Newly-Empowered House Republicans Take Aim at Dodd-Frank Financial Reform Bill

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With Republicans taking control of the House of Representatives, much of the Democratic agenda will be challenged in the months ahead. That includes the Dodd-Frank financial reform legislation, which Congressional Republicans have already pledged to weaken.

The financial reform bill passed in June and brought with it increased consumer protection, trading restrictions for big banks, and tighter regulation of financial products. However, the bill still fell short of dramatic Wall Street reform as the lobbying efforts of large financial institutions eroded the legislation's sharper points.

The original bill, for example, would have ended banks' ability to trade derivatives. But the final version was watered down to allow banks to retain certain derivatives trading units to hedge risk.

Now, after last week's midterