
Mr. Barr. I wouldn't want to guess about the exact
structure, but it certainly eases restrictions at the very
largest firms to engage in merger and acquisition activity
irrespective of concerns about financial stability. And the
other measures that are undertaken in the bill suggest
significantly less oversight of those firms with respect to
stress testing and the process for resolution planning.
So I do think that the very largest firms are going to
benefit a great deal under this legislation.
Ms. Waters. You were around when we went through the
meltdown in 2008 and you know how scary it was. And we did not
know what to do. We ended up with this bailout. Should we go
through that again? Do we have to go through that again with--
Mr. Barr. Mr. Chairman, I see I am out of time. May I
respond?
Chairman Hensarling. Quickly.
Mr. Barr. I don't think we can afford to go through that
kind of crisis again, and the orderly liquidation authority and
the prudential measures put in place were designed to prevent
the kind of problems of bailouts in the future. I think it
would be a mistake to repeal them.
Ms. Waters. Thank you very much.
I yield back.
Chairman Hensarling. The gentlelady yields back.
The Chair now recognizes the gentleman from New Mexico, Mr.
Pearce, chairman of our Terrorism and Illicit Finance
Subcommittee, for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
And thanks to each one of you for your presentations today.
Mr. Allison, you appeared to be in the eye of the hurricane
while the hurricane was going on. I am going to refer a
question. There are two different narratives that always pop up
when we are in these kinds of hearings.
One is well-stated by Mr. Wallison, where he describes in
his text that the enactment in 1992 of the Affordable Housing
Goals caused the underwriting that Fannie and Freddie were
compelled to take those on. If that underwriting had not been
available then the implication is that banks would have stayed
in their lane, but since they could get rid of the loans then
the system just got out of control.
The other narrative is that the big banks were somehow evil
and then without any support at all just went out and did these
things on their own.
You were in the eye of the hurricane. Can you give a
perspective on how this actually developed--a brief
perspective, please?
Mr. Allison. Yes, sir.
There is no question that government policy caused it.
Freddie and Fannie were the giant providers of credit in the
marketplace; they dominated the market because they had
government implicit guarantees so they had the lowest cost of
capital.
BB&T had been a mortgage portfolio lender requiring a 20
percent downpayment. We were driven out of that business, as
were most other banks.
The regulators wanted banks, they wanted Wall Street, to do
subprime lending. But a lot of people who blame the banks were
the people who actually forced banks to do subprime lending
because we didn't want to do that, most of us, because we were
lending other people's monies and banks really shouldn't be
doing subprime lending.
Mr. Pearce. And then the big banks, seeing the opening,
said in order to get more of these loans in this area we will
give bonuses. But if the banks could not have gotten rid of
those loans then how many of the big banks would have had
incentives for--where they were going to eat the loan if they
couldn't resell them to a government-backed enterprise?
Mr. Allison. They wouldn't have.
Mr. Pearce. Yes. Okay. Thank you. I appreciate it.
Mr. Wallison, you say that Fannie and Freddie were--you
hint that they were compelled. Were they actually compelled
through legislation, or pressure, or how, that Fannie and
Freddie changed their underwriting standards? How did that
compulsion look and feel? Was it legislation?
Mr. Wallison. The Affordable Housing Goals was legislation.
The Department of Housing and Urban Development was given
authority to raise the goals. The original goals were 30
percent of all mortgages they bought in, in any year, had to be
made to people who were at or below median income where they
lived. HUD raised those goals to 56 percent.
Now, you can say Fannie and Freddie could have ignored
that, but they couldn't. These regulations from HUD were
binding on Fannie Mae and Freddie Mac, so they had to find
those mortgages.
Mr. Pearce. Okay, so--
Mr. Wallison. You can't find prime mortgages if more than
half of all mortgages you are allowed to buy are made to people
who are below median income.
Mr. Pearce. Okay, so of the two narratives, that the evil
institutions caused it and greed caused it, versus the
government regulators and congressional law, that is clear.
Now, we also hear, Mr. Allison, that the community banks
have exceptions. There are exceptions to the rule. Mr. Barr
said that in his testimony.
Why don't those exceptions work out? Because my bankers,
the community bankers in rural New Mexico with 4,000 and 5,000
people in a town, are livid about Dodd-Frank and livid about
the CFPB. Why aren't those exceptions in place? I know they are
written into the law, but how does that work out?
Mr. Allison. Community bankers are adamantly opposed to
Dodd-Frank, and I know many of them, and the reason is it is
nice to say the regulators can make an exception, but if you
are a regulator and you make an exception and your bank gets in
trouble, you will get blamed. So in fact, most of the Dodd-
Frank provisions are hurting community banks.
And you can raise the level and all that, but the community
banks are not going to really be exempt because the regulators
are just human beings. They don't want to get in trouble if
their bank gets in trouble, so they go and apply basically the
same rules to community banks they provide to big banks.
Mr. Pearce. One of the witnesses, and I forget which one,
talked about having firefighters put out fires, and it made me
think about the forest in New Mexico. The Forest Service
regulating the forest began to quit cutting trees. They stopped
cutting trees about 60 years ago or whenever.
And so typically trees in New Mexico are about 50 trees per
acre; now we have 5,000 stems per acre, and the fires break out
and they are catastrophic fires, and so the Forest Service now
says we need more firefighting money. What we needed is to stop
letting the trees grow to start with. And so it looks like a
very close parallel to what should have been done here.
I yield back, Mr. Chairman. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, ranking member of our Capital Markets Subcommittee.
Mrs. Maloney. Thank you.
I think it is important that we remember why we passed
Dodd-Frank in the first place. We did it because our country
experienced the worst financial crisis since the Great
Depression: 8 million people lost their jobs; 6 million people
lost their homes. The crisis destroyed over $5 trillion in
wealth for the middle class--their savings, their pensions,
they just evaporated. And overall, over $13 trillion in
household wealth in this country was lost.
But with better regulation and with the tools that we put
in place in Dodd-Frank, we can prevent this type of devastating
financial crisis from happening again. So it is important not
to go backwards, which the wrong choice act does.
So my first question is to Professor Barr.
One of the main ways this bill, in my opinion, goes
backwards is by repealing Dodd-Frank's orderly liquidation
authority. I find this provision deeply, deeply, deeply
troubling.
The creation of the resolution authority for large nonbank
financial companies like AIG and Lehman was one of the most
bipartisan ideas in Dodd-Frank. In fact, it was originally
proposed by the Republican-appointed Treasury Secretary, Hank
Paulson, and it was supported by the Republican-appointed Fed
Chair, Ben Bernanke, and the Republican-appointed FDIC Chair,
Sheila Bair.
It is important to remember that the FDIC has long had the
authority to resolve commercial banks outside of the bankruptcy
process. And all Dodd-Frank did was give the FDIC the authority
to do the same thing for large nonbank financial institutions.
This was very important because when many of the big
nonbank financial institutions were on the verge of collapse,
we had only two choices: chaotic, disorderly bankruptcy, like
Lehman, which went under; or a bailout, like AIG. Neither was a
good choice.
Dodd-Frank gave the regulators a third option: an orderly
wind-down that prevents a government bailout but does not harm
the overall broader markets.
But now the Majority has somehow convinced themselves that
this longstanding FDIC authority is some type of evil new
taxpayer bailout. In their minds, allowing the FDIC to take
away a failing financial firm, fire the management, wipe out
the firm's shareholders, impose losses on the firm's creditors,
and completely liquidate the firm, that, in the Majority's
mind, somehow constitutes a bailout.
So my question is, Professor Barr, is the orderly
liquidation authority in any way, shape, or form a bailout?
Mr. Barr. No, it is not. The orderly liquidation authority
actually is the opposite. It provides a realistic chance of
winding down a firm or a set of firms in a financial crisis to
avoid the kind of bailouts and also chaos we had in the fall of
2008.
And so if you look overall at the legislation we are
considering now, the Financial CHOICE Act, in my judgment,
would move toward bailouts, move us away from the system of
orderly liquidation that was put in place in Dodd-Frank. I
think that is quite dangerous both for taxpayers and to the
financial system.
Mrs. Maloney. I agree. So I want to ask you again, what
would happen if the Majority is successful in erasing the
orderly liquidation authority?
Mr. Barr. I think that it would make it more likely that in
the next financial crisis Congress and the President would be
faced with the same horrible choices they faced in 2008, and I
think it will mean that we will see more bailouts and more
chaos in financial markets. So it will be the worst of both
worlds.
We are going to get more taxpayer bailouts and more harm to
the economy, and that is why I think it would be a serious
mistake to repeal orderly liquidation.
Mrs. Maloney. And the living wills. If the orderly
liquidation authority is repealed, making a traditional
bankruptcy the only option for a failing financial institution
like AIG and Lehman, would that make living wills more
important--would it make them more important or less important?
Mr. Barr. I think it would make it even more important to
have a very robust resolution planning process with living
wills, with simplification of holding company structures, and
with the other sets of supervision undertaken.
Mrs. Maloney. So why in the world would the Majority want
to make bankruptcy the only option?
Chairman Hensarling. Brief answer.
Mr. Barr. I believe that it would be a serious mistake to
rely only on the bankruptcy courts. I think it should be an
option, but not the sole option for dealing with a failing
firm.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, chairman of our Financial Institutions
Subcommittee.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
I ask unanimous consent to enter into the record statements
from the Electronic Payments Coalition and the Independent
Community Bankers of America, and I have a statement, as well.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Luetkemeyer. And it is kind of interesting that the
Community Bankers--they represent 6,000 community banks--
support the CHOICE Act, which, if Professor Barr is really
interested in the big banks going through and supporting
something, they do not support the CHOICE Act, and I haven't
spoken to a single one that supports this. And you wonder why
they would want to give up their implicit guarantee from the
Federal Government. So I don't know where that statement came
from, but it defies the facts.
With that, Mr. Allison, you have testified with regards to
the capital ratio here a couple of times already this morning,
and I want to just follow up with regards to something that Mr.
Barr said again. He said that the CHOICE Act offers a simple
option to be exercised at the discretion of Wall Street firms
at a 10 percent leverage ratio, that it takes big firms like
Goldman Sachs and Wells Fargo, out of the heightened
supervision of the Fed.
If you actually look at what happens if they get to that
point, you are looking at $430 billion that is added to the
capital structure of these big banks. Do you think that is a
giveaway to Wall Street?
Mr. Allison. I do not.
Mr. Luetkemeyer. Do you think that this improved capital
leverage ratio would be detrimental to financial stability and
economic growth?
Mr. Allison. I think it would substantially reduce
financial risk far more than more regulations, and I think it
would be good for growth because banks would be more rational
when allocating capital to the most productive ends because
they would be lending more of their own money.
Mr. Luetkemeyer. Thank you.
Mr. Pollock, you also mentioned some things with regards to
this. It would seem to me that it would--any time you put the
private sector dollars on--or at risk versus the taxpayers'
dollars at risk, that would seem to me to be a preferential
situation than what the capital leverage ratio, this 10 percent
ratio, actually does because suddenly if the owners of the
institution have their own money at risk they are going to be a
little bit more, I would think, discretionary about how they
run that institution, versus if they know that the taxpayers
are going to bail them out regardless of what decision they
make it would, I would think, enhance risky behavior.
Can you comment on that?
Mr. Pollock. Congressman, I completely agree. I talked
about that as accountability, putting up more capital. There is
also the issue, as Mr. Allison said, of ``skin in the game'' in
your own business, being actually at risk in the business you
do. There are provisions in the act which give relief to the
small lenders who actually operate on a skin-in-the-game basis
in their mortgage lending, which I think is a very good idea.
Mr. Luetkemeyer. I know that Mr. Allison also made a
comment with regards to the community banks and regulations,
and on your testimony you also made that comment that it would
be very beneficial to help them be able to survive. I assume
that is what you think?
Mr. Pollock. I think that without question, intrusive and
extensive regulation falls disproportionately heavily on
smaller organizations. That is true every place, but it is also
true with banking. The bigger banks can create bureaucracies to
face off against the government bureaucracies; the smaller
banks are strangled by that same bureaucracy, and that is in
their own words, as you point out, Congressman.
Mr. Luetkemeyer. Mr. Michel, one of the things that Dodd-
Frank did was give the authority of the unfair, deceptive, and
abusive acts and practices situation to--authority, anyway--to
the CFPB. The key word there is ``abusive.'' Has anybody ever
defined what ``abusive'' is? Has the CFPB ever defined what
``abusive'' is?
Mr. Michel. No. And Director Cordray has actually said that
it would be a bad idea for them to define abusive practices and
said that we should just look at these things on a case-by-case
basis. So we know that they are not unfair, we know that they
are not undeceptive, but they are something else and we will
figure that out as it happens.
Mr. Luetkemeyer. Wow. That is like putting police in charge
and then saying, ``Well, they can decide what is a crime and
what is not a crime.'' Is that basically a good analogy?
Mr. Michel. Yes. That is hardly the rule of law, yes.
Mr. Luetkemeyer. I know we have a bill to do just that very
same thing. And in this CHOICE Act is something to basically do
that, as well.
Mr. Wallison, before I go away here, you make a couple of
comments with regards to the slow economy and part of it being
done as a result of Dodd-Frank. Former Fed Chair Alan Greenspan
last week made the comment that if we did away with Dodd-Frank
it would spur the economy. Would you like to just--a quick 10-
second comment on that?
Mr. Wallison. I didn't hear his comment, but I would say
that the problem is that Dodd-Frank has caused such a decline
in the number of small banks that it is very hard for small
businesses that rely on small banks to get the kind of
financing that would keep our economy going.
Mr. Luetkemeyer. Okay. Thank you.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Sherman.
Mr. Sherman. Mr. Chairman, I reiterate my plea that we vote
on these bills separately so that members of this committee
have a choice. There are 12 bills that the CHOICE Act has
swallowed up that have the support of half or more of the
Democrats and half or more of the Republicans of this
committee, and we ought to be moving those bills separately.
Of particular importance are the Preserving Access to
Manufactured Housing Act and the Mortgage Choice Act. These
bills will pass this committee overwhelmingly if we bring them
up separately.
We are told that it is the government's fault,
overregulation. But you cannot say that overregulation caused
the panic of 1814, the panic of 1819, the panic of 1837, the
panic of 1839, the panic of 1857, the panic of 1861, the panic
of 1873, the one of 1893, or October 2000--rather 1907. And
overregulation did not cause the Great Depression, nor did it
cause the 2008 Great Recession.
We are told that Fannie and Freddie were making loans that
the private sector, at least those not subject to HUD
regulations, would never make. But it was the credit rating
agencies that gave AA and AAA ratings to Alt-A loans that
Freddie and Fannie wouldn't touch, and to loans that did not
meet Fannie and Freddie's standards.
And, Mr. Chairman, your bill eliminates the last vestiges
of already unenforced Franken-Sherman to regulate the credit
rating agencies. As long as they have a high rating to bad
bonds, whether they are mortgage or otherwise, portfolio
managers almost have to buy them.
How does a portfolio manager say, ``Well, the guy across
the street is getting a 7 percent return on AA-rated bonds but
I prefer a 6 percent return because I don't trust the credit
rating agencies?'' How am I supposed to invest in Vanguard if
T. Rowe Price is giving me half a percent more and their bond
portfolio is AA-rated, just as the Vanguard one is?
The problem we have, the problem that this committee has
not fixed, is that the credit rating agency is the only game
where the umpire is elected and paid by one of the teams,
namely the issuer of the bonds. As long as that happens, you
can blame Fannie and Freddie for bonds they never touched that
got AA rated, that portfolio managers on pain of being fired
had to buy to match other portfolio managers, and we didn't do
anything about it.
Mr. Barr, this discussion of a 10 percent capital rate,
meaning basically no regulation--do you think it makes sense to
allow a business model in which you get a lot of capital or
money through FDIC-insured deposits and you are free, as long
as you have 10 percent capital, to buy Zimbabwe bonds, high-
risk bonds, super high-yield bonds? Would we be opening things
up to a business model of 10 percent capital and extreme high-
risk debt instruments?
Mr. Barr. I do think it is a mistake to rely on only one
form of capital rule. There is not any perfect capital rule.
The 10 percent leverage requirement has a positive
attribute for firms where it raises their equity position, but
it has lots of downsides as a sole tool, and one of those
downsides is that without a measure of the riskiness of assets
you are incentivizing the firm both to move items off the
balance sheet and also to engage in riskier lending activity,
and I think both of those are a problem. And it would also
remove the full set of heightened supervision that is enhancing
the safety of the firms.
Mr. Sherman. All right. Thank you.
And I want to focus on this issue of bailouts. I opposed
the first five drafts of Dodd-Frank because they provided
permanent unlimited bailout authority. We got rid of those
provisions. We do have orderly workout authority.
But, Mr. Chairman, we will have another bailout if we have
another 2008 as long as there is an institution big enough to
call the White House and say, ``We are going down and we are
taking the whole economy with us.'' You know. You were there.
You opposed it. I opposed it. But this Congress will pass a
bailout bill under those circumstances.
The way to deal with this is the Sanders-Sherman approach:
Break up every institution that is over 2 percent of GDP.
Otherwise it is just bandaids, trying to pretend we won't have
a bailout when we allow too-big-to-fail to exist.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Huizenga, chairman of our Capital Markets Subcommittee.
Mr. Huizenga. Thank you, Mr. Chairman.
And I would like to start by asking unanimous consent to
enter into the record a letter of support from Duff and Phelps,
one of the leading firms in mergers and acquisitions and
valuations, specifically on Section 822.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Huizenga. Thank you.
And I want to get to Ms. Peirce here on couple of things. I
was intrigued as you were talking about sort of the Title VII
and Title VIII, but we may need to revisit that at another
time.
What I liked is you used a phrase, I think, where we need
to have people meet in the marketplace, is I think the phrase
that you used, or something like that. And what we have seen
is, I believe, less access to the financial opportunities that
are out there that have occurred. And on March 22nd the Capital
Markets Subcommittee held a hearing where we had a witness
testify that 2016 was one of the slowest IPO years since 2008,
and I am curious if you could comment on that.
Ms. Peirce. Sure. I think it is a big problem that
companies--it is understandable that companies are waiting
longer to go public. It is very expensive to be public and so
many are choosing not to. And when you become public you
subject yourself to litigation risk, and many worry about that.
I think efforts that will lower the cost of being a public
company while still ensuring that investors are protected are
very important. There are a number of these included in the
bill--
Mr. Huizenga. Wait a minute. Do you think we can do both?
Ms. Peirce. I think it is possible to do both, and I
think--
Mr. Huizenga. Because if you listen to the rhetoric from
the other side it is one or the other.
Ms. Peirce. And I think that is what has led us to the
place we are in, which is we think of protecting investors in a
very specific way, which is just making sure that investors
never get harmed. But we never think about the opportunities
that we shut them out from participating in. So as a company is
growing we want to let investors be part of that growth.
Mr. Huizenga. And we are not talking necessarily accredited
investors. What happens after an IPO is our retirement funds,
us as individuals, no matter what your income or net worth is,
are able to go in and take advantage of an opportunity. Isn't
that right?
Ms. Peirce. Yes. That is why we really need to preserve--it
is fine for companies to raise money privately, but we really
need to preserve and protect our public markets, as well.
Mr. Huizenga. I am concerned that we are not doing that. We
have half the number of public companies that we did 20 years
ago, and we have only slightly more public companies than we
did in 1982 right now. And we have a number of folks who have
given testimony in front of this committee at different times
about income disparity, and I wholeheartedly agree that that is
a problem.
Having a less-than-robust--that may be the polite D.C. way
of putting it--economy out there I believe is part of that, and
it was not long ago, less than a month ago, that I asked Chair
Yellen about the effects and influences on regulation, on our
recovery and how shallow it has been, how long it has been, how
weak it has been. She literally--look it up on YouTube--
stammered and hemmed and hawed for about 3 or 4 seconds and
then said she disagreed with that.
We saw just this week former Chairman Greenspan came out
and precisely hit the nail on the head by saying we have gone
and had this over-regulatory burden, and I see Dr. Cook's
reaction is not exactly in favor of that. But this sort of this
rosy outlook of where the economy is can't be a straight-faced
analysis if you look at the income disparity. And it only seems
that when it is in defense of the past Administration that you
have people talking about what a great economy we have going
on.
In my last minute here I have the Securities and Exchange
Commission I believe is the police officer, the cop on the beat
that is out there making sure that investors are protected.
What we have them doing now under Dodd-Frank and under other so
many provisions, though, is we frankly have them being road
maintenance. They are filling in the potholes and checking the
streetlights when we have them going out and doing things like
figuring out rules for CEO pay ratio, rules for having conflict
minerals.
Can you explain to me how in the world that is advantageous
to protecting an investor when we are out there doing that,
when the SEC is required to protect investors; maintain
orderly, fair, and efficient markets; and facilitate capital
formation?
Ms. Peirce. Yes. I think with any requirement that you
place on public companies it not only places a requirement on
public companies but, as you point out, it requires the SEC to
engage in areas in which it doesn't have particular expertise
in, is very difficult. The pay ratio rule is one example of a
rule that is very difficult to implement in a way that will be
meaningful for investors.
Mr. Huizenga. And, Mr. Chairman, I think that shows it just
pulls their focus away from what they really need to be
concentrating on.
With that, I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New York, Mr.
Meeks.
Mr. Meeks. Thank you, Mr. Chairman.
And first I want to associate myself with some remarks from
the gentlewoman from New York, Carolyn Maloney, because I think
what she said was exactly right. Often, people forget where we
have come from and what took place in 2007 and 2008, the number
of jobs that were lost, how people were devastated, and why
that--and that it was, in fact, a Republican Administration
that then, on a transition, worked with a Democratic
Administration to try to help fix this problem, which is why we
came up with Dodd-Frank as opposed to doing nothing at all, so
that we can make sure that we protect our system.
In fact, if we are serious about doing this, that is a
matter in and of itself because that showed a Republican
Administration during a transition making recommendations to a
Democratic Administration also on how we can resolve some
issues to make sure that we don't get in this--in the worst
recession and get out of the worst recession since the Great
Depression.
And when we talk about the--in the Obama Administration the
economy, as my colleague just talked about, the reason why we
did talk about it is because we talked about where we have come
from. You just don't change things overnight, and it took hard
work to make sure that we got out of losing 700,000 jobs a
month to the place where we were at least gaining jobs again,
gaining 200,000 to 300,000 jobs a month.
Surely all of us would like it if the past Administration
would have said, ``We want to gain more jobs,'' and we would
need to do that over time. But yes, I would be rejoicing also
as I did as we started beginning to reverse the depths of the
recession that we were in.
Now, the other issue that I want to bring up quickly in the
time that I have left, Mr. Barr, is this world is
interconnected like never before. And I believe in your
testimony you talked about how the United States led
internationally in regards to Dodd-Frank so that we could make
sure that we have some uniformity, et cetera, and therefore
there were some agreements internationally.
So my question to you is, can you tell us whether or not
the wrong choice act would cause the U.S. to go back on its
word on international agreements and how that will affect us,
if you will?
Mr. Barr. You are absolutely right. The U.S. really led the
effort globally for financial reform really from the start--
beginning in the end of the Bush Administration and continuing
into the Obama Administration, shaped a global financial
structure that made sense for reducing risk in the system.
And I do believe that moving backwards, as the CHOICE Act
would do, on orderly liquidation, on designation of nonbank
firms in particular, would be a retreat from the global system
that has developed in the wake of the crisis to deal with this
problem.
Mr. Meeks. Let me just ask you this because we have folks
who are looking at this and screaming, et cetera: Just break
that down for me. Break it down in layman's terms so that the
average person who is listening--so if we get out of these
international agreements, what kind of impact would that have
on the average American citizen? That is who I am focused on,
what kind of impact would that have on them? Can you, so that
they could understand what you are talking about?
Mr. Barr. I think it exposes families to enormous risk of
financial abuse in the marketplace. It exposes them to the risk
and harm of another financial crisis that was, as Dr. Cook
suggested, so brutal for American families in terms of lost
incomes, lost jobs, even the ability to have enough food to
eat. So if you get these things wrong it can have a brutal
impact on how people try and live their daily lives every day.
Mr. Meeks. Let me go to Dr. Cook quickly because on that
same part, Dr. Cook, knowing that you have reviewed the CHOICE
Act, what parts of the CHOICE Act--and I know there are a lot
that you can choose from, et cetera, but maybe there are one or
two in the time that I have left that you might be able to
single out--what parts of the CHOICE Act will go directly to
the heart of hurting the average American citizen, the middle-
class and the low-income households?
What do you think will most be going directly to them?
Because that is who I am focused on. I don't care what party
you are from, the middle class of America, the low-income who
needs the most help. How would this hurt them?
Ms. Cook. I think all of the provisions that weaken the
CFPB and weaken the authority of the Federal Reserve to monitor
and have oversight and make sure that we don't have the Wild
West that we had before the financial crisis, I think this is
the most onerous part. We aren't even collecting the
information or not allowing--these provisions wouldn't allow
collecting the information we need critically to input into our
models or even know, understand what is happening in the
economy.
We need this information in a timely way, and I think
anything that undermines that authority is not a good thing.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Duffy, chairman of our Housing and Insurance Subcommittee.
Mr. Duffy. Thank you, Mr. Chairman.
I think this has been a fascinating debate today and I
appreciate the witnesses being here. But it is the conversation
that I am hearing some on the Democrat side say, ``Well, Dodd-
Frank is looking out for the little guy, and the previous
system we used to have was to the benefit of the big guy.'' And
maybe to quote Mr. Barr, he said the CHOICE Act now is going to
help the Wall Street titans.
I don't know if the panel can see this, but to your left
and to your right there are quotes that come up--and behind you
are quotes that come up--from Wall Street CEOs. Articles have
been written about the CHOICE Act and Dodd-Frank.
And I think it is interesting that the Wall Street titans,
Mr. Barr, are in opposition to the CHOICE Act and they are in
support of Dodd-Frank. And if I was also to talk to my
community bankers, my little credit unions that serve rural
Wisconsin, that like to have money from their community go to
bankers in their community to then make decisions that benefit
their community--those shops, those banks, those credit unions,
they are closing up or they are consolidating and the decisions
aren't made in that community anymore but they are made in
Chicago, or Minneapolis, or Milwaukee, or Green Bay, but no
longer in that community.
So I would look at Dodd-Frank and think: The big titans,
the big guys, they like it. The little guys, they are getting
crushed by Dodd-Frank, which is the exact opposite of what my
friends say was supposed to happen.
I would also argue the Democrats, my friends, say that the
bigger the bank, the riskier it is to the economy, the more
systemic the risk. Does anybody have an opinion whether big
banks have gotten bigger since Dodd-Frank or smaller during
Dodd-Frank?
Mr. Wallison, do you have an opinion on that?
Mr. Wallison. Well, the numbers speak for themselves. Yes,
the big banks are much bigger--
Mr. Duffy. Have gotten bigger.
Mr. Wallison. Much bigger, of course.
Mr. Duffy. Because they are more--do sometimes complex
rules and regulations help big guys, the big titans, and hurt
the little guys? Is that a philosophy that you believe in?
Mr. Wallison. Jamie Dimon, who is the chairman of JPMorgan
Chase, the biggest bank in the United States, called regulation
a moat, and he is correct about that, because it keeps
competition from challenging his bank.
Mr. Duffy. So Dodd-Frank protects him?
Mr. Wallison. It weakens the smaller institutions.
Mr. Duffy. Are you saying that Dodd-Frank actually protects
them from competition?
Mr. Wallison. Yes, it protects them from competition.
Mr. Duffy. Helping the big titans on Wall Street.
Mr. Wallison. Yes. It is easy to see, Congressman, because
they have all kinds of lawyers and compliance officials and so
forth to handle--
Mr. Duffy. Economies of scale.
Mr. Wallison. --regulation and spread it over a $2 trillion
bank, and the small banks do not, so they are harmed by Dodd-
Frank.
Mr. Duffy. I think one of the most interesting factors when
you look at the breakdown of where does the--where do the big
titans believe Mr. Barr on Dodd-Frank versus reform in the
CHOICE Act there is--look at the Presidential election. Where
did big banks and Wall Street give their money? Did they give
it to Hillary Clinton, who supported Dodd-Frank, or did they
give it to Donald Trump, who wanted to do away with Dodd-Frank?
They voted with their money, and they gave most of their
money, Mr. Wallison, to whom? Do you know?
Mr. Wallison. I think the statistics show that they gave
most of it their money by far to Hillary Clinton.
Mr. Duffy. To Hillary Clinton, yes. So this argument that
Dodd-Frank helps the little guy and hurts the big guy is
absolutely false. It is a great narrative, but it doesn't work.
You would think that when you have a financial crisis you
might actually wait for the Financial Crisis Inquiry
Commission, which I think you served on, Mr. Wallison, to come
out with its report before you decide, what do we do to fix
what caused the crisis, because we now know and now we are
going to legislate.
Dodd-Frank passed before the commission even came out with
its report. So now the opposition to the CHOICE Act is
astonishing to me.
I just want to--Mr. Wallison, I keep asking you questions
here, but was it your testimony that government policy created
the crisis in housing finance?
Mr. Wallison. That is exactly right, and it is almost
incontrovertible because if you look at the data you can see
very clearly that as the Department of Housing and Urban
Development required Fannie Mae and Freddie Mac to buy more and
more mortgages that were subprime mortgages, that spread to the
entire housing finance system. This weakened the system
substantially, and when the housing bubble--created by these
low underwriting standards--collapsed, we had the financial
crisis.
Mr. Duffy. One more quick question: So if government policy
helped created the crisis, is it fair to say that Dodd-Frank
doubled down on more government policy? Yes or no?
Mr. Wallison. That is what we are seeing.
Mr. Duffy. Absolutely.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Barr, I agree with you. There seems to be a case of
policymaking amnesia going around this room. I was here in 2008
as our Nation stood on the edge of financial calamity and ruin.
Try telling the victims of the Wells Fargo account scandal
that we need less financial oversight, not more. Try telling
hardworking families who were preyed upon with deceptive
mortgages or cascading overdraft fees that this bill is the
right choice for them.
My position is that this legislation before us is the wrong
choice for consumers, for small businesses, and our entire
community.
Mr. Barr, I am deeply concerned about the impact the CHOICE
Act will have on consumers in my district. According to a
report from the New York City Comptroller, since 2011 the CFPB
has helped more than 23,000 New Yorkers.
For example, in October 2016 a Brooklyn resident filed a
complaint against Navient with the CFPB regarding student loan
repayment. Because of the Bureau, Navient was compelled to
respond and the individual was granted relief. Further, using
its enforcement authority, the CFPB sued Navient partially on
the basis of complaints just like this to seek relief for other
impacted borrowers.
If the CHOICE Act is enacted it will make it harder for the
CFPB to work with a company to help resolve a specific issue
and severely restrict its ability to take enforcement actions
on a person's behalf. So, Mr. Barr, how will consumers like the
one I just mentioned continue to be protected in situations
like this?
Mr. Barr. I think that the CHOICE Act would bring us back
to a situation that we had before the financial crisis where
there were insufficient ways to protect American families. In
fact, in many ways it would make it worse than what we had
before.
I think the act would cripple the new Consumer Bureau and
there wouldn't really be anybody standing up for American
families on issues like the Wells Fargo scandal, or payday
lending, or other abuses in the marketplace. So I think it
would be quite a tragedy to see that happen.
Ms. Velazquez. Thank you.
Mr. Barr, the CHOICE Act repeals the Department of Labor's
fiduciary duty rule and makes it extremely difficult for the
SEC to ever move forward with its own conflict-of-interest
rule. Can you explain how these changes will continue to put
Americans at the mercy of unscrupulous financial advisors?
Mr. Barr. I think that if you are offering investment
advice you ought to have the same high standard of care of
fiduciary duty, where if you are offering individual investment
advice to a consumer the consumer can rely on the fact that you
are looking out solely for their best interest. That is what
the fiduciary duty rule would do, and repealing it would be a
horrible mistake.
Ms. Velazquez. Thank you.
Dr. Cook, the CHOICE Act repeals the Volcker Rule, Dodd-
Frank's ban on speculative trading and certain investments in
hedge funds and private equity funds at banking entities with
access to the Federal safety net. Doesn't this repeal expose
taxpayers to losses associated with banks' proprietary trading,
which amplifies the costs associated with the crisis?
Ms. Cook. That is exactly right. And as I was saying
earlier, with respect to the guarantee that is given any bank,
especially if it has depositors, if it is playing with public
money then certainly it gets all of the upside and doesn't feel
the pain on the downside. So certainly this repeal, I think,
would not be appropriate for American consumers.
Ms. Velazquez. Thank you.
Mr. Chairman, I yield back.
Chairman Hensarling. The gentlelady yields back.
The Chair now recognizes the gentlelady from Missouri, Mrs.
Wagner, chairwoman of our Oversight and Investigations
Subcommittee.
Mrs. Wagner. Thank you, Mr. Chairman.
And thank you all for appearing here today to discuss the
merits of the CHOICE Act and the ways that it will help bring
accountability to Washington while opening up the economy for
Main Street back home.
Something that I specifically want to discuss is the level
that the U.S. has outsourced its decision-making and
regulation-setting to the international level since the
financial crisis.
Mr. Pollock, you reference in your written testimony a
September 2014 letter from Mark Carney, Chairman of the FSB, to
then-Treasury Secretary Lew regarding whether Berkshire
Hathaway should be designated as systemically important. Now, I
understand that letter has been made classified by Treasury,
but I agree with you, sir, that your statement that the letter
should be made available to Congress as well as documents about
any possible agreements and decisions made at the FSB level.
Mr. Pollock, going forward should Congress demand the same
level of disclosures and transparency regarding these decisions
made at FSB as we would in the case of other international
economic and trade negotiations in which the U.S. engages?
Mr. Pollock. Congresswoman, I think that is a very
important provision in the CHOICE Act, just as you say, and
that the issue of whether American government agencies like the
Fed and the Treasury make deals in international settings,
which they then feel compelled to follow when they get back
into the American process, is a very important issue. We don't
want the International Financial Stability Board telling the
United States what to do, in my opinion. So I fully support the
transparency and reporting required in the CHOICE Act of the
financial regulators, and of course that includes the Fed and
the Treasury.
Mrs. Wagner. Besides the CHOICE Act and the provisions that
we have regarding that kind of transparency and accountability,
what can Congress do to prevent further outsourcing of U.S.
regulatory priorities in international bodies do you think?
Mr. Pollock. Congresswoman, I think in general the
accountability of regulatory bodies called for in the CHOICE
Act, where Congress carries out its duty as the elected
representatives of the people to oversee what the bureaucratic
agencies are doing, fits in with understanding what may be
going on internationally and guiding it.
Mrs. Wagner. Thank you very much. I couldn't agree more. It
is important that the best interests of the U.S. are being
represented at the international level with full
accountability, full transparency, and disclosure.
Moving on, last week the President signed an Executive
Order halting the FSOC's ability to designate nonbank SIFIs
while they review the designation process. Through the
Oversight and Investigations Subcommittee, which I Chair, we
have published a staff report and held a hearing that has shown
this process has been both arbitrary and inconsistent in the
past.
Mr. Pollock, could you please comment on the prudence of
last week's Executive Order?
Mr. Pollock. Congresswoman, I remember the hearing very
well, which you chaired, and at which I had the honor to speak.
I think what the staff study found is quite true, that the
FSOC's decisions were inconsistent, arbitrary, and capricious,
as the judge said. And it is because the decisions are
fundamentally political, judgmental decisions that they
shouldn't be delegated to a committee. FSOC is not even a
committee of agencies--although it would be under the CHOICE
Act--but a committee of individuals who happen to head
agencies.
So I think what the Executive Order said, and what the
CHOICE Act would provide here, and what your hearing showed,
are all correct.
Mrs. Wagner. Political and judgmental. Sir, should FSOC
even have authority to designate these firms? And how does the
CHOICE Act help curtail this power that seems to enshrine this
status of too-big-to-fail for certain firms?
Mr. Pollock. Congresswoman, I concur with the idea they
should not have such authority and that we would be better off
moving in the direction of the CHOICE Act where they would not
have it.
Mrs. Wagner. Mr. Wallison, should FSOC have this
designation authority for nonbank SIFIs?
Mr. Wallison. Certainly not. FSOC should not have that
authority. It has abused that authority so far and it will
continue to do so if it is left with that authority.
Unfortunately, they have been implementing in the United
States decisions of the Financial Stability Board in Europe.
Mrs. Wagner. Absolutely correct. Thank you very much for
your testimony.
I yield back.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Clay, ranking member of our Financial Institutions
Subcommittee.
Mr. Clay. Thank you, Mr. Chairman, and thank you for
conducting this hearing.
Let me thank all of the witnesses for being here.
We have heard a lot of bank-and-forth from my friends on
the other side as well as from the witnesses here, but let me
see if I can inject some of the facts before we move forward.
And I have a letter here from the CEO of an American bank,
a community bank, who said that, ``The lending and credit
markets are on a hot streak. Credit card lending is higher than
it has been in 6 years and just hit a record high of $996
billion at the end of last year.
``Auto loans peaked at over $1 trillion in the fourth
quarter of 2016, up from $634 million in the same quarter of
2010. Mortgage rates fell to 3.65 percent by the end of 2016,
down from 4.69 percent in 2010.
``The recession caused by 2008's financial collapse tore
apart these industries, left millions of Americans out of work,
and obliterated any and all trust in the country's largest
financial institutions. We are finally seeing true recovery and
growth again under the watchful eye of careful regulatory
oversight and in the wake of years of careful policymaking
designed to encourage recovery while preventing the country
from ever experiencing a crisis of that scale again.
``Yet, even as we watch this progress continue, some
Federal lawmakers insist that regulations formed in the wake of
the crisis are holding markets back--claims which fly in the
face of reality. These lawmakers are demanding a rollback of
the Dodd-Frank Reform Act despite the protections it offers to
both consumers and our national economy.
``The opponents of oversight and regulation insist the red
tape of Dodd-Frank's reforms are driving up mortgage and credit
costs for consumers even though the costs are consistently
hitting record lows.
``An American Banker piece published recently used the
figures above to dispel these falsehoods about the lending
industry, proving Dodd-Frank is not holding back opportunities
for consumers. In reality, interest rates on mortgages are at a
long-term low point; mortgages are being given more freely than
at any point since the crisis. Auto lending is already well
above pre-recession levels, and auto loan rates are lower than
they were in 2010.''
And then he goes on to say, ``It is difficult to argue with
the point that scrapping Dodd-Frank would make it easier for
banks to issue credit and loans. However, the protections
offered under this law are the only thing standing between
consumers and the predatory lending practices which fomented
the greatest economic crisis in 70 years.
``Dodd-Frank helps prevent any small handful of banking
institutions from holding the keys to the country's economy by
limiting investments by banks and forcing accountability to
Federal regulators. We are preventing the rebirth of too-big-
to-fail institutions.''
And this is from the CEO of Amalgamated Bank, which I would
like to submit and have it included in the record.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Clay. Thank you.
Mr. Barr, do you agree with the writer of this letter?
Mr. Barr. I don't know all the details in the letter
itself, but in the biggest-picture sense, yes. I think the
lending markets are quite healthy in the United States today,
and one of the reasons for that, in comparison to, say, Europe,
is that we took swift action in the wake of the crisis to
reform and build capital. And I think all of our panelists are
saying that more capital is good. We have differences beyond
that.
Mr. Clay. Thank you so much for your--
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr, chairman of our Monetary Policy and Trade Subcommittee.
Mr. Barr of Kentucky. Thank you, Mr. Chairman.
And thanks to all our witnesses for your testimony.
I would note that a number of our witnesses are either
lawyers or law professors, and I want to ask you a little bit
about Article 1 powers in the Constitution as it applies to the
Dodd-Frank law.
As you all well know, Article 1 Section 1 of the
Constitution provides that all legislative power shall be
vested in the Congress, and we know in law school that they
teach us in constitutional law that is known as the non-
delegation doctrine, which has been interpreted creatively by
the judiciary to allow for delegation to unelected,
unaccountable Executive Branch officials over time.
That practice has exploded under the Dodd-Frank law. And in
fact, most law is now written by unelected bureaucrats, as
opposed to elected representatives of the people here in
Congress.
My question to Mr. Pollock and Mr. Wallison: Does the
massive delegation of authority to Federal bureaucrats concern
you?
Mr. Wallison. I will go first.
Yes, quite a bit, actually. Take, for example, what the
FSOC is supposed to do. The FSOC is supposed to determine
whether a particular company at some time in the future, in a
time unknown--that could not possibly be known--could, if it
collapsed or had material financial distress, cause a financial
crisis. In other words, they are being asked to make a decision
about something that no one can possibly know.
So of course they struggled with all of this, and when they
finally designated MetLife, MetLife went to court and the
judge--a district judge here in the city--looked at it and
said, ``This is not possible. This is arbitrary and
capricious.''
That is the kind of decision that the Dodd-Frank Act has
given to the Executive Branch--and that, to me, is a delegation
of legislative authority. Congress should have made those
decisions.
Mr. Barr of Kentucky. And, Mr. Pollock, in answering that
question, why is it important that key policy judgments be made
by those who define legal rules and not by those who enforce
the rules?
Mr. Pollock. It is the most fundamental constitutional
idea, as you suggested in your comments, Congressman, that it
is the elected representatives of the people who make law. As I
said in my testimony, the regulatory agencies are derivative
bodies--derived from the Congress, responsible to the Congress.
I am delighted to see the CHOICE Act having the Congress step
up to carry out its governance responsibility of these
agencies.
Mr. Barr of Kentucky. Ms. Peirce, I appreciate your
testimony that good rules require good process. And in
reference to the structure of the CFPB under Dodd-Frank, and in
reference to the D.C. Circuit decision in PHH, can you tell us
a little bit about why the structure of the Bureau and
insulating that Bureau from political accountability, why that
is a bad idea and how that may produce anti-consumer policies?
And in answering that question could you respond to the
refrain we hear from the apologists of Dodd-Frank, the
defenders of Dodd-Frank, that, ``Oh, we need to insulate the
Bureau and the Director from political accountability; it needs
to be an independent agency.''
Ms. Peirce. Yes. The notion that independent of
accountability will produce better regulation is false. The PHH
case is actually a great example because the underlying facts
of that case are fairly stark, so even if you take away the
constitutional concerns and look at what was actually done in
the case, changing the law midstream, essentially, and applying
a retrospective penalty that increased dramatically when it got
to the Director's level shows the kind of due process concerns
that you can have.
So the idea that one man is going to be able to make
consumer decisions for all the consumers in the country is
troubling, especially when that person doesn't experience the
circumstances that a lot of people experience and doesn't have
the limited options that people have. And so from his
perspective he may not understand that constraining the options
even further is making life even more difficult for people.
Mr. Barr of Kentucky. Let me ask the question this way: Is
the public interest--is the interest of the consumers best
served by the people's representatives or by those who are
fundamentally unaccountable to the people?
Ms. Peirce. I think that is what you need to have. You need
to have appropriations and you need to have other powers so
that Congress can monitor what the agency is doing and bring in
the public interest.
Mr. Barr of Kentucky. Thank you for your testimony.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott.
Mr. Scott. Thank you very much. Mr. Chairman, I was an
original cosponsor of Dodd-Frank, and I remember that we had
exactly 41 hearings before the House passed its version of
Dodd-Frank. But today it seems to me, unless I can be
corrected, we have only a single hearing on this issue, and I
assume this is it.
I happen to believe that the American people deserve much
better than this. This CHOICE Act goes underneath all of the
elements of our complex, complicated financial system, and to
give it only one day, one hearing, is not fair to the American
people.
It doesn't take a historian to remember the amount of jobs
we lost. Sometimes we lost as much as 600, 700 jobs a month.
Retirement savings of American citizens, millions went down the
drain. And the amount of foreclosures was devastating.
And the thing that disturbs me is that this should be a
very definitive Republican and Democratic partnership working
together. And let me remind the committee and the people of
this Nation who might be listening, every major piece of public
policy that has been sent forth has had both Democrats and
Republicans working on it together.
Social Security started way back, but we had people working
on it together. Even our highway system, the interstate highway
system, by a Republican President, Dwight David Eisenhower, but
they were Democrats and Republicans working together.
I could go on to cite even the Civil Rights Act. It was
Democrats and Republicans. And need I say, if it weren't for
Everett Dirksen we would never have been able to pass some of
this legislation.
So I just wanted to set the stage on that because I don't
think there has been any Democrat on this side of the aisle who
has reached over to that side of the aisle and worked together.
And I want to appeal to the chairman that before we move this
bill out, to have some additional hearings, and I think the
American people certainly deserve that.
But I do have some very, very pressing concerns. One is the
capital requirements, Title I under this act, to bring about
this area of accountability and to simply base it upon certain
data that has been collected that might not be the case--the
off-ramp, audits deemed the Fed, which would handcuff the Fed.
So in my last minute, Dr. Cook and Mr. Barr, you all
touched upon this. Am I right about what I am saying?
Dr. Cook, and then Mr. Barr?
Ms. Cook. You are absolutely right about what you are
saying. There is a lot of forgetfulness about the effort that
went into fighting this financial crisis.
And I am not sure I understand from the conversation. There
is a lot of disparagement of economists and expertise and
people who have been working on these tools for a long time.
I guess I am the only macroeconomist here. Maybe I feel
under siege.
We work very hard. These people who are being described as
bureaucrats who are undemocratically making these decisions,
they are just Ph.D. economists who want to do a good job, who
think about the spirit of public service. So I think that they
would be interested in making sure that the system was safe and
sound and stayed that way.
Mr. Scott. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Florida, Mr.
Posey, for 5 minutes.
Mr. Posey. Thank you, Mr. Chairman.
Mr. Wallison, an important yet perhaps overlooked provision
of the CHOICE Act would limit donations made pursuant to
settlement agreements to which certain departments or agencies
are a party. Section 393 of the Financial CHOICE Act would
prohibit Federal financial regulators from using settlement
proceeds to make payments to third parties who are not harmed
by the wrongdoing that led to the settlement.
That seems like a no-brainer, and I think the vast majority
of American people believe that when the government enters into
these settlement agreements, those funds are reserved solely to
compensate the actual victims.
But as we learned from the previous Administration, that is
not always the case. Over $3 billion--``billion'' with a
``B''--in settlements has been pilfered from victims and sent
to special interest groups since 2014.
For example, the National Council of La Raza, the
controversial left-wing advocacy group, received $1 million in
grants under a mortgage lending settlement despite not being
harmed by the activity in question. Community development
groups and other political allies of the previous
Administration have also benefitted from these settlements,
receiving de facto Federal funding without the approval of
Congress.
Because enforcement agencies cannot unilaterally disperse
settlement proceeds to third parties, they have instead
directed the banks to donate funds to various groups as terms
of their settlement agreements. And even worse, the previous
Administration actually incentivized companies to donate to
unharmed third-party groups by doubling the credit such
donations would have toward paying down their settlement
obligations.
In these situations the consumers, the victims of the
alleged wrongdoing, end up losing because funds would have
otherwise gone to them.
Mr. Wallison, beyond the moral and ethical questions of
this practice, can you discuss the constitutionality of these
settlement slush funds and whether or not this practice
violates, at least in principle or spirit, the appropriations
power reserved for Congress and, therefore, the separation of
powers? And finally, do you believe this provision in the
CHOICE Act is an appropriate step toward correcting this
problem?
Mr. Wallison. Yes, Congressman, I do. I think this is
something that this committee should be quite concerned about.
There was an investigation by The Wall Street Journal last
year--a very thorough investigation--to find out what happened
to over $100 billion in settlements that the government had
made with the large financial institutions, and they found that
$45 billion of that went to the victims but they could not
determine and did not determine how it went to the victims,
because I suspect that there weren't lawyers from the Justice
Department standing on street corners taking applications. I
suspect that what happened is that most of this money went to
people who said they represented the victims and would make
sure that the victims were suitably reimbursed.
I think this is a serious problem because that money should
have belonged to the American people and should have been
appropriated by Congress. And I am quite unhappy with the way
that whole process was looked at by the previous
Administration.
Mr. Posey. Yes. I know I tried to get copies of some
consent decrees to try and follow the money and the Justice
Department refused to provide me the information. To this day I
am still unable to get it. I am glad The Wall Street Journal at
least could get some of it.
Dr. Michel, in keeping with the important check that the
power of the purse provides Congress, the CHOICE Act would
subject the CFPB to regular appropriations. As you know,
currently the CFPB requisitions money from the Federal Reserve
to fund its operations. Congress cannot review or direct how
the CFPB uses that money.
What inherent problems are there with allowing an agency to
avoid Congress' power of the purse? And conversely, what are
the benefits of ensuring agencies must justify their spending
to the people's representatives in Congress during the
appropriations process?
Mr. Michel. I think it is important to know that any and
all Federal agencies should be directly accountable to the
people through their elected representatives. So any process
that keeps them--or that puts anything in between that and that
slows that process down or makes that process more difficult is
bad.
The FTC is a good example historically of an agency that
was reined in by Congress through the appropriation process
when they were doing what they were not supposed to be doing,
and I could envision how that could happen again with something
like the CFPB, were it the case that those protections were in
place. And it is very important. It is the only mechanism that
the people have.
Mr. Posey. Thank you.
Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Lynch.
Mr. Lynch. Thank you very much, Mr. Chairman, and to the
ranking member, as well.
And thank you, to our witnesses, for your willingness to
help the committee with its work.
I have to admit, I am very concerned with this bill that we
are discussing today. I have to say that the Financial CHOICE
Act of 2017 is probably the worst bill that I have seen in my
time in Congress. And I am not new.
But it is a compendium of just bad, bad ideas. It is
actually breathtaking in the naked purpose of this bill, to
benefit the big banks in this country at the expense of the
American taxpayer.
I have to give you credit, Mr. Chairman and my colleagues
on the other side of the aisle. I have never seen so many bad
ideas jammed into one bill. This is really an accomplishment. I
am not sure you should be proud of it, but the bill is what it
is.
This essentially repeals Wall Street reform, okay? And I
was here when the market went in the toilet, and I am familiar
with the reasons why it did so. I am a Democrat who voted
against the bailout because there were folks in my district who
didn't even have a bank account and we had to give the people
who caused the problem billions and billions of dollars at
their expense.
And now we are going to go back and do the same thing
again. And we are just about out of the--there are some towns
in my district that haven't yet climbed out of the last
recession and we are paving the way to the next one. It is just
a very, very bad idea.
So this bill repeals the Volcker Rule, which stops banks
from gambling with taxpayer money and depositors' money. It
repeals the orderly liquidation authority, which was a
mechanism that we adopted to prevent future bailouts and which
would allow any mega financial company to fail in a way that
didn't damage the wider economy.
Mr. Barr, I appreciate you being here and your
thoughtfulness, as well as Dr. Cook.
Mr. Barr, as you know, Section 901 of this legislation
repeals the Volcker Rule. And there is a study that was
authored by the International Monetary Fund which disclosed
that 73 banks identified currently as systemically important by
the Basel Committee on Banking Supervision account for nearly
two-thirds of global assets, according to this study. These
institutions pose management challenges and are very, very
difficult to regulate, supervise, and resolve in an orderly
manner in the event of a failure.
And I ask you, what would the repeal of the Volcker Rule do
to the ability of regulators to manage the risks in the
financial system due to the proprietary trading, and sponsoring
hedge funds, and other risky activities? What would that do?
Mr. Barr. I think it would make it much harder to manage
those firms, harder to supervise them, and harder to resolve
them if they got into trouble. So I think these kind of
structural barriers that slow down the transmission of risk
from one institution to the other can be effective as long as
you are sure to regulate the shadow banking system and not say,
``Well, as long as it is going on over there we don't care
about it.''
So if you have a system that really regulates both banks
and shadow banks, I think those kinds of structural separations
can be quite useful, including the Volcker Rule.
Mr. Lynch. Thank you.
Dr. Cook, do you have any thoughts on that?
Ms. Cook. No more than what my colleague has said.
Mr. Lynch. Okay.
The same people who tried to kill the Consumer Financial
Protection Bureau want to put the funding necessary for that
agency subject to the appropriations process. So they have
already tried to kill it; now they want the ability to defund
it.
Any idea what the ramifications of that might be if that
were to come to pass, as this bill suggests, Mr. Barr?
Mr. Barr. I think it would be a mistake to put the CFPB
under appropriations. I think the system we have for the OCC
and the Fed and the FDIC insulating it from the appropriations
process is appropriate, and I think the CFPB should be treated
the same.
Mr. Lynch. Dr. Cook, do you have any feelings on that?
Ms. Cook. I just agree.
Mr. Lynch. Okay. Very good.
All right. I have 20 seconds left. I just want to say what
a horrible bill this actually is.
It is amazing. I hope that people are paying attention in
their home and they understand what is going on in this
committee. It affects every home and business in America today,
and you should pay attention to this stuff.
Thank you. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Royce, chairman of the House Foreign Affairs Committee.
Mr. Royce. Thank you, Mr. Chairman.
Mr. Allison and Dr. Michel, I just want to follow up on the
questioning from my colleague, Mr. Duffy. And my primary
concern, I will just explain here, has to do with the
regulatory weight that we have placed on community banks, on
smaller financial institutions, on the credit unions, and so
forth.
And simply due to economies of scale we have put them at a
significant disadvantage so that the smaller the institution,
the larger the disadvantage, which is a backwards equation. And
I think any of us who have talked to our local community banks
understand this.
And my question for you is, what is the real-life impact
thereby on a borrower seeking a loan? We were all onboard, of
course, with increased underwriting standards, no more low-doc
or no-doc loans. But it seems that we have moved closer to what
we would all consider a utility model here.
We are not letting bankers be bankers. We have moved to
sort of a utility model that puts increased regulatory burden
on local banks and credit unions--they are not the ones that
created the crisis--while at the same time taking away the one
advantage that they had over their competition because they
knew their own customers. So if they were going to be allowed
to be bankers they could work out the loans. Not when you have
this kind of regulatory environment.
So let me ask that question: How does the current
regulatory environment created by the current version of Dodd-
Frank affect constituents in Southern California who are
seeking a loan?
Mr. Allison. There is no question that it makes it more
difficult for banks to do their traditional what I call small
business venture capital lending, which was the core of their
business. That is where they--you look at the financial
information, but you judge an individual, the market, and the
idea.
The Federal Reserve has put intense pressure on
mathematical modeling, which a lot of these loans don't make
it, and a lot of loans that I made that have turned out very
successful wouldn't have happened.
In addition to the direct cost, I grew up in a small bank
and the CEO has to do a lot of this regulatory stuff himself.
And the CEO provides a disproportionate amount of the
intellectual talent in a small bank, and if he or she is
spending her time--their time doing regulation instead of out
in the community looking for opportunities to make the
community grow then you have a really serious misallocation of
resources, and you see that in a lot of small communities
today.
Mr. Royce. Or if you have performing assets.
Mr. Allison. Yes.
Mr. Royce. And the regulatory approach here says, ``Write
them off.''
Mr. Allison. Definitely. And it hurts the growth in those
communities. I think it is a big problem for small communities.
Mr. Royce. There is another aspect to this that I have
worried a lot about, and that is because of the economies of
scale they are going to be ripe for being bought by the larger
financial institutions. Wouldn't that over time--and I think
this was Mr. Waller's argument some years ago; I heard him lay
out this case that if we are worried about over-leverage, why
would we create a situation where the burden on the smaller
institutions is such that they are going to be bought out by
larger institutions who then will be in a position without the
competition to further over-leverage? And that is the kind of
over-leverage we were really worried about in the first place.
Let me ask you about that.
Mr. Allison. Yes, sir. I think that definitely happens.
And one of the ironies, we have made it so hard for banks
to start because ultimately what has been happening in the
community banking industry is some community banks are
getting--
Mr. Royce. So that is why we are not seeing any new banks
or credit unions.
Mr. Allison. They can't get started.
Mr. Royce. Yes, yes.
Well, a quick follow up. My colleague, Mr. Williams, has
introduced a bill that would encourage greater use of CFPB 1022
exemption authority. Do you believe that Director Cordray has
correctly interpreted the Bureau's authority and used it
appropriately to prevent over-burdening small community banks,
smaller credit unions?
Mr. Allison. No. In theory community banks are supposed to
be exempt, but in practice they are not, and that is just the
way regulators act. They are not going to exempt community
organizations.
Mr. Royce. I was going to ask Ms. Peirce, I was hoping you
could also put to rest the idea that the AIG was a failure only
of Federal regulation of the financial products unit. You have
researched the role AIG securities lending program and the
failure of State regulation on this front had, and maybe you
could opine on that for just a second?
Ms. Peirce. Yes. AIG was about much more than just
derivatives, which people like to portray it as. There was a
failure of the State insurance regulators, as well. And so the
solution in Dodd-Frank was not appropriately tailored for the
actual problem at AIG.
Mr. Royce. Thank you.
Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The gentleman from Minnesota, Mr. Ellison, is recognized
for 5 minutes.
Mr. Ellison. All right. Thank you, Mr. Chairman.
Thank you, to the ranking member.
Mr. Wallison, I have a question to you. On your role as a
member of the Financial Crisis Inquiry Commission you
continually claimed that Fannie Mae and Freddie Mac were
responsible for the financial crisis. My question to you is--I
would like to ask you about a July 13, 2011, report published
by the Committee on Oversight and Government Reform.
The report was entitled, ``An Examination of Attacks
Against the Financial Crisis Inquiry Commission,'' and I ask
unanimous consent to submit the report for the record.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Ellison. On page 11 of the report it says that you used
your position on the commission to promote a theory supported
by Representative Issa and put forth by Edward Pinto, a
resident fellow at the American Enterprise Institute, that was
ultimately rejected as flawed by every other member of the
commission--namely, that government housing policy was the
primary cause of the government's economic crisis. The report
also notes that your fellow Republican commissioners thought
you were really just a ``parrot for Pinto.''
I guess my question is, you are offering your testimony
here so that, I guess it could be believed, but how do you
react to your fellow members of the commission making the
observations that they made about your work?
Mr. Wallison. I don't want to really refer to my work, but
I can refer to the commission and I think my work will stand up
over time. You can also look at my book on the subject,
``Hidden in Plain Sight''--
Mr. Ellison. Okay. Thank you for your answer.
Mr. Wallison. --which--
Mr. Ellison. I think that is--
Mr. Wallison. Wait a minute. Wait a minute. I do think--
Mr. Ellison. No, it is my time, and you have sufficiently
answered. Thank you.
Mr. Wallison. Am I not entitled to answer what you just--
Mr. Ellison. You have answered.
Chairman Hensarling. The time belongs to the gentleman from
Minnesota.
Mr. Ellison. Thank you.
Also, Mr. Wallison, was your compensation at the time you
served on the commission or after your service tied in any way
to you magnifying the beliefs of Mr. Pinto?
Mr. Wallison. No.
Mr. Ellison. Okay.
Also, did you receive a warning from the General Counsel
that you violated the confidentiality requirements to serve on
the Financial Crisis Inquiry Commission?
Mr. Wallison. I received a statement by the members of the
commission that I had not observed the confidentiality
requirements of the commission at one point.
Mr. Ellison. Okay. And how do you respond to the
observation that you had confidentiality expectations that you
didn't meet?
Mr. Wallison. I don't think they were applicable to me.
Mr. Ellison. Okay.
Dr. Cook, could you talk about the--there has been a lot of
discussion around the role that Fannie and Freddie played in
the financial crisis of 2008. And as I look at the CHOICE Act--
or the wrong choice act--I couldn't find anything that
addresses Fannie and Freddie directly. Did you see anything?
Ms. Cook. I have seen something. Bostic and coauthors, in I
think it was 2012, had a paper--an extensive paper, so this is
Raphael Bostic, who is now the president of the Atlanta Fed,
but a colleague from the University of Southern California, who
looked into this in depth to see what the role was, and it
didn't--it said that it didn't have an outsized role in forcing
this financial crisis. So I think that I would agree with what
you are intimating by your question.
Mr. Ellison. Okay. But in the bill that is before us--and I
would encourage Mr. Barr to offer his views--I was looking
through the bill. I try to read all the bills. I didn't see any
provisions directly bearing on Fannie and Freddie.
If it is such an enormous problem and it caused so much
damage, you would think that it would focus on--the CHOICE
Act--the wrong choice act would focus on it, and yet I did not
see where the CHOICE Act addresses fixing the problems of
Fannie and Freddie.
Mr. Barr, would you like to comment on this?
Mr. Barr. I am not aware of any provision of the act that
takes on the question about the future of Fannie Mae and
Freddie Mac. There are--
Mr. Ellison. Well, wait a minute.
Mr. Barr. --things around the edges.
Mr. Ellison. It is a huge problem and it caused all the
catastrophe. Shouldn't they be the central focus of this
legislation?
Mr. Barr. I was surprised that it was not a central part of
any approach here.
Mr. Ellison. That is all the time I have and I want to
thank the entire panel, including you, Mr. Wallison.
Thank you very much.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Illinois, Mr.
Hultgren.
Mr. Hultgren. Thank you, Mr. Chairman. And I just want to
say thank you for all of your work, Mr. Chairman, in getting us
to this point.
And I want to thank everyone on the panel for being here,
as well.
Before I get into my questions, Mr. Wallison, I wanted to
see if you wanted a minute to respond to anything from the
previous question. I wanted to offer that first, if there is
anything that you want to respond; you weren't given much of a
chance to answer.
Mr. Wallison. I wasn't.
Unfortunately, the Financial Crisis Inquiry Commission was
a poorly run operation and all of us, the members, did not see
all the data that the staff of the commission had. We did not
get a copy of the report until--the final report, until 9 days
before it was supposed to be published.
After the commission ended I was able to go back and look
at some of the files that they had, and I found that much of
the material they had in their files and the material that they
ignored supported the position I had been taking all along,
which was that the financial crisis was caused by government
housing policy.
I have since written a paper that is available on the AEI
website, and anyone could have a look at that to see how the
commission distorted the facts in order to achieve something
that they wanted the--they wanted Congress to follow up.
Mr. Hultgren. Thanks.
I do want to direct my first question to Ms. Peirce, if I
may. I understand there is some consternation regarding Section
844 of the CHOICE Act. I would like to use this opportunity to
clear up some of those concerns.
One purpose of this provision is to update the resubmission
thresholds and holding requirements for shareholder proposals
to prevent only those proposals with very little or no support
from continuing as a nuisance every year after they have
already been denied by the vast majority of other shareholders.
For example, I can't believe investors need for Boeing to
adopt health care reform proposals, for Mondelez to report on
gender equality through the entire supply chain, for McDonald's
to educate the American public on the benefits of genetically
modified products, or for Archer Daniels Midland to adopt and
implement a comprehensive sustainable palm oil policy.
These social objectives, for which I agree there could be
some merit in addressing, have nothing to do with investor
protection or capital formation.
The resubmission thresholds in the CHOICE Act I think are
reasonable. They were actually proposed by SEC staff in 1997
under the leadership of a Democratic appointee, Arthur Levitt.
The Association for Corporate Secretaries testified in the
Capital Markets Subcommittee last year that, ``The so-called
failure rate under the 3-6-10 threshold of 1997 would compare
to current voting patterns under 5, 15, 25 percent.''
So all of that, am I missing something here? Is there--the
purpose of our securities law is for job creators to constantly
respond to proposals with almost no support? Shouldn't the SEC
be focused on capital formation and real investor protection,
not social issues? And furthermore, from an investor protection
standpoint, if people feel very strongly about these social
issues don't they have the choice to invest in other companies
that they feel are addressing these concerns?
Ms. Peirce. Yes. Shareholder proposals have become a big
consumer of resources, both of SEC staff and of company
resources. And ultimately shareholders pay the cost, and so
putting in--revisiting the resubmission thresholds is one way
to make sure that investors are not paying for companies to
respond to these each year.
Mr. Hultgren. Ms. Peirce, on page two of your written
testimony regarding administrative procedure you highlight some
of the reforms the CHOICE Act proposes for the SEC. In general,
can you discuss the importance of the rule of law for
accountability in the investigation and enforcement process of
this agency? Furthermore, wouldn't it be logical to also make
identical reforms to the CFTC?
Ms. Peirce. Yes. I think due process is not only valuable
for the target of an enforcement proceeding, but also for our
country as a whole to know that when an agency pursues an
individual for a violation that it is following all the proper
procedures and affording all the proper protections. And so I
think that some of the changes that the CHOICE Act makes do
this and could be extended to other agencies, as well.
Mr. Hultgren. Mr. Wallison, there has been some concern
about the lack of clarity between proprietary trading and
permitted activities such as market-making and hedging. How do
you draw the distinction between proprietary trading and
market-making and hedging, and what are the consequences of not
having the clear distinction between the banned proprietary
trading and permissible market-making? Have any of the
regulators addressed these concerns?
Mr. Wallison. The problem is that you cannot draw a line
effectively between proprietary trading and market-making. That
caused many years of dispute among the regulators who were
supposed to draft the appropriate regulation.
They finally put one out, but it still hasn't solved that
problem. The two look very much alike when you consider what
they are. And as a result, banks, in an excess of caution, have
stopped doing what they should do to make markets.
Mr. Hultgren. My time has expired. I yield back. Thank you,
Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Maryland, Mr.
Delaney, for 5 minutes.
Mr. Delaney. Thank you, Mr. Chairman.
My questions are for Mr. Wallison, but before I start I
want to comment on Mr. Allison's testimony, which I thought was
very thoughtful. I have long thought that in the rating of
banks the ``C'' in CAMELS and the ``M'' in CAMELS should be way
over-weighted relative to the other categories because capital
does solve many problems.
I am not sure I agree with your conclusions. I don't think
the reason we have had such tepid economic growth is because of
banking regulations.
Recognizing, however, that we should be doing things to
provide relief to community banks, and parts of FSOC I think
are overreaching, and there are clear things we should be doing
to this regulation to get more at the spirit of what you laid
out in your comments. But I thought they were very thoughtful.
And, Mr. Wallison, I think my question to you kind of ties
into my colleague from Minnesota's question, which is the
reason we are not fixing Dodd-Frank, which is what in my
judgment we should be doing, any time we do a transformative
piece of legislation, whether it be health care or financial
regulation, the Congress should sign up for 10 years of fixes,
right, because we shouldn't presume we got it right on the day
we drop the bill, and we haven't been able to do that with
Dodd-Frank.
And I think the CHOICE Act is also a step backwards in that
direction. I would much rather this committee be focused on
fixes to Dodd-Frank as opposed to repealing it.
But the repeal seems to be based on two premises: first,
that Dodd-Frank has caused us to have reduced economic growth
since it was put in inception. I don't buy that argument. I
think U.S. banks have generally done pretty well. They have
gained market share relative to their foreign competitors;
liquidity in U.S. markets is quite strong.
However, small community banks have clearly been, in my
opinion, hurt by the law and they are not providing credit at
the levels they could in the market. But if you look at the
percentage of the market small community banks have, and even
if you were to assume they were to be providing 50 percent more
credit, it wouldn't move the needle that much, in my judgment.
But the other premise is that somehow the government caused
the financial crisis and, therefore, if that is true then the
government shouldn't be responding to it. And that is where I
have issues with your testimony because you seem to believe
that the reason the financial crisis occurred was because of
the U.S. Government. And you said that in your testimony.
And so my question to you is, 19 of the 20 largest
financial institutions that existed in the United States right
before the financial crisis either failed or required a massive
injection of government capital--19 of 20. It is hard to trace
what actually caused the financial crisis, but it is clear that
one thing was a main contributor to it, and that is that the
market--the private market, whether it be the credit rating
agencies, risk managers in private financial institutions--and
the government, whether they be regulators or these quasi-
government institutions, Fannie and Freddie, had a view that
mortgage securities were as safe as U.S. Treasuries because
they were treated almost interchangeably on the balance sheets
of these financial institutions, which caused excess leverage
in the system.
How is that the fault of the U.S. Government?
Mr. Wallison. This is a very complicated question, but--
Mr. Delaney. No, it is a simple question: How did the
government somehow kind of put the private market in a trance
that mortgage securities were as safe as U.S. Treasuries? How
is the government responsible?
Because clearly the market thought that because they
leveraged them accordingly, they repackaged them accordingly,
and they treated them accordingly. How was that the
government's fault?
Mr. Wallison. The underwriting standards of Fannie and
Freddie were forced down by the Affordable Housing Goals. When
you reduce underwriting standards you cause a bubble to start
growing. Let me give you an example of that.
Mr. Delaney. So you think the private market doesn't have
any responsibility for determining whether underwriting
standards have been reduced and whether, in fact, mortgages are
riskier? You think that is the government's problem?
Mr. Wallison. Fannie and Freddie set the underwriting
standards for the housing finance market because they were by
far the largest buyers of mortgages. So if you wanted to
compete in that market you had to make the kinds of mortgages
that Fannie and Freddie wanted. That is why the underwriting
standards of the entire market declined.
Mr. Delaney. So it is the government's fault that market
participants engaged in irrational business practices for
competitive gains?
Mr. Wallison. It wasn't irrational because Fannie and
Freddie were buying these mortgages. They were happy to buy
them. And you could profit from making these mortgages and
selling them to Fannie and Freddie and also FHA--
Mr. Delaney. But a lot of mortgages were bought by things
other than Fannie and Freddie. They were bought by securitized
instruments.
Mr. Wallison. Yes, that is--
Mr. Delaney. At the peak of the financial crisis 18,000
securitizations had received a AAA rating. Only eight
corporations in the world had a AAA rating. So it took the
history of the world and all the corporations in the world and
eight of them made it to a AAA, yet 18,000 mortgage
securitizations had a AAA rating.
Mr. Wallison. Well, now you are talking about the rating
agencies. That is a whole other story. But the fact is that
the--they used a model--
Mr. Delaney. But you are assuming the government made the
rating agencies misunderstand--
Ms. Waters. Mr. Chairman, unanimous consent for the
gentleman to have 1 more minute?
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Florida, Mr.
Ross.
Mr. Ross. Thank you, Mr. Chairman. I thank you very much
for holding this important hearing.
I firmly believe that we must enact many of the important
reforms contained in the CHOICE Act. We need to unlock
financial growth and opportunity once again in this country.
I support the provisions of this bill that increase
accountability of both Washington and Wall Street. For example,
I support repealing the Department of Labor's flawed and
misguided fiduciary rule.
I support the provisions of this bill that would help
financial institutions, especially smaller institutions that
have had too many burdens placed on them over the years. I
support the provisions that require the restructuring and
accountability of the CFPB.
Yet, there is a provision of this bill that I must express
my concerns about, and that is the provision that would repeal
debit reform. I have heard directly from a broad spectrum of
the retail community in my district, and even from my manager
at Publix Supermarket in my hometown where I shop, about the
need to maintain debit reform.
Just last night I had the opportunity to sit down with an
old friend, Wogie Badcock, III, who is the executive vice
president of public affairs for Badcock Home Furniture and
More. Wogie is in the room today and he is here because of the
importance of this debit reform to his family furniture
business, which was started in 1904 by his grandfather.
The savings that they have realized from debit reform has
allowed them to hire more employees, open more new stores and
distribution centers, and even pass along some of the savings
to consumers, benefiting consumers. In fact, since the
enactment of debit reform Badcock Home Furnishing and More has
used those savings to open up more than 30 stores in the last 5
years across the Southeast. This is significant.
With that in mind, Mr. Chairman, I would like to take a
moment to enter the attached letters from the Food Marketing
Institute, the National Retail Federation, the Merchants
Payments Coalition, and a joint trade letter into the record
that represents 170 national, State, and local trade
associations and 900--
Chairman Hensarling. Without objection, it is so ordered.
Mr. Ross. Thank you, Mr. Chairman.
I now would like to move on.
For you, Mr. Wallison, I find it really interesting that
here we have on FSOC one member--a voting member who has
insurance expertise and yet is ignored, is so much ignored that
we create this idea that somehow or another in the nonbank
financial institutions, such as an insurance company, that they
are going to be the subject of a run on an insurance company
that is going to lead to the demise.
Would you not agree, then, that we should allow for the
best system that we have, which is our State system of
regulation, to continue to be that which not only protects our
consumers but also allows for solvency and capital requirements
to make sure the best products are available for our consumers
and not have FSOC being that faux umpire?
Mr. Wallison. The State system of insurance regulation has
been very successful over time. I don't see any reason we would
have to change that.
Mr. Ross. I agree. Well, go ahead.
Mr. Wallison. As I said earlier, I think the FSOC was
simply implementing the decisions of the Financial Stability
Board in Europe, which declared AIG, Prudential, and MetLife to
be GSIIs.
Mr. Ross. Yes.
Mr. Wallison. As a result, they simply put those into
effect--
Mr. Ross. They just rubber-stamped them.
Mr. Wallison. They were rubber-stamping what the FSB was--
Mr. Ross. Yes. And we know what the courts have said. And
that is good, and I think that is what is very good about this
bill is it does away with that.
But let me get back to something that my colleague from
Maryland, Mr. Delaney, was just talking about, and that is
rating agencies. When we look at too-big-to-fail, when we look
at organizations that are so large that they are going to be
subject to bailouts from the government, would not a rating
agency consider that in terms of them giving them their rating,
so much so that they would consider it to the detriment of one
that was too small and allowed to fail, that the bigger one,
the too-big-to-fail, would have an unfair competitive
advantage?
Mr. Wallison. Yes. That is exactly what happened with
Fannie Mae and Freddie Mac--
Mr. Ross. Exactly.
Mr. Wallison. --which were not supposed to be.
Mr. Ross. --mortgage-backed securities and they knew they
were backed by the Federal--full faith in the credit of the
Federal Government, so why not give them a AAA rating? Why not
give them what they want because the Federal Government stands
behind it?
And if that doesn't create a disincentive for a strong
economy, I don't know what does. It creates the moral hazard
that we are here today trying to correct with the CHOICE Act.
Mr. Wallison. You are completely right.
Mr. Ross. Thank you. You should tell my wife that sometime.
[laughter]
Mr. Allison, you mentioned earlier in your testimony--and I
appreciate your experience in the banking industry, I really
do, because I think you did something that was tremendous with
regard to the financial meltdown: You withstood it. You
withstood it strongly. You didn't have any damage because you
did it right.
You had capital requirements. You knew what to do.
But you also mention in your testimony that the regulatory
burden imposed by the Dodd-Frank Act has a negative impact on
lower-income Americans. Can you expand on this in 10 seconds?
Mr. Allison. To the degree that consumer banks are focused
on regulations instead of taking care of their customers--or
big banks are focused on regulations instead of their
customers--the customers get worse service and pay higher
prices. At the end of the day, all cost gets passed to the
customer.
Mr. Ross. Thank you.
My time is up.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green.
Mr. Green. Thank you, Mr. Chairman.
Friends, if you like kickbacks you will love the CHOICE Act
because it will allow hardworking Americans to go into a
lending institution to acquire a loan and receive an indication
that he or she has qualified for a loan at 8 percent when they
actually qualified for a loan at 5 percent.
Dodd-Frank ended what was called the yield spread premium,
which allowed hardworking people to qualify for loans at a
lower rate and be put in a loan at a higher rate, and the
person doing it suffered no consequences at all because it was
lawful. So if you like that kind of kickback scheme you will
love the wrong choice act.
It allowed people to find themselves in a circumstance
where they were paying more for a loan than they should have
been, there were more defaults than we should have had. It was
a bad circumstance that Dodd-Frank eliminated, the so-called
yield spread premium, but it really was just another kickback.
If you want to see a real setback then choose the CHOICE
Act because the CHOICE Act would allow investment bankers to
take your money that you have deposited in a bank, go out to
Wall Street and gamble with it, and if they make a profit they
get to keep it. They will call it proprietary trading. They
will get to keep that profit. And if they lose then the FDIC
bails out the bank.
It is a bad bill. It allows hardworking Americans to be
ripped off with impunity.
Ms. Cook, would you kindly give your explanation in terms
of how the so-called yield spread premium, the kickback, had an
impact on hardworking Americans?
Ms. Cook. One manifestation of that was when this was used
to put especially African-Americans and Hispanics into
mortgages that were actually lower--in lower-quality mortgages
than they deserved from their credit score and other
information that would have gone into a mortgage decision. So
this was absolutely rampant.
We are still finding more cases of that from this period,
but yes, it was used in a widespread way.
Mr. Green. And actually there is no way to really measure
how much damage it did. There is no way to adequately determine
the suffering. I see a person of the cloth here. You have no
way of knowing how much suffering took place because of this
so-called yield spread premium that the CHOICE Act will again
allow.
Mr. Barr, explain if you would for us as tersely as
possible how allowing investment bankers to take money that
hardworking Americans have deposited and use that money on Wall
Street, make a profit and keep it--would you explain, please?
Mr. Barr. The Volcker Rule is really designed to try and
separate out different kinds of risk in the financial system,
so prop trading, short-term trading contributed to some of the
problems that the largest firms had, and therefore, when they
failed the American people were the ones who ended up suffering
from that failure. So that reform, along with other structural
reforms, is designed to make it less likely that families will
get crushed.
Mr. Green. And less likely that deposits that hardworking
people place in banks will end up in the hands of an investment
banker on Wall Street with a gamble that may or may not
succeed, true?
Mr. Barr. I think that it is a bigger reform than that.
That is, it is designed to really push that risk all the way
outside the bank holding company to really try and separate out
the risk so families aren't crushed in the future if we have a
huge crisis.
Mr. Green. And that is what the Volcker Rule did with--
Mr. Barr. Correct.
Mr. Green. --Dodd-Frank. But that is being eliminated,
true?
Mr. Barr. Correct.
Mr. Green. Okay. Quickly, I remember how bad it was when we
were going through the crisis in 2008. It was such that banks
would not lend to each other. The banks refused to lend to each
other. We had to pass Dodd-Frank and we still need it.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman. Thank you so much
for hosting this very important hearing of one of many scores
of hearings we have had with multiple individuals who have come
to testify from the private sector as well as from the academic
world, those who have had vast experience.
And I thank each of you for joining us today.
Mr. Allison, I would make special note of my friend from
North Carolina, a graduate of North Carolina.
Mr. Allison. Thank you.
Mr. Pittenger. If I recall, you graduated with high honors
and the notoriety of the academic institution is only matched
by the prowess on the basketball field, so--
Mr. Allison. Well, I agree.
[laughter]
Mr. Pittenger. As well as your education at Duke.
But more important to me of that is 38 years that you have
had in the banking business right there at BB&T, and to serve
20 years as the CEO for that institution. And as I have watched
you from a close distance, from Charlotte, a major financial
center, those of us in Charlotte have the utmost respect for
you as the quintessential banker, one who really understood the
business, the one who understood the customer, one who valued
the importance of good banking.
I was a banker, served on a board of a community bank for
10 years, from the time we chartered until the time we sold the
bank. Like you, we were favored with a disciplined approach. We
knew our customer and we had very low losses.
You, of course, suffered through the 1980s and the 1990s
with great success. You went through this last decade without a
loss quarter. That is remarkable.
And so what you bring to the table, to me, really far
surpasses all the regulators, the bureaucrats, people, frankly,
I think who have good intentions, who come with the right
spirit of wanting to address a real problem. But we get down to
the bottom line. We get down to the real world of banking.
And for us it was knowing your customer. And you knew your
customer. I went in to see you on several occasions just to
talk and learn from you during that period of time.
But what I want to ask you today is, what is the impact of
what has happened as a result of Dodd-Frank on the broader
context. What has happened to that entrepreneur? What has
happened to that small business guy who is trying to get
started? What is the impact of that in terms of our economy in
the future?
Here we are tepidly moving along at 1.5 percent. This is
the only period of time since World War II that we never could
reach 3 percent. We have had an average of 3.5 percent for the
last 100 years in this country of economic growth, and we are
just barely moving along.
Look at the future, where we are with our country and where
that growth is going to come from, and what is impeding that
growth, and how this plays a role into that. Kindly speak to
that, if you would.
Mr. Allison. Well, unquestionably, healthy banking systems
lead to healthy economies. And community banking, even when it
is done in a larger organization, is what spurs entrepreneurial
activity, because we are basically small business venture
capital lenders.
And I saw this--to concretize it--that at BB&T our board,
once Dodd-Frank passed, we spent 9 or 10 hours a day on
regulation and none on running our business. The regulators
forced us to get rid of our community banking model. We were a
very decentralized organization, which is one reason we went
through the financial crisis without any losses. We had local
decision-making with people who understood the markets.
The regulators forced us to centralize our lending
authorities just like the banks that failed. So they absolutely
forced the model that hadn't worked because they were all
academics and they knew all about mathematics; they just never
made a loan, and they didn't understand what banks do, and even
larger banks that serve their communities.
And the irony is that a handful of Wall Street banks have
been the big winner.
Mr. Pittenger. While I have a few seconds left, give us a
forecast for the future. What is going to happen if we don't
fix this problem right now?
Mr. Allison. You are going to have a lot more consolidation
in the industry and basically community banking as a successful
business is not going to continue. But I keep hearing people
here say community banks are doing so well. Look at their low
stock prices--
Mr. Pittenger. What is going to be the impact on the
economy if we don't help this entrepreneur?
Mr. Allison. I think it is going to be stuck in slow
growth. I think if you don't have entrepreneurship you don't
have growth.
Mr. Pittenger. Thank you, sir.
My time is--
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Wisconsin, Ms.
Moore, ranking member of our Monetary Policy and Trade
Subcommittee.
Ms. Moore. Thank you so much, Mr. Chairman, and Ranking
Member Waters.
And I want to thank this distinguished panel.
I am the last Member on our side here so I apologize in
advance for having you suffer through some of the inquiries
along the same lines. But I do appreciate getting some
clarification on some things.
Mr. Wallison, you and I have talked before about your
perspectives and about your views on--your minority views with
regard to the financial crisis and its causes. One of the
comments that you have made, not only that the fault of this
was Freddie and Fannie and CRA, but then you double down today
to say that you had done research afterwards and found that
your book, which I will be happy to look at, bore all these
things out.
And you essentially blamed it on predatory borrowers. Now,
I don't know about other people in this room but I have only--I
am 66 as of last Tuesday and I have only bought 2 homes in my
entire life. And the only reason I have a second house is
because I was a State Senator and I didn't live in the district
and I had to move when I won the State Senate seat. I sold that
house to my daughter.
People don't go and sit down and buy a house every day. So
it is amazing to me that you don't think credit default swaps
or lax underwriting or CRA rating agencies are at fault, that
you think it was predatory borrowers.
But having said that, let me move on and just say that for
one thing I--Mr. Chairman, without objection, I would like to
enter into the record a letter from former Representative
Barney Frank, the former chairman of this committee, his letter
to his constituents on the economic crisis.
Chairman Hensarling. Without objection, it is so ordered.
Ms. Moore. Thank you.
One of the things that Barney Frank points out in his
letter is that from 1991 until 2006, when Democrats took over
the Majority, they were trying desperately to stop predatory
lending. And that is what we have found is that there is a lot
of predatory lending that was involved. It was not predatory
borrowers; it was predatory lending.
I also heard you say that Freddie and Fannie underwrote bad
loans. Freddie and Fannie do not underwrite loans. They were
scammed, as well.
Mr. Barr, let me ask you something. This CHOICE bill
proposes to repeal Title I of Dodd-Frank, which governs the
role of the clearinghouses. Can you talk to us about the
systemic risk that may be involved if we were to pass this bill
and to undo Title I, which deals with the clearinghouses?
Mr. Barr. The legislation would dismantle, basically, the
process for overseeing and designating financial market
utilities, including derivatives clearinghouses, payments and
settlement systems, basically the essential backbone of our
economy. So it would remove the ability to impose heightened
standards; it would remove the ability to provide liquidity in
events of distress. And I think that would be a horrible
mistake.
It is consistent with the mistake that is made in the other
part of the bill that repeals the authority to designate shadow
banking firms like Lehman Brothers and AIG--
Ms. Moore. And what--the impact. I have 1 minute left, so--
Mr. Barr. It will crush the economy.
Ms. Moore. It will be like when Henry Paulson showed up
that day and said, ``Give me $700 billion.'' I don't want to go
through that again.
All right. So Title I will be eliminated under this
legislation.
Also, if we don't have the Volcker Rule, this will allow
federally-backed funds to trade, and it would create some sort
of moral hazard. Do you agree with that, if we were to
eliminate the Volcker Rule?
There has been discussion of that earlier. Some
clarification about what is proprietary trading and what is
market-making. I agree we need to hone in on that distinction.
But do you think eliminating the Volcker Rule is a good idea?
Mr. Barr. I think that would be a mistake. I agree with you
that clarification of the lines, what is clearly in, what is
clearly out--gray areas might be handled with capital rules. So
I think there are ways of implementing the Volcker Rule more
efficiently, but I would not eliminate it by any stretch.
Ms. Moore. And by the way, 85 percent of all these
nonperforming loans were done by non-CRA and non-FDIC-insured
banks. Thank you.
Chairman Hensarling. The time of the gentlelady has
expired.
For what purpose does the ranking member seek recognition?
Ms. Waters. Mr. Chairman, I seek unanimous consent to enter
into the record 108 letters from groups opposing all or part of
the CHOICE Act.
Chairman Hensarling. Without objection, it is so ordered.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Rothfus, for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
I thank the panel for helping us today understand these
various issues.
My first questions are going to go to Mr. Wallison and Mr.
Pollock.
As you know, under Section 165 of the Dodd-Frank Act, firms
that are subject to the Fed's heightened prudential
supervisions or provisions are required to prepare and submit
resolution plans or living wills that demonstrate how they can
be resolved under the Bankruptcy Code without posing a risk to
U.S. financial stability.
Dodd-Frank authorizes the Fed and the FDIC to restrict the
business activities of a firm submitting a living will if the
firm cannot demonstrate that it can be resolved in a safe and
orderly manner under the Bankruptcy Code. If necessary, the Fed
and the FDIC, after consulting with the FSOC, may even order a
firm to divest assets or operations.
Mr. Wallison, your colleague, Paul Kupiec, has pointed out
that the living will process outlined in Section 165 of the
Dodd-Frank Act is a recipe for government command and control
of private enterprise. He writes, ``Living wills are a gateway
for regulators to change the company itself. If companies'
living wills are not to regulators' liking, regulators can
require the institutions to restructure, raise capital, reduce
leverage, divest, or downsize. Thus, rejecting a living will
gives regulators an opening to restructure the companies
themselves.
``This type of regulatory discretion is not uncommon in the
world, but it is usually found in banana republics and
countries where the government runs the banking system. Such
unconstrained authority opens up all sorts of avenues for
partiality and government intrusion into a financial
institution's operations.''
Mr. Wallison, do you share Mr. Kupiec's concern that the
vast discretion granted to Federal regulators under Dodd-
Frank's living will regime is essentially a license for those
regulators to decide the proper size, scale, and business model
of private sector enterprises?
Mr. Wallison. Yes. It seems pretty clear that the
legislation allows the regulators to permit or to stop certain
kinds of activities by companies that would otherwise be
helpful to the market and perfectly legal. So yes, this is a
major impairment of the freedom of companies to try to develop
markets and serve those markets.
Mr. Rothfus. Is this setup consistent with your view of how
our free-market economy should operate?
Mr. Wallison. It is completely inconsistent with how the
market should operate, and that is one of the reasons why I
oppose it.
Mr. Rothfus. Mr. Pollock, do you agree with Mr. Wallison's
assessment? If so, will the Financial CHOICE Act provide
benefits to firms and the market?
Mr. Pollock. Yes, I do agree with him and with Mr. Kupiec.
A theme of the Dodd-Frank Act is granting wide, unfettered
discretion to regulatory agencies outside of notice and comment
rulemaking to impose judgment and subjective views. The living
wills are a great example of that. The stress tests, if I may
say so, are another example where you can regulate through
regulatory proceeding without rules and without laws.
Mr. Rothfus. Mr. Pollock, previously Senator Phil Gramm
testified before this committee that the Fed and the FDIC have
almost total discretion in deciding whether a plan is
acceptable. Are you aware of any other industry in the Nation
that is subject to such requirements and micromanagement by the
Federal Government?
Mr. Pollock. I am not.
Mr. Rothfus. I am glad my colleague from Wisconsin
mentioned the former chairman, Mr. Frank.
Mr. Wallison, do you recall a time in maybe 2003 when
Barney Frank said he wanted to roll the dice on the housing
market?
Mr. Wallison. Yes, I do very well.
Mr. Rothfus. Do you know if he was ever held accountable?
Did anything in Dodd-Frank ever hold him accountable or anybody
who wanted to roll the dice in the housing market?
Mr. Wallison. No, I am afraid that was not done.
Mr. Rothfus. Okay.
Dr. Michel, I was at a Women in Business lunch last week in
Pittsburgh where most of the attendees were small-business
owners, executives, and entrepreneurs. Much of the discussion
centered on the difficulties that many women face in pursuing
their goals, and we had a great discussion about regulations in
Washington.
At one point one of the attendees stood up and suggested
that regulations were not a problem and challenged those in
attendance to identify specific regulations that hurt their
business. Immediately--immediately--a woman jumped on that
opportunity and she said there--she was an executive with a
community bank in the area. She told us that regulatory burdens
for her firm were over the top in every respect.
Thanks to the CFPB and its mortgage disclosure rules it now
took her customers twice as long to close on a home--6 weeks to
12 weeks. Disclosure documents had also nearly tripled in
length, leading to increased cost and customer confusion.
How do the reforms in the Financial CHOICE Act provide
consumers relative to the CFPB with the protections they
deserve while supporting the growth of a vibrant financial
sector?
Chairman Hensarling. Very brief answer, please.
Mr. Michel. Okay. Well, very brief, I--
Chairman Hensarling. If a brief answer is not possible--
Mr. Michel. No, I--
Mr. Rothfus. We will follow up--
Mr. Michel. I'm sorry, yes.
Mr. Rothfus. We will follow up.
Mr. Michel. Thank you.
Chairman Hensarling. The Chair wishes to advise all members
and our panel that we expect Floor votes somewhere in the next
15 minutes. Shortly thereafter we will recess. I believe two
votes will be pending on the Floor at that time so we will
recess for approximately 30 to 40 minutes, at which time our
panel can take a needed break.
The Chair now recognizes the gentleman from Washington, Mr.
Heck, for 5 minutes.
Mr. Heck. Thank you, Mr. Chairman, very much.
So from where I sit I thought that the Great Recession, the
global financial crisis, was the worst financial crash or panic
certainly of my lifetime, not having lived through the Great
Depression. It obviously came, I think we would all
acknowledge, as a surprise to a lot of bankers and regulators.
And as a consequence, it caused a lot of people to do some
serious introspection and reevaluation of their thinking, most
notably including in 2008 the former Chair of the Federal
Reserve, Alan Greenspan, who testified before the House and
made the following statement: ``I made a mistake. I made a
mistake in presuming that the self-interest of organizations,
specifically banks and others, were such that they were best
capable of protecting their own shareholders and their equity
in their firms.''
More recently than 2008 he said, ``I have come around to
the view that there is something more systematic about the way
people behave irrationally, especially during periods of
extreme economic distress, than I had previously
contemplated.''
Those are obviously big statements and big changes from the
vantage point of Chairman Greenspan, who had previously
believed, as we all know, that regulators should absolutely
defer to markets, which were made up, he thought at the time,
of rational, self-interested actors.
So I have read all your testimony today and, frankly, I
wish there was more discussion of the lessons learned from the
financial crisis and the Great Recession, because I think it is
really important that we not go through that again, not have
all that net worth wiped out, not have all that unemployment
created.
So I am going to ask each of you, beginning with Mr.
Allison, very, very briefly, if I may, to follow the model of
Chairman Greenspan very succinctly and tell me what you learned
from the financial crisis that conflicted with your earlier
beliefs.
Mr. Allison. I learned that government policy, even well-
intended, can be incredibly destructive. Affordable housing,
which was really subprime lending, had very positive thoughts
behind it and it was incredibly destructive and driven by
government policy, including by Alan Greenspan, by the way.
Mr. Heck. Thank you, Mr. Allison. Banks played no role in
lending money to people who shouldn't have been--
Mr. Allison. Banks made mistakes too.
Mr. Heck. They are not government. The banks weren't
government. They loaned money to people that they shouldn't
have.
Mr. Allison. They were regulated.
Mr. Heck. I call it the fog-of-mirror test.
Mr. Allison. They were regulated.
Mr. Heck. Ms. Peirce?
Ms. Peirce. I learned that when you put institutions into a
system where a lot of their decisions are being driven by
regulation they often behave differently than you would expect
a self-interested institution to behave.
Mr. Heck. ``They made me do it.''
Dr. Cook?
Ms. Cook. I believe that the monetary authorities should
have as much flexibility and as many tools as they can to fight
the next financial crisis, and they don't need to be
micromanaged.
Mr. Heck. Mr. Pollock?
Mr. Pollock. Having for decades studied financial cycles,
Congressman, I learned that this cycle was like the others--
severe, but there have been other severe cycles. And I agree
that mistakes are key. Mr. Greenspan made an incredible mistake
in deciding to set off a housing boom in the early 2000s. That
is part of the government's responsibility.
Mr. Heck. And the private sector played no role in it.
I am always amazed--I have to interrupt and say I am always
amazed that there are ideological points of view that seek to
attribute and allocate 100 percent of the culpability to the
three parties to this. It amazes me.
Did the government not catch this, not intervene? Yes.
Did the private sector, in the form of the banks, loan
money to people that they should not have? Yes.
Did people seek loans that they could not support? Yes.
There is plenty of blame to go around, and I just have to
say that when we refuse to acknowledge that there is lots of
culpability to go around here, it frankly impedes our progress
in preventing it again.
Mr. Barr?
Mr. Barr. I agree with the last statement you just made.
What I was going to say is that I think all the gatekeepers and
safeguards in the system broke.
So all of our private sector safeguards broke down: the
capital provision broke down; lawyers didn't do their jobs;
credit rating agencies didn't do their jobs; supervisors didn't
do their jobs; bankers didn't do their jobs; and borrowers
didn't do their jobs. We had just a disastrous consequence when
all of that broke down.
Mr. Heck. Thank you.
I don't have enough time left for the two of you, and I
apologize.
But I am going to ask one quick question, ask you to raise
your hands. Raise your hand if you think that the problem of
the last 10 years is too much investigation of financial crimes
and abuses? Who thinks there is too much investigation of
financial crimes and abuses?
[No hands were raised.]
Thank you, Mr. Chairman. I yield back the balance of my
time.
Mr. Rothfus [presiding]. The gentleman's time has expired.
The Chair recognizes the gentleman from Colorado, Mr.
Tipton, for 5 minutes.
Mr. Tipton. Thank you, Mr. Chairman.
And I thank the panel for taking the time to be here.
Mr. Allison, listening to you, I thought it was really
interesting--you were talking about CEOs of banks now being
compliance officers, not being able to actually do the business
that they want to be able to do to be able to loan to the
communities. And you are in North Carolina, is that correct?
Mr. Allison. Yes, sir.
Mr. Tipton. I have a couple of comments out of Colorado,
small community banks out of Colorado. One stated to me, ``We
have shut down the majority of our mortgage group from 15 to 4
people because the business model no longer made sense. People
lost jobs because the cost of the regulatory burden was too
much.''
Another gentleman, a banker in Durango, Colorado, stated,
``We want to be able to have the ability to be flexible with
products in dealing with customers, but because of Dodd-Frank
it is not, `How can we help the customer;' it is now a matter
of, `How can we not get in trouble with compliance?'''
In terms of dealing with our small community banks, do you
think it would be important for us to be able to actually
tailor rules and regulations to be able to meet those needs of
the small community banks rather than the one-size-fits-all
mentality of Dodd-Frank?
Mr. Allison. I absolutely do, and I think you have to take
away the structure that is there or the community banks are
going to get stuck with the big bank regulations.
Mr. Tipton. When we are going down that road of actually
sculpting it we had had Chair Yellen, and she kept talking
about the trickle-down effect. So there seems to be unanimous
opinion that our small community banks are really being bound
by Dodd-Frank's action.
Under Section 546 of the CHOICE Act, it includes my bill,
the TAILOR Act, and this legislation would require that
financial regulators examine the unintended effect of
unnecessarily burdensome compliance requirements. Do you
believe that this would achieve a more balanced approach to
right-size regulatory framework?
Mr. Allison. I think it would be very helpful.
Mr. Tipton. Good.
Mr. Pollock, I thought it was interesting listening to some
of the comments that we have had in regards to the impact of
regulators in terms of policy that is going through. Is there
anything that was required in Dodd-Frank when it came to
actually doing a cost-benefit analysis, in terms of how rules
and regulations were put into place and how it would impact?
Mr. Pollock. I don't believe so, Congressman, and it is
certainly not a theme of Dodd-Frank, but it is a theme of the
CHOICE Act, I think a very good one. It is fundamentally
important that things be looked at in terms of benefits and
costs. Even if there is quite a bit of uncertainty, confronting
the uncertainty is extremely important.
Mr. Tipton. Right. We often hear from some of our friends
that really being able to have a cost-benefit analysis is just
a tactic to be able to put the brakes on regulators. Do you see
it that way?
Mr. Pollock. I see it as a logical requirement for rational
action, Congressman.
Mr. Tipton. Mr. Wallison, do you have any comments on that?
Mr. Wallison. No. I think that is exactly--I agree
completely, as usual, with Mr. Pollock's position on these
things.
Mr. Tipton. Okay.
Mr. Pollock, then, I will go to you again. In the absence
of an explicit statutory requirement, having financial
regulators conduct an economic analysis and a retrospective
review of their regulations, would that be an important thing
to do?
Mr. Pollock. I think it is a great idea, which is in the
CHOICE Act, Congressman. We all ought to be doing that. We were
talking a minute ago about reviewing our mistakes, and we
should review our past actions for what was right and what was
wrong. And if it was wrong that gives us a chance to fix it.
Mr. Tipton. All right.
And just to go back to you, Mr. Allison, a little bit more
on the community banks, listening to some of the questions from
our Democratic colleagues, regulatorily were banks put in a
position if they did not make a loan they were going to be in
violation and if they did not make the loan they were going to
be in violation? Did you find experiences like that?
Mr. Allison. Absolutely. There was tremendous pressure to
do subprime lending.
Yes, some banks got greedy and made mistakes. Ironically,
those were the banks that were saved, like Citigroup, in my
view. And they were big banks.
And that was a mistake because what that does is encourage
those banks to continue. They should be allowed to fail.
I think the CHOICE Act would be much more effective at
dealing with bank failures. And I do not agree with the
systematic risk. Citigroup could have gone broke and BB&T would
have been happy; it would have been a good day.
So Citigroup has been saved 3 times during my banking
career. That is how we got too-big-to-fail banks. The community
banks always get hit with penalties because the really big
banks do bad things and get bailed out.
Mr. Tipton. All right.
Thank you. My time has expired, Mr. Chairman.
Mr. Rothfus. The Chair would like to advise the committee
that votes have been called. We intend to go through two more
sets of questions.
Right now, we have Mr. Williams and Mr. Poliquin on deck.
We will be taking a brief recess then to finish up the votes.
And I recognize the gentleman from Texas, Mr. Williams.
Mr. Williams. Thank you, Mr. Chairman. And one could
argue--
Mr. Rothfus. Will the gentleman suspend?
For what purpose does the ranking member seek recognition?
Ms. Waters. Mr. Chairman, pursuant to clause 2(j)(1) of
rule 11 and clause d(5) of rule three of the rules of this
committee I am submitting for your consideration a letter
signed by all of the Democrats of the Financial Services
Committee notifying you of our intent to hold a Democratic
hearing, also known as a minority day hearing, on the Financial
CHOICE Act before a committee vote on this measure. I look
forward to working with you to determine the date, time, and
location of such a hearing.
Mr. Rothfus. The demand being properly supported, the
continued hearing day will be scheduled with the concurrence of
the ranking member and members will receive notice once the day
is scheduled.
The Chair recognizes the gentleman from Texas, Mr.
Williams, for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman.
I guess with what we have heard today with this testimony
is that the Consumer Financial Protection Bureau is one of the
most unacceptable and most unaccountable agencies in the
history of the United States. So what happens when you create
an agency that is not only unaccountable to Congress but
unaccountable to the American taxpayer?
Let me give you a few examples.
First, you get an agency that uses strong-arm tactics to
encourage payments or settlements, often using faulty studies
to justify enforcement. That is what happened to Ally and
others who found themselves in the crosshairs of the CFPB.
Second, you have an agency that is growing by leaps and
bounds with no end in sight. According to the CFPB's own
strategic plan, the fiscal year budget estimate for 2017 is
$636 million, a 5 percent increase from last year.
Third, you get rules that are thousands of pages. The
proposed rule on payday lending is 1,341 pages, not to be
outdone by the rule on prepaid accounts, totaling 1,689 pages
long.
And finally, you have an agency that hides behind their
consumer complaint database. Although the CFPB received just
0.06 percent of their overall complaints on the above-mentioned
prepaid cards, the Bureau ignored more than 5,000 public
comments--in this book right here, okay, they ignored that--
expressing support for these products and issued the rule
anyways, all at the expense of the consumer.
So this is what Dodd-Frank gave us, Mr. Chairman, and that
is why it is so important to fix this disastrous law.
Now, Dr. Michel, let me begin with you. As we have talked
about, the very structure of the CFPB rule was unconstitutional
late last year. The court rules in order to bring the agency
within constitutional bounds the President must be able to
remove the Director at will.
Do you agree with the D.C. Circuit opinion that the lack of
accountability Dodd-Frank provided the CFPB was so great that
it violated the separation of powers embedded in the
Constitution?
Mr. Michel. Yes, I agree, and the PHH case is a great
example. You have a Director who can't be removed, who decided
on which case he wanted to enforce, which company he wanted to
go after, decided which statutes did and didn't apply, decided
that it would be an ALJ proceeding, decided that he didn't like
the ruling, decided he could double the fine.
Mr. Williams. Okay.
Mr. Michel. All of these things.
Mr. Williams. All right. Another question: Would making the
agency's Director removable at will by the President provide
accountability to the agency?
Mr. Michel. That would be an improvement, yes.
Mr. Williams. All right.
Again, Dr. Michel, the FTC has been enforcing consumer
protection for decades before the CFPB existed without ever
conducting supervision. Isn't that right?
Mr. Michel. Correct.
Mr. Williams. Okay. Do you believe that the FTC has been
effective in protecting consumers through enforcement actions
without supervision power?
Mr. Michel. Yes.
Mr. Williams. Okay. And do you believe the CFPB would be
effective at protecting consumers as a civil enforcement agency
that has investigative and enforcement authority rather than
supervisory authority?
Mr. Michel. Yes, especially when it comes to the banking
industry. They don't need any more supervisors.
Mr. Williams. Thank you.
Would you comment on that, Mr. Wallison?
Mr. Wallison. Yes. I agree that they don't need any more
supervisors.
Every agency of the Executive Branch ought to be
accountable to the President. Otherwise, our elections mean
nothing.
You elect a President, and if Congress has the power to
say, ``This person cannot be removed from office,'' they are
saying the election of the President had no meaning. It did not
make that person accountable in any way.
So this is what is at stake in the CFPB case.
Mr. Williams. And just in closing, Mr. Allison, when the
public hears people in your industry and even in my industry--I
am a car dealer--say that since this legislation you have
literally had to hire more compliance officers and loan
officers, that is a true statement, isn't it?
Mr. Allison. Absolutely.
Mr. Williams. And who is affected by that?
Mr. Allison. The consumer. The consumer always pays.
Mr. Williams. Right.
I yield my time back, Mr. Chairman. Thank you very much.
Mr. Rothfus. The Chair recognizes the gentleman from Maine,
Mr. Poliquin, for 5 minutes.
Mr. Poliquin. Thank you, Mr. Chairman. I appreciate it.
Thank you, everyone, for being here today.
I represent some of the hardest-working, most honest people
in America up in Maine's 2nd District. Maine is vacation land.
Now, if you folks have not planned your vacation to Maine, it
is a good time to consider that because we are booking up
quickly and we have staff here to help anybody out if they need
that help.
Mr. Allison, we have about 500 small towns in our State.
And in these small towns you often have a community bank, a
credit union, maybe a local insurance agency or a retirement
fund manager. And these folks, these little institutions are
the pillars of our community.
I love to travel around our district. I am a business
professional. Like you folks, this is not my profession in
politics. I am here to help, but I love to talk to folks who
grow our economy and create jobs. I love to do it.
And without exception, Mr. Allison, they tell me what Mr.
Williams and Mr. Tipton have already talked about, which is
their major problem is this compliance and this paperwork. They
are spending more time filling out paperwork than they are
selling money.
Mr. Allison. Absolutely.
Mr. Poliquin. I remember a conversation I had with a loan
officer up in the Machias Savings Bank way down east in Maine
when you--right before you hit Canada you take a left, right
down there. And they are saying this is just driving up the
cost of the business that we have and they can't get this--the
money out they need to families that want to grow and
businesses that want to grow and hire.
So my question, Mr. Allison, is in your opinion--you have
30 years' experience in the banking business--does this CHOICE
Act help with that problem such that small community banks and
credit unions, and what have you, are going to be relieved of
some of this burden of compliance and instead get in the
business of lending money to our families?
Mr. Allison. Absolutely. I think the CHOICE Act would be
very beneficial in that regard.
Mr. Poliquin. We have roughly 26 small community banks in
Maine. And they are traditional: they take in deposits, Mr.
Allison, and they provide checking accounts and savings
accounts and lend out money.
They do not package these mortgages and sell them in the
secondary market. Bangor Savings Bank and the Community Credit
Union in Lewiston, they did not cause this recession.
Don't you think it is a good idea to make sure to back up
what Mr. Tipton said, that the regulations, the rules that
these bureaucrats in Washington come up are tailored to
specifically the size and the type of institution and the
complexity of an institution instead of otherwise?
Mr. Allison. Absolutely. And it is ironic that Dodd-Frank
was supposed to penalize the very large banks, the Wall Street
banks, and it has actually helped them and it has actually hurt
the community banks, which did not cause this crisis.
Mr. Poliquin. Great. We are batting a thousand.
Let me ask you another question, sir. FSOC currently
continues to deliberate on whether or not nonbank financial
institutions should be designated as too-big-to-fail and
therefore come under a whole other set of regulations and rules
that drive up cost, reduce product offering, and so forth and
so on.
Now, if you or I are in the investment management
business--we run pension mans, retirement assets--and your--I
hate to say this--your performance is lackluster and mine is
good. Your client is going to leave you and come to me.
But guess what? The assets are held by Roger down the
street in a custodial bank, so if you get into trouble or I get
into trouble but the assets are held here, does that represent
a systemic risk to our economy?
Mr. Allison. Absolutely not.
Mr. Poliquin. Of course it doesn't.
What advice would you give this committee when it comes to
FSOC's ability to designate those nonbank financial
institutions that represent no systemic risk to our economy--
what advice would you give them with respect to the CHOICE Act?
Mr. Allison. I absolutely don't think that they ought to be
able to designate them. And I think also those companies ought
to be allowed to fail if they get in trouble. That is good.
Mr. Poliquin. Which brings me to my next point and my last
point: The CHOICE Act ends the requirement for taxpayers to
bail out big Wall Street banks if they take too much risk and
get into trouble. I happen to think that is a great thing.
Now, we have a Bankruptcy Code that deals with this. Do you
think that Code, the existing laws we have now, could handle
this problem?
Mr. Allison. I think we need some modification to the
Bankruptcy Code, but I think the Bankruptcy Code would be much
better than what has been proposed in the Dodd-Frank law.
Mr. Poliquin. Okay. And does the CHOICE Act accommodate
that end?
Mr. Allison. Yes.
Mr. Poliquin. Thank you, Mr. Allison, very much.
Mr. Chairman, I yield back my time. Don't forget the trip
to Maine this summer.
Mr. Rothfus. The gentleman yields back.
Votes have been called. This is a two-vote series. The
committee will reconvene immediately after this vote series.
The committee stands in recess.
[recess]
Chairman Hensarling. The committee will come to order. The
Chair now recognizes the gentlelady from Utah, Mrs. Love, for 5
minutes.
Mrs. Love. Thank you. Thank you, Mr. Chairman, and thank
you for all of our Members who are here, and our witnesses who
are here for this hearing. I really appreciate it. I want to
start off with Mr. Wallison.
You may have noticed a slide being displayed over the
course of this hearing that cites the Federal Reserve data
indicating that commercial and industrial loans are up 75
percent since Dodd-Frank became law. The graph represents
trends for loans and leases and bank credits for all commercial
banks through December 2016.
So in your opinion, in your experience do you think that
that figure is entirely accurate?
Mr. Wallison. No. Actually I don't understand that.
Mrs. Love. Okay. So in what ways do you think that there is
room for nuances in explaining that trend?
Mr. Wallison. For one thing, all of the data that we have
seen shows that banks have not yet reached the point where they
were in 2008--the banking system as a whole--except for the
very largest banks, which are doing quite well. But in terms of
return on equity and return on assets, banks in general are
still below where they were in 2008.
In addition, and this is the most devastating fact about
this whole situation: There were 25 new banks in 2009; there
were 9 in 2010; there were 3 in 2011; and since then there have
been either zero or one in all the subsequent years.
Now what does that say? That says that the banks cannot
make a profit. Otherwise people would be forming new banks. So
we have a serious problem here with this legislation. We have
to get this out, and we have to start relieving the pressure on
our community banks.
Mrs. Love. Do you have that graph that we can pull up? Does
staff have that other graph that we pulled up, where we
separated large banks and small banks? There we go, right
there. Can you look at the one before Dodd-Frank, please.
When we took the data and we separated between large banks
and small banks, the data before showed that small banks, you
can see the difference between small banks and large banks. Now
look at the data after. Which tells me that large banks are
doing okay and small banks are the ones that are providing less
access to credit for those who need it in their communities.
Mr. Wallison. That is right. In my prepared statement I
have a couple of charts that show exactly that--that the loans
from the large banks have been going up and the loans from the
small banks have been going down. Large loans have been going
up and small loans have been going down, all consistent
completely with the idea that the small banks are gradually
going out of business because of the regulation, and the large
banks are taking up whatever new business there is.
Mrs. Love. I am being as fair as I possibly can here. Who
are the people that small banks lend to versus the people that
large banks lend to?
Mr. Wallison. The large banks are not lending to the very
smallest businesses. They are lending to the larger small
businesses. But the really troublesome part is the startups,
because in our economy, fortunately, and this has always been
true, everything starts from the bottom. And the little
companies that develop over time are the ones that eventually
become the big companies and displace in many cases the big
companies.
The startups are in the most trouble now because the
smaller banks lend to the startups, but they make what would be
called character loans. They are making it to people whom they
know in the community, and those loans are not being made
anymore because bank the examiners are stopping them from doing
it.
Mrs. Love. Let me tell you, the people that I represent are
actually getting less access to credit because of the
burdensome regulations that are being imposed on our small bank
communities. Now people may say that this is not really about
small banks and large banks, and we are not really here to help
small banks.
But I am telling you right now, when you get Jennifer
Jones, who can't get a loan from her small bank in her
community to expand her school, that affects middle- to lower-
income families. When you get Brett Madson in Sanpete County,
who has a turkey farm, and can't get access to the credit that
he needs in order to get the tools that he needs to farm his
turkeys, that affects the people in his community.
Goldman Sachs is not in Sanpete County. JPMorgan Chase is
not in Saratoga Springs. And all of the banks that give them
access to credit are closing their doors every day.
Chairman Hensarling. The time of the gentlelady has
expired. The Chair now recognizes the gentleman from Arkansas,
Mr. Hill.
Mr. Hill. I thank the chairman. Thank you for holding this
hearing. I was particularly pleased about the CHOICE Act,
because it really has one of the first innovative proposals
that we have seen in the regulatory in terms of ideas in some
time.
And I want to thank Mr. Allison and certainly my friend Tom
Hoenig at the FDIC for being the inspiration behind it, and
that is this off-ramp provision for banks that hold tier 1
capital at 10 percent, tier 1 leverage ratio of 10 percent.
I was looking at all of the banks at the end of the year in
Arkansas, and three quarters of our community banks--we have
103 community banks in Arkansas--meet that 10 percent leverage
ratio. There are several others that are quite close. The
median ratio for the State was 11.16 in tier 1 leverage ratios.
So I really do think that this is an important step to
reward high capital with a more modest footprint of complexity
in how we do prudential regulation.
Mr. Allison, have you been able to identify sort of in your
own thinking about this, because you have done a lot of
thinking on this point, do you like the 10 percent leverage
ratio number that we have selected? Do you think that sort of
represents a sweet spot between capitalization and financial
stability, while at the same time facilitating bank continued
growth and profitability?
Mr. Allison. I do. I think it is a reasonable number.
Defining that number is part art and part science, but the
important thing is you have to have a fair trade-off. What
Dodd-Frank asks is for banks to have a lot of capital and a lot
of regulation. They can't stay in business, and the regulators
have chosen more regulation because they like to regulate,
right? It is their job.
I think we would be much better off with more capital and
less regulation, so that is what makes it work economically.
Mr. Hill. I am really reminded, knowing of your past CEO-
ship of BB&T, I am really reminded of Jim Grant's quote last
year in his newsletter, where he said that because of Chair
Yellen's desire to have macro-prudential regulation, Grant
postulated there is just no rule for micro-prudentialism. That
is, what CEOs and boards of directors are supposed to do.
And he said, do you think there would be any difference in
outcome if all management at the bank didn't show up one day
and just the regulators were there?
Mr. Allison. I think all the banks would fail fairly
quickly, in my opinion.
Mr. Hill. Thank you for that.
If I could turn to Ms. Peirce because I want to switch
gears from capital formation to the ideas of capital formation
for another challenge that we have tried to address in this
bill, which is a loss of our public companies. About 50 percent
of our public companies we have lost. This means there are
fewer opportunities for people's 401(k) plans, fewer
opportunities for individual investors to participate in
economic growth.
And one of those barriers is this regulatory cost of being
public, and one of those issues is the burden of the governance
process and access to the proxy. Do you think the current
$2,000 ownership threshold for submitting a shareholder
proposal is still in today's age a reasonable threshold? And
also, in the holding period, is a one-year holding period
requirement for submitting that proposal reasonable?
Ms. Peirce. Yes, I think it is time to revisit those
thresholds because shareholder proposals have become very
costly to companies and to the SEC in processing them. So it
seems to make sense to take a look. Shareholders obviously pay
every time a company has to respond, so we need to look again
and see what reasonable thresholds would be.
Mr. Hill. Thank you.
Mr. Wallison, one thing I have heard from regulators off
the record, and from bankers of all sizes, community banks and
then large, complex institutions, is the issue that the Volcker
Rule, no matter how well-intended, just isn't working. What are
your thoughts about the burdens to institutions of all sizes,
and is that rule, you think, misdirected?
Mr. Wallison. The Volcker Rule is a really serious problem.
And first of all, it applies to much more than just insured
banks. It applies to all firms affiliated with banks in any
way. So they are all covered by these restrictions. The trouble
is that it not only affects their ability to buy and sell
securities as market makers, it also affects hedging. The banks
have to do hedging in order to protect themselves against
losses on the various things that they are invested in.
Unless they can show that the hedge is actually related to
something they have invested in, they are in danger of being
charged with proprietary trading. In order to put on a hedge,
the hedge must be related to something, some kind of security
bought for their own accounts, which sounds like proprietary
trading.
So the banks are likely to become much more risk averse,
even the largest banks as well as the medium-sized and small
ones, when they have to comply with the rule.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Minnesota, Mr.
Emmer.
Mr. Emmer. I thank you, Mr. Chairman, and I want to thank
you for holding this hearing. Earlier today it was suggested
that it is wonderful that this is regular order but we hope we
are going to have more than one hearing on this. It ignores the
fact that many of the concepts that are in the CHOICE proposal
have been debated and discussed now for years.
And to Representative Love's point, when she had those
graphs put back up on the screen, if we think back to 2008,
there were roughly 8,000 community banks in this country and
roughly 8,000 credit unions. A year after the crash there were
roughly 8,000 community banks and roughly 8,000 credit unions.
They did not cause the crash.
And yet, here we are a little more than 6 years after Dodd-
Frank was passed and we are down to about 6,000 each and we are
not growing at all. It is pretty clear that Dodd-Frank has been
a problem to the capital generator for the small recesses, as
Mr. Wallison was talking about.
Nobody, as I have heard today, is talking about some of the
specific organizations created in Dodd-Frank and I would like
to touch on one, and maybe start with you, Mr. Wallison. The
Financial Stability Oversight Council (FSOC), another one of
these very interesting organizations that was created, for a
guy who is new to Congress, off the books. It is not under the
appropriations process or the supervision of Congress. It works
off the books.
Mr. Barr states in his written testimony that the FSOC, as
it is known in the alphabet soup of Washington, in making its
SIFI determinations, has established a system that again, in
Mr. Barr's words, ``provides for a sound, deliberative process,
protection of confidential and proprietary information, and
meaningful and timely participation by affected firms.''
Mr. Wallison, do you agree with this assessment of the
FSOC's process?
Mr. Wallison. I am afraid I can't agree with that. We
didn't know very much about the process until the MetLife case,
when MetLife actually challenged its designation. They
described what they were permitted to see, and what the FSOC
had as evidence for their being designated. They were
restricted from seeing a lot of the things that anyone who is
in a normal kind of investigative situation like that would be
permitted to see.
So the FSOC is not only non-transparent for those of us
outside, it is not even transparent for the people who are
inside and being designated. So you cannot call this a fair
process, and I am afraid it is more like a ``Star Chamber''
than anything else.
Mr. Emmer. I am glad you brought that up because another
one of the quotes has to do with--I think in his written
testimony Mr. Barr notes that members of the FSOC are not
beholden to their agencies but rather, ``participate based on
their individual expertise and their own assessments of the
risks in the financial system.''
It's very interesting that when we talk about their
expertise, they express and are heard based on their expertise,
especially when we look at the MetLife situation. When the guy
with expertise in insurance was completely ignored within the
Star Chamber, as you refer to it, is there really a
deliberative process that goes on in the FSOC?
Mr. Wallison. There are two big problems. First of all, you
might be an expert in securities, but you are the only
securities expert who is sitting on the Council, and there are
three bank experts sitting there, too. So the banks have more
votes than other parts of the financial system.
Another part of this, so troubling to me and to anyone who
is concerned about the Constitution, is that the people who are
sitting on the FSOC Board are all appointed by the same
President. Ordinarily, in agencies that are commissions, you
have a bipartisan arrangement. So a commission, when it speaks,
is speaking on a bipartisan basis.
But when you appoint only the person who is the chairman of
an agency, that person probably was appointed by the President
in power, and all of the members are sitting around the table
and they are looking at one person, the Chairman, who is the
Secretary of the Treasury and a very close person, a very close
advisor to the President of the United States.
So when the Secretary says, this is what we should do,
these people are not going to be exercising their individual
abilities and skills. What they are going to be doing is simply
following the direction that they are getting from the
Secretary.
Mr. Emmer. And it looks like I am going to run out of time,
but I was going to ask Ms. Peirce if putting them under the
congressional supervision and appropriations process might not
solve some of these problems, short of getting rid of it. But I
see my time has expired, so I apologize.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New York, Mr.
Zeldin.
Mr. Zeldin. Thank you, Mr. Chairman, and I appreciate your
leadership on behalf of those hard-working constituents in the
1st Congressional District of New York on Long Island trying to
obtain a home loan for a new house, or to obtain a car loan, or
to be able to access free checking for that small business in
my district, trying to access more capital.
I appreciate all the witnesses for being here today. In my
district there are a lot of small business owners and
entrepreneurs who have that next great product or idea and are
struggling to access capital when it comes time to get their
businesses off the ground.
These innovators are being forced out-of-State, or worse,
out of the country to find a more favorable regulatory climate.
These firms are often pre-revenue, having just enough cash on
hand to keep the lights on. So without access to private
capital, growing their business and hiring is impossible.
Most of these emerging firms are also pre-IPO and need to
attract the ground-level investors that make going public and
to grow, create more jobs possible. Unfortunately, major
obstacles have been put in place by Dodd-Frank and other
onerous laws and regulations that made it harder for these
entrepreneurs to hire, grow, and make money.
Ms. Peirce, I would like to start with you. What provisions
in the CHOICE Act, and in particular Title IV, will most help
small and emerging companies to grow and create jobs?
Ms. Peirce. I think there are a number of provisions that
will be helpful, including making it easier for venture capital
funds and for angel investors to invest in small companies. I
think that also once the company--when a company is looking for
investors, it needs to look for accredited investors if it is a
private company generally. The bill would expand the types of
people who can qualify as accredited investors, which is a
much-needed change.
Mr. Zeldin. Mr. Allison, would you like to add anything to
that?
Mr. Allison. I think the biggest thing is the opt-out will
allow community banks to go do what we did at BB&T, which is do
venture capital lending for small businesses that are really
too small for even the smallest end of the private capital
market.
That is a very low-risk market long-term if you do it
right, and we had thousands of success stories and created
hundreds of thousands of jobs, and we can't do that anymore.
Mr. Zeldin. I thank you both, and I appreciate your
perspective. There was a comment made earlier that I wouldn't
want anyone to take the wrong way, as if there aren't other
economists on this panel with a broad breadth of experience
capable of talking macro economics.
Dr. Michel, what have been the macro economic impacts of
the hundreds of new regulations imposed by Dodd-Frank?
Mr. Michel. So we estimated part of that, with a standard
sort of look at banking risk, or I should say banking cost,
excess borrowing cost, and we came up with a 22 basis point
increase since Dodd-Frank. A colleague of mine at Heritage and
I use that--that is the we--and we use that in a macro,
standard macro economic approach to pull that excess borrowing
cost back out of the economy.
And it estimated around 1 percent increase per year in GDP.
It had up to I think about a $340 billion dynamic revenue
effect. It had a 3 percent per year average increase in the
capital stock. This is not a model that was designed to model
Dodd-Frank. This is just the standard macro approach. So quite
significant cost, quite significant impact.
Mr. Zeldin. Mr. Allison, do you want to add anything to
that?
Mr. Allison. I don't have a concrete measure, but there is
no question that we have had less innovation. You can just look
at the start-up numbers for new businesses. In the shift in
employment where new businesses and small businesses are
getting a smaller and smaller share of the economy, and a lot
of jobs unfortunately in the big businesses are entry-level
jobs.
So the shift has impacted the quality of jobs, not only the
quantity of jobs. And the creation of innovative jobs.
Mr. Zeldin. Thank you, Mr. Allison. I going to yield the
remainder of my time to Mr. Emmer to finish his question for
Ms. Peirce.
Mr. Emmer. Thank you. Ms. Peirce, so the question quite
simply is, by putting something like the Financial Stability
Oversight Council under the supervision of Congress and in the
appropriations process, could we solve some of the issues?
Ms. Peirce. Yes, certainly appropriations will be helpful
in making FSOC more accountable. Taking away its designation
powers is also an important step.
Mr. Emmer. Thank you very much. I yield back.
Mr. Zeldin. I yield back to the Chair the remainder of my
time.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Loudermilk.
Mr. Loudermilk. Thank you, Mr. Chairman, and I thank
everyone on the panel for being here. We have an opportunity to
correct what I believe was one of the greatest wrongs done to
the economy and the American people.
I want to talk a little bit about stress tests. My doctor
wanted to do a stress test, but he told me after the last
couple of weeks dealing with healthcare legislation that if I
am still walking, I am probably pretty good.
Dealing with the stress test, the committee has had some
testimony and hearings we have had here that often regulators
are punishing banks for failing to meet requirements that are
never stated.
Mr. Allison, has the Fed lacked transparency around the
stress test process?
Mr. Allison. The stress test in theory can be useful, but
what has happened is there has been an incredible waste of
resources around stress tests because the regulators started
out saying they wanted banks to come up with their own stress
test, but at the end of the day they want everybody to have
exactly the same stress test.
The irony is that type of stress testing increases risk,
because if everybody risk weights the same assets the same, you
get systematic errors. A concrete example of this is very
recently in energy lending, which a few years ago was supposed
to be low risk and now it is high risk. And low risk weighting
encouraged more energy lending and actually increased risk.
So stress test, banks doing mathematical models, is okay
independently. However, when they are forced by regulators, the
tests lead to bad outcomes. You can probably imagine that in
medicine, it's the same kind of thing.
Mr. Loudermilk. I know that the Fed recently exempted most
banks from the qualitative part of the CCAR stress test. Should
we expand that to all banks?
Mr. Allison. I would say so because the qualitative is
totally a subjective judgment on the regulators' part and they
won't tell you what it is. I know at my company they had to
spend a whole bunch of money making the qualitative side
better, even though the bank was ranked as one of the lowest-
risk banks in America.
Mr. Loudermilk. Mr. Pollock?
Mr. Pollock. I fully agree. I think the qualitative part,
which is indeed purely subjective and political, should be
eliminated.
Mr. Loudermilk. Ironically, Fannie and Freddie both passed
those stringent stress tests right before they failed in
September of 2008. Even former Chair Ben Bernanke stated it was
difficult to predict future economic turmoil. Are the stress
tests really a reliable tool for predicting future downturns?
Mr. Allison. I think not. I think they can be a tool if
they are taken in context, but we have done a bunch of studies
at Cato that show the more complex a model is, and the stress
test models are very complex, the more likely it will be wrong.
Rules of thumb models, like debt service to income in the
mortgage business, are much better than complex mathematical
models, which stress tests are, because in the models, the
forest gets lost for all the trees.
Mr. Loudermilk. Mr. Pollock?
Mr. Pollock. Paul Kupiec at AEI did a study recently of
stress tests showing that their outcomes were wildly
inaccurate.
Mr. Loudermilk. Thank you.
Dr. Michel, let us talk about the CFPB and the massive
amount of data that they have been collecting, and the
potential of cybersecurity risk. Now I also serve on the
Science, Space, and Technology Committee in the last Congress,
which led some investigations into some cybersecurity breaches.
We had the Inspector General at one of our hearings and I
asked the Inspector General--this was after the OPM data
breach--if he would rate, on the elementary school rating
scale, the Federal Government's cybersecurity posture. He said
it was a ``D minus.'' The only reason he didn't give it an
``F'' is because of the minor changes that were made at the OPM
after their breach.
How concerned should we be with the mass collection of data
with the CFPB, and what is our risk of exposure, not only just
to bad players in this Nation but foreign entities?
Mr. Michel. I am not a cybersecurity expert by any stretch,
but I am concerned that they are collecting so much data,
principally because I still don't really see exactly what they
are doing with it. You have a lot of stuff that is being
collected that is just sitting there in many respects with no
clear purpose, as far as I can tell.
Do you want me to elaborate for just a second?
Mr. Loudermilk. Sure.
Mr. Michel. The payday lending stuff is a great example.
You have millions and millions of things in this database on
all these people, and if you look at the number of complaints
on payday lending, it amounts to about a 10th of a percent of
transactions in the industry. Yet that has all been pushed
aside. That would dictate to a rational person that maybe this
isn't such a big problem.
Instead, they come out with a rule and they openly say that
this could kill off 85 percent of the industry. Those two
things don't mesh at all. So I don't understand what the
purpose is of collecting all that data.
Chairman Hensarling. The time of the gentleman has expired.
At this time, the Chair wishes to thank Mr. Wallison for his
testimony today, and Mr. Wallison, you are now excused from the
panel.
The Chair now recognizes the gentleman from Ohio, Mr.
Davidson.
Mr. Davidson. Thank you, Mr. Chairman, and Mr. Wallison,
thank you for being here. Thanks for the things that you have
addressed with the FSB, and particularly the shortchanges they
have done on American sovereignty. So that is a particular
concern. I have enough questions for other folks. Thanks for
being here.
And really, thank you all. I have learned a lot and
reaffirmed many things that I have already learned about the
impact of Dodd-Frank, both from your testimony today and from
your prior work. So, thank you.
Mr. Allison in particular, I appreciate your clarity, here
today, in your books, and in your work at Cato. And you all
have sounded the alarm for some of the misses and perhaps
unintended consequences of Dodd-Frank.
While I have myriad concerns about the negative impact on
families, farms, and businesses, I am particularly concerned
about due process. These protections are some of the most
important in our Bill of Rights.
Ms. Peirce, you have talked a fair bit about some of those
concerns with respect to the SEC. Under Dodd-Frank, do
respondents in SEC administrative proceedings have the same
rights as defendants do in Federal district court?
Ms. Peirce. No, the two systems are different, and some
have argued that there are some issues with the administrative
proceedings and have called on the SEC to make changes. I don't
think the SEC has made enough changes yet to equal out the two.
Mr. Davidson. Does the mismatch create the potential for
different legal interpretations of the same or similar laws,
and potentially create inconsistent enforcement outcomes?
Ms. Peirce. It does. There is a potential that you could
get different outcomes depending on which forum you are in.
Mr. Davidson. Do you believe that a respondent can receive
a fair outcome when the SEC serves as prosecutor, judge, jury,
and many times ultimately the appellate body?
Ms. Peirce. I think that the SEC can run its system well. I
think it will run it better if people have the option of going
to court if they prefer, which is what the CHOICE Act would
allow.
Mr. Davidson. Thank you for that. And I just wanted to open
up to the panel some of the concerns that you may have with
respect to due process that you have seen as a consequence of
Dodd-Frank changes.
Mr. Allison. I think one general thing is that any
regulated company, particularly now, really doesn't have
practical access to the court system because by the time the
courts decide, you are already out of business. And under the
doctrine the court has, they think the regulator is right. You
have to prove the regulator is wrong--it is like being assumed
guilty and you have to prove your innocence, and that is very
hard to do.
Mr. Davidson. This is fundamentally a consequence of the
Chevron doctrine.
Mr. Allison. Yes.
Ms. Peirce. A lot of the regulation is not even being done
through rules that could be challenged in court. It is being
done through supervision, which is a big problem in the bank
regulation side.
Mr. Barr. I think if you look by contrast at the way in
which the court system has actually gotten involved in Dodd-
Frank compliance issues, it has been quite extensive. The fact
of the matter is, in the PHH against CFPB case, which is
challenging its constitutionality, that is a case involving
whether the CFPB followed proper procedure with respect to its
internal operations.
And the court seemed quite aggressive about enforcing that.
I think you can see it in the MetLife case, you can see it in
the case brought against the SEC.
Ms. Peirce. But I--
Mr. Davidson. I want to highlight--this is pretty late in
the game and fairly consequential. If you look at PHH, look at
the valuation of their company and what happened, they have
been decimated basically by fiat.
Mr. Barr. I think if you look at the way in which the court
system is overseeing--
Ms. Peirce. I would also--
Mr. Barr. --agencies, it is quite--
Mr. Davidson. Ms. Peirce, would you please?
Ms. Peirce. So I would say that it is fine to cite PHH and
MetLife, but those are the two companies that were able to
fight because they had the resources and the courage to do so.
But often it is just not worth the regulatory risk to take the
fight to court. So you just suffer with the consequences.
Mr. Davidson. Thank you for pointing that out. I think we
are at about a 90 percent conviction rate, which is a little
shocking. It basically says, yes, cave or else.
Dr. Michel, were you going to say something?
Mr. Michel. I was just going to add Allied to that
equation. It is an example of just kind of giving up and going
ahead. You have no reason, you have no contact with the
borrower at all, and you are accused of racial discrimination,
and you know that the race of the borrower was never even--
Mr. Davidson. Particularly when automotive lenders were
explicitly excluded, carved out--
Mr. Michel. And you still find yourself with the choice of
going to court or settling to get this over with.
Mr. Davidson. Thank you all. Mr. Chairman, I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from Tennessee, Mr.
Kustoff.
Mr. Kustoff. Thank you, Mr. Chairman, and thank you all for
being here today.
Since the enactment of Dodd-Frank almost 6, 7 years ago, to
me it is incredible that we have had very few new banking
starts in this country.
Mr. Allison, if I could, with your banking experience could
you talk from a practical and procedural standpoint. Today, if
you wanted to start a new bank, which I can tell from your
expression that you are not particularly interested in doing,
what are the real-world hurdles and challenges that Dodd-Frank
presents to somebody who would want to start a new bank today?
Mr. Allison. First, the biggest challenge is that
regulators don't want you to start a bank. So they are going to
come up with every obstacle they can dream of to start a bank.
And secondly, when you do your cost analysis and your
profit analysis, you are going to say, I can't make any money
because I am going to have to hire an army of compliance people
before I can make my first loan. So I am going to be embedded
with a cost structure radically higher than a traditional
community bank startup has.
This is very interesting. The ability to sell your bank, it
sounds like that will consolidate the industry. But actually,
it encourages startups because a lot of banks are built to run
for 25 or 30 years, kind of the life expectancy of the board
and the management, and then to be sold.
So the fact we have made it hard for people to sell their
banks, ironically, has not kept banks from being sold. It has
kept banks from being started because that is the payback. I
can't get a high enough return in the short term, but 10 or 15
or 20 years from now I will be able to sell the bank, and that
is kind of when my management talent is going to run out and I
am not going to be able to hire enough people to replace me.
That is the mindset.
Mr. Kustoff. The converse: Let's assume that we get the
CHOICE Act passed in toto, the way that it is written now. Can
you predict what that would do for new bank starts in this
country?
Mr. Allison. I would predict a significant increase in the
number of new bank starts. Pretty radical, because all they
have to meet is the 10 percent equity requirement, which is
really not that hard, and then they will have the option in the
future if they do well to sell it.
And that is kind of the carrot out there so I think you
will see a significant increase in the number of startups. And
I think that will be good for the economy.
Mr. Kustoff. Thank you, Mr. Allison.
Dr. Michel, you and I had the opportunity I believe to talk
earlier at our subcommittee hearing. I do want to ask you if I
could about the CFPB for a moment and the consumer complaint
database, if we could.
The way I understand it is, when complaints are submitted
to the database, we have seen that the facts are not verified.
In other words, the complaints are submitted, but there is no
verification. So somebody could submit a complaint. It may be
valid; it may not be valid; or it may be partially valid.
Could you talk about how the CFPB could ensure the validity
of these claims before they are submitted and placed in the
public domain?
Mr. Michel. Sure. Just find out what happened before you
put it on the public database. The FTC has a similar model,
where those things are kept internally and they verify the
complaints internally. This isn't supposed to be about public
shaming and finding out later, oh, we made a mistake. What
purpose does that serve if we are talking about protecting
people?
Mr. Kustoff. And following up on that, do you believe or
have an opinion as to whether the CFPB should remove these
complaints from the public domain rather than keep the database
as is?
Mr. Michel. Sure. Again, I don't see any public purpose to
having all of that raw complaint information public because it
is counterproductive.
Mr. Kustoff. How would the CFPB go about verifying these
complaints once they are submitted?
Mr. Michel. If we have a Federal agency that is an
enforcement agency and they are doing their job, when they
receive a complaint, they check it out. They verify it. They
talk to the person who filed the complaint, they talk to the
company that the complaint is filed against, and they go and
actually investigate what happened. I don't think anybody would
have a problem with that.
Mr. Kustoff. Do you have any idea how many complaints have
been submitted to the CFPB?
Mr. Michel. I have not looked lately. I know that it was
millions at some point. I don't know--I could not give you a
number now, no. I have not looked lately.
Mr. Kustoff. And again, none of those complaints have been
verified. They are submitted--
Mr. Michel. They were simply submitted raw complaint data,
yes. And I don't have the error rate off the top of my head
either, but I know that they have made some statements about
how many of those were not actually verified complaints.
Mr. Kustoff. Thank you, Dr. Michel. I yield back my time.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Tenney.
Ms. Tenney. Thank you, Mr. Chairman, and thank you, panel,
for a great discussion.
I come from a very rural area in central New York, where we
had wonderful old names of old community banks--United
National, Savings Bank of Utica, Homestead Savings, Herkimer
County Trust, Marine Midland Bank, which was a little bit
larger bank. All those have gone. We do have one solid
community bank left called the Bank of Utica, and we have a,
well, a regional bank called Adirondack Bank.
But so many of these regulations have caused us to lose our
banks. In fact, there haven't been any new banks created, de
novo banks created in New York State since Dodd-Frank was
passed.
My concern as a small business owner who has relied on many
of these great relationships--I know some of you mentioned
character lending--throughout the years, and honestly, I can go
into my bank and hand my checkbook to the teller and go back
and talk to the bank president, who is in the same room. And I
know that is a quaint situation that doesn't happen often.
And these banks, some have been excluded from regulation,
but many of them can't even compete in the big market because
they don't have the compliance. And I think Ms. Peirce
mentioned really significant, so many of them just either stop
lending to their customers, force their customers into having
second mortgages or putting themselves into credit cards to get
financing because they don't want to face litigation. And it is
so expensive. They can't afford the compliance cost. It is a
very similar situation as it is for us as a small business
owner in the area.
I just thought what I would like to do is talk to you about
the ability of a regulator to--and for us to look at sort of
Chevron that was referenced by my colleague, with the over-
expansion of the Executive Branch and how Dodd-Frank has caused
over 400 different rules just to implement it, and thousands of
pages, 2,300 pages or whatever it is. And how we can roll that
back and come up with a way, using economic factors, to put
some restraints on regulators.
I would love to know if you could just comment on that, Mr.
Michel, start first and we will work the panel. Because to me I
think that is really where we are going with this. The
regulations have proven to be so much burden for--
Mr. Michel. I know this isn't on the table at the moment,
but I am not a fan of independent regulatory agencies. I think
that is a problem. You are supposed to be accountable to the
people who have been elected, and there should be more direct
rules that come directly from Congress and there shouldn't be
so much discretion. And that would be one way against that.
Passing a law that gives the regulator a great deal of
discretion to come up with a rule, and it ends up looking
almost nothing like what was initially discussed, is incredibly
poor policy. So not having those independent agencies with the
ability to do that is a way around that.
And I think with the CHOICE Act, you can play around with
the model that is here, you have a much higher equity
requirement with a much bigger regulatory relief component and
that way get away from doing some of these things.
Ms. Tenney. Thank you.
Mr. Pollock, do you have a comment on that?
Mr. Pollock. Congresswoman, first I would like to say on
the small banks going down in number, which they obviously are,
one of the reasons is that there are few new banks being
created. We ought to have as a policy at all times the
encouragement of new capacity and new entrants, which we don't
have. Especially in times of trouble, when you most need new
entrants, the regulatory philosophy is to cut off new entrants.
On the general question of more accountability in
regulatory activity, it is essential, in my opinion, for the
cost of the regulation and the effects, as we have been
discussing, of the regulation to be explicitly taken into
account and compared to whatever benefits we think there are.
On mortgage loans in particular, we have had very heavy
regulatory and legal risks imposed, and the result is for
little banks, talking about less than a billion dollars in
assets, mortgage loans in those banks have been falling since
2011. Anybody who has tried to get a mortgage knows why. The
regulations have made it extremely painful, even for quite good
credits, to go through the process.
Ms. Tenney. Yes, thank you. I appreciate that. As a former
bank attorney, I used to be able to do maybe 10, 15 residential
closings a day. I could probably only do three now just because
of burdensome paperwork.
And again, I know Mr. Barr is anxious to answer, but I
think I am losing my time here, so I want to say thank you to
the panel for really great work today. It is really an honor to
have you here and talk about the CHOICE Act. And we are excited
about getting it passed. Thank you.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Indiana, Mr.
Hollingsworth.
Mr. Hollingsworth. Good afternoon. Thanks so much for being
here. As she said, I really appreciate everybody's investment
of time and all the great comments and conversation that we
have had.
There has been a lot of discussion throughout the course of
the day about banks taking exceptional risk inside their
trading book that has caused losses that have been covered by
the taxpayer and that is why we need the Volcker Rule.
Dr. Michel, would you care to comment on that and whether
the true issue that caused the crisis was in the trading book
or was it in the loan book?
Mr. Michel. I would love to comment on that. Thank you. So
first of all, this started off in the wholesale trading
market--or I'm sorry, the wholesale funding market, so this has
nothing to do with the banks really in that sense at all.
Secondly, if we are talking about risk, banks take risks
every day. Commercial loans are risky. A portfolio of
commercial loans is riskier than a commercial portfolio of
stocks. This makes no sense at all.
Prior to Dodd-Frank, you had the Fed, the FDIC, and the OCC
with all the ability in the world to stop any of those large
banks from trading, doing proprietary trading, doing any of the
securities investment that they wanted. Type I securities, Type
II securities, Type III, all of these things are codified.
This is the biggest nothing burger ever. This is just a
waste of time, effort, energy, and money, period.
Mr. Hollingsworth. Excellent. Thank you. Thank you for
that.
One of the things I also wanted to talk about, Dr. Cook,
you had mentioned earlier today and talked about--gave a great,
stirring introduction about how this will never happen again
and how we made sure that this will never happen again.
I guess my question is, does Dodd-Frank slaughter the
business cycle? Do we expect that we will never have another
downturn again now?
Ms. Cook. Excuse me. I didn't go that far.
Mr. Hollingsworth. I got a ``C'' in macro-economics, by the
way.
Ms. Cook. Wait, wait, let me be clear. To try to stem the
irresponsible practices that were happening before. But I just
want to be careful, as was stated in my prepared remarks, this
is not perfect. Dodd-Frank is not perfect.
Mr. Hollingsworth. I guess in that--I think what you were
trying to get at was not that we slaughter the business cycle
but hopefully we can dampen the amplitude of the ups and downs.
Is that kind of what you were trying to convey in your
introduction?
Ms. Cook. No. Still focused on financial practices. Now we
keep working as macro-economists on trying to--and we thought
we had it figured out before the recent crisis.
Mr. Hollingsworth. Can you determine what is irresponsible
and what is responsible behavior? Who gets to determine that?
Ms. Cook. So the Federal Reserve, all of the regulators
can.
Mr. Hollingsworth. So regulators determine what is
responsible and irresponsible lending. So this is really--and
Dodd-Frank is government pushing capital in certain directions
and out of other directions, and determining who should be the
recipients of loans and who shouldn't be the recipients of
loans. So government-directed capital is the answer to the
crisis in your mind?
Ms. Cook. Oh, not at all. No, no.
Mr. Hollingsworth. More regulation is not more government
direction of capital?
Ms. Cook. No, I want to be clear. When I say irresponsible,
I don't mean it as--you are making it as a technical term. I
want to make sure that I am saying this because it is not--this
isn't something that a standard, that you are looking at a
banking law and saying, this is responsible, or these are the
characteristics, these are the criteria for responsible and
irresponsible banking.
But I want to make sure that we understand that the crises,
the recessions that are the deepest we know from economic
research are the ones that are fueled by bad financial
practices, by financial crises. That is what I don't want to
see happen again. The Great Depression, this Great Recession,
and what is happening in Europe, we certainly don't want that
to happen again.
Mr. Hollingsworth. I guess back to Dr. Michel, I wanted to
talk a little bit about Title VII and better understanding how
Title VII might certainly, under Dodd-Frank, begin to change
the way clearinghouses are structured and offer them with Title
VIII some additional avenues. Can you talk a little bit about
that?
Mr. Michel. So on VII, with the clearing mandate, I would
go back to--this isn't quite as--maybe I don't have as strong
feelings as I do on Volcker, but this is another one that is a
really bad idea. If counterparties wanted to have these
derivatives cleared and clearinghouses wanted to clear these
things, that was already happening.
Mr. Hollingsworth. Right.
Mr. Michel. And that is a progressive thing over time. As
those things become more standardized and more accepted, that
is what happens.
To mandate it is a very bad idea and we end up
concentrating all the risk in the clearinghouses.
Mr. Hollingsworth. Exactly.
Mr. Michel. And then Title VIII, and say, here you have a
direct line to the Fed.
Mr. Hollingsworth. We have just basically opened another
avenue towards more bailouts and more opportunities for
bailouts through Dodd-Frank.
Mr. Michel. Absolutely.
Mr. Hollingsworth. Instead of how it was sold originally.
Mr. Michel. Absolutely.
Mr. Hollingsworth. Thank you. I appreciate the time, and I
appreciate all of you today.
Mr. Michel. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New Jersey, Mr.
Gottheimer.
Mr. Gottheimer. Thank you, Mr. Chairman, and thank you to
the panel for being here today.
If I could start with you, Mr. Allison. With the benefit of
almost 7 years of experience now we can only identify areas
where Dodd-Frank could be improved without compromising the
core regulatory framework that has been put in place.
One such area for potential improvement is Section 619 of
Dodd-Frank that inhibited speculative investments. Former Fed
Governor Tarullo highlighted this in his parting remarks
earlier in April. What do you think of his assessment, and what
are some of the tweaks that could be made to keep our
regulations smart but also keep our regulators adequately
focused on protecting the safety and soundness of the banks and
consumers?
Mr. Allison. I think you have to look at a bank at a meta-
level, not at the parts. And regulators, Governor Tarullo in
particular, likes to look at the parts. And I think that is a
poor way to do it.
If you look at the Canadian banking system, their
regulators evaluate the whole organization and they have had
much smaller, lower failure rates than we have. I think our
kind of regulation tends to focus on these little parts and add
them together instead of asking the macro questions, including
the basic philosophy of the bank. Is it a high risk taker or
not?
Mr. Gottheimer. Thank you very much. I appreciate that.
Related to that, Section 619 requires that five regulatory
agencies examine traders' intent to effectuate the rule of
prohibitions. Is that inherently difficult for regulators and
the banks?
Mr. Allison. I would say so. I don't think they have the
skill set to do it, would be my view.
Mr. Gottheimer. Thank you very much.
Mr. Barr, do you think the OCC's failure to sufficiently
address Wells Fargo's bad sales practices more than a decade
ago shows that the agency may have been putting its consumer
protection mission in a subordinate role to its other mission
of improving the profitability of the bank?
Mr. Barr. I do think that the failure was rather
significant, and it was one of the reasons--the basic problem
of the lack of prudential agencies' attention to consumer
issues was one of the main reasons for bringing those
authorities together under the new Consumer Financial
Protection Bureau.
I think the recent report on Wells Fargo reinforces that it
was a good idea to bring those authorities together under the
CFPB, to give it the power to protect American families and to
really have as a core mission and a set of expertise protection
of consumers.
So I think it reinforces the choice made in Dodd-Frank and
frankly undermines the choice made in the CHOICE Act.
Mr. Gottheimer. So you would say what happened with the big
account scandal, it is what the mission of the CFPB, it meets
its mission in that case.
Mr. Barr. Yes, I do think you want a consumer agency that
can stop the kind of abuses we saw at Wells Fargo and at payday
lenders and in other markets, where there have been significant
problems with taking advantage of consumers repeatedly over
time.
I think that is one of the core reasons you need the
consumer agency to have supervisory power and not take it away,
as the CHOICE Act would do. So I think having an agency that
has supervisory authority and rule-writing authority, and
enforcement authority across the market is really important to
creating a level playing field for consumers and for banks and
non-banks alike.
Mr. Gottheimer. Thank you so much. I yield the balance of
my time.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from Michigan, Mr.
Trott.
Mr. Trott. Thank you, Mr. Chairman.
Dr. Michel, let's talk about Title II of Dodd-Frank. Some
of my friends today have offered a couple of arguments as to
why OLA is better than a bankruptcy solution. First, they have
suggested that the FDIC has it covered. There is no need to
worry about taxpayers being at risk again.
And the second argument is that the FDIC will do a better
job than a bankruptcy judge at resolving a failed financial
institution.
So let's look at the first argument. How has the government
done at maintaining insurance programs and ensuring they are
solvent in the event of a claim? For example, how have they
done on the National Flood Insurance Program? I think it is $24
billion in the hole. How have they done on the Pension
Guarantee Corporation? I think it is $79 billion in the hole.
Or for that matter, how have they done on FHA?
So do you think, based on the government's track record,
that they are going to do a good job at making sure the FDIC
has the money in the event of a failure?
Mr. Michel. Do I think so?
Mr. Trott. Yes.
Mr. Michel. No.
Mr. Trott. Well, let's assume that the examples I just
gave--yes?
Mr. Michel. I was going to say, I would throw in the FSLIC,
back from the S&L crisis, and then I would throw in the FDIC
from the recent crisis because without TARP you have an FDIC
bailout. But I'm sorry, go ahead.
Mr. Trott. I only have 5 minutes.
Mr. Michel. I'm sorry.
Mr. Trott. Just kidding. So let's assume all these examples
are just an aberration though, and that the orderly liquidation
fund is adequate to cover a failure of the top 6 financial
institutions, which would total about $10 trillion.
So taxpayers might not be funding that if the money is
there, but indirectly wouldn't consumers still have to pay a
price because all the healthy financial institutions have to
pay for the failure of their competitors, and ultimately that
cost is going to be passed on to consumers in higher fees?
Mr. Michel. That is exactly right. These assessment fees,
somebody pays for those, and ultimately customers pay for at
least a part of those.
Mr. Trott. Let's assume that they don't have the money, so
they can go under section 210 and borrow $10 trillion from the
Treasury. Would you agree that at that point taxpayers are in
the crosshairs again?
Mr. Michel. Very much so.
Mr. Trott. So indirectly or directly, the first argument
fails because taxpayers are going to be exposed. Let's look at
the second argument. So the FDIC is going to do a better job
than a bankruptcy judge, so these--because they have more
knowledge and experience. So these are the same folks who were
in charge before the last crisis, right?
Mr. Michel. That is correct.
Mr. Trott. But now they are all a whole lot smarter. Let's
look at transparency. Let's compare the FDIC folks sitting in a
closed room versus a bankruptcy judge sitting in an open court.
Which is going to be more transparent and lead to a fairer
result?
Mr. Michel. I would go with the open court.
Mr. Trott. Oh, you are answering all the questions right.
It is really something.
Let's talk about predictability. So you have a bankruptcy
judge who has years of precedent, case law, previous decisions,
and attorneys, creditors, and shareholders can look at that.
Which is going to lead to a more predictable result, a
bankruptcy court that has years of precedent, or the FDIC, that
every now and then has to deal with a financial institution
that fails?
Mr. Michel. Bankruptcy court, again.
Mr. Trott. I spent a lot of time in my previous career in
bankruptcy court representing creditors, and by and large my
clients thought it was a fair, predictable, transparent result.
But a lot of times they didn't really like the result because a
lot of times they didn't get any money.
Sometimes there was no money in the bankrupt estate for
them, or they were deemed to be unsecured creditors. Sometimes
the money given to them was deemed to be a fraudulent transfer
or a preference. But that risk in the bankruptcy proceeding
kept some integrity in the process.
So my question is, don't you think having a bankruptcy
process where creditors and shareholders are at risk versus the
taxpayers is going to lead to a better decision-making process
at the banks and financial institutions because of the threat
of the bankruptcy court giving them zero?
Mr. Michel. Yes. I don't see how there can be any doubt,
honestly. And I hear the criticism that, well, if we do that,
you won't have as many of these repos and you won't have as
many of this broad money, as much of this broad money. I am
kind of flabbergasted because that is exactly the point.
Mr. Trott. It is kind of like the bond ratings for Fannie
and Freddie's mortgages, isn't it?
Mr. Michel. Yes.
Mr. Trott. Thank you.
Mr. Allison, I really enjoyed your opening statement. I
thought your comments and perspective, the real-world
perspective was refreshing. My only caution it is probably too
much common sense for us here in Washington, but it was
certainly interesting to hear your comments.
And I am going to put up on the screen, if it is here
somewhere, I would appreciate the staff helping me out. That is
a puzzle of all the different regulations that affect financial
institutions. So I want you to just to comment in the 30
seconds I have left, what all those regulations have done to
the banking industry, which in turn what that has done to the
small business community, which in turn what it has done to
what we all care about most here. Democrats or Republicans
alike agree on one thing. We all would like to see more jobs
created in this country.
What has that done to job creation in this country?
Mr. Allison. It has made banks less efficient, it has made
them less able to provide the credit that drives the economy.
It has reduced innovation, creativity, and it has made a lot
less good jobs. It has reduced the number of good jobs in
America.
Chairman Hensarling. The time of the gentleman has expired.
The Chair wishes to advise all Members that votes are
pending on the Floor. We have two Members remaining in the
queue. Without objection, the remaining two Members will be
afforded 3 minutes apiece.
The gentleman from North Carolina, Mr. Budd, is now
recognized for 3 minutes.
Mr. Budd. Thank you, Mr. Chairman.
And Dr. Michel, let's talk about price controls, which are
put into place on the theory or belief that the market for a
good or service just isn't working. So we have a long history
of trying to do that in our country.
Mr. Michel. Indeed.
Mr. Budd. Nixon tried that in 1971, Carter in 1980. And if
you look at it recently outside of our country, the Venezuelan
food prices controls, they were unsuccessful and are
unsuccessful.
So Dr. Michel, is the Durbin Amendment, which is a price
cap, is it helping the American public or is it failing like
these other attempts?
Mr. Michel. It is failing like other price controls always
do. Somebody finds a way around it, somebody finds another way
to get the money that they lose from the price control. And we
see that already. It ends up not helping the people it
supposedly is going to help. Not that I believe that, that they
really wanted to help the people they say.
Mr. Budd. So about those people that we are talking about,
the consumers.
Mr. Michel. Yes.
Mr. Budd. In terms of the effect on their pocketbooks, the
Richmond Fed has said that a sizable fraction of merchants
raise their prices or debit restrictions as their cost of
accepting these debit cards increase. However, few merchants
reduce prices or debit restrictions as these costs decrease.
So take ideology out and history out just for a second. The
bottom line, the practical cost of the Durbin Amendment price
control is that consumer pocketbooks, these people we are
talking about, are you saying they have been hurt in terms of
increased banking costs? And they haven't seen any other relief
in prices. Is that correct?
Mr. Michel. The evidence ranges from unaffected to harmed.
Yes, that is correct.
Mr. Budd. So these that we are supposed to help, these
consumers, but it didn't, why is that?
Mr. Michel. The idea that we were going to get rid of a
regulation for a small group of large retailers, and those
retailers were going to just pass that cost directly back, cost
savings directly back to their consumers is fantasy. And then
there would be no other impact, with nobody who has lost the
revenue trying to pick it up from somewhere else. It is not
practical.
Mr. Budd. Mr. Allison, so from my hometown, you mentioned
something about at the end of the day, somebody pays. Would you
care to reiterate on that?
Mr. Allison. The Durbin Amendment has been particularly bad
for low-income consumers. Banks were providing free checking
accounts. The way they were doing that was with debit card fees
that merchants were paying. The Durbin Amendment is a huge
subsidy for big merchants, for Walmart at the expense of low-
income consumers. The low-income consumers are the big losers.
Now the way the banks have been hurt, banks invested
billions of dollars to develop the technology to make this
system work. Banks have lost part of the incentives of
technology for new things that consumers might benefit because
it might be stolen by legislation. Price controls never work.
Mr. Budd. Thank you. In my remaining time, a quick
question. So have the prices for merchants that do a lot of
small ticket items--
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from West Virginia,
Mr. Mooney, for 3 minutes.
Mr. Mooney. Thank you, Mr. Chairman. Recently, proponents
of the Dodd-Frank Act have rolled out numerous anecdotes and
favorable data to prove that with Dodd-Frank in place the
economy is growing, banks are both profitable and lending.
But what you don't hear about is the overall regulatory
costs imposed by Dodd-Frank that are weighing down our economy.
A current analysis by the American Action Forum found that
compliance with the Dodd-Frank Act has cost $36 billion and 73
million hours of paperwork, the equivalent of almost 37,000
employees working full-time on paperwork for 1 year.
As I travel my district in West Virginia, with small
community banks and small towns, the pain that I hear from
folks who work at banks that they have to hire full-time
employees just to do paperwork and pay them salaries, money
that could otherwise have been lent to buy a home or start the
American dream of owning your own business is evident.
So Dr. Michel, has Dodd-Frank helped ``lift the economy''
since it was enacted in 2010?
Mr. Michel. No, and I wouldn't have believed that to begin
with. We have done some analysis. We have done, as far as I can
tell, one of the first real macro economic modeling analyses of
this very question. And we do show that it had a significant
impact, I think I mentioned before of about 1 percent per year
in GDP. That would be the loss associated with the increased
costs. That would be the gain from removing it.
You have a significant decrease to the capital stock in the
Nation. And there is a dynamic effect on that in terms of the
revenue effect that we have on the budget and just on the
economy in general.
Mr. Mooney. Thank you. A quick follow up, what have been
the macro economic impacts of the hundreds of new regulations
imposed by the Dodd-Frank Act?
Mr. Michel. Unfortunately, the part that we do is very
narrow. Or I shouldn't say unfortunately, but I should say that
the part that we looked at was a very narrow look. So I would
imagine it is much worse. I don't have the macro analysis
because I can't--it is almost intractable, the problem.
We are talking about over 400 rules, we are talking about
rules that span the entire financial spectrum. Macro economic
models can't really handle a lot of that stuff very easily, so
you have to start doing a lot of subjective manipulation, I
will call it, and we didn't want to get into that.
So I suspect that it is pretty severe. I would add that a
lot of the stuff where everybody talks about how we have had
the worst recession since the Great Depression, well, yes, and
a lot of that actually happened after we started doing all of
this stuff. So that doesn't get a pass.
Mr. Mooney. Thank you. Thank you all for your testimony
today.
Mr. Chairman, I yield back.
Chairman Hensarling. The gentleman yields back.
I want to thank our witnesses for their testimony today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
I ask our witnesses to please respond as promptly as they
are able.
This hearing stands adjourned.
[Whereupon, at 3:06 p.m., the hearing was adjourned.]
A P P E N D I X
April 26, 2017
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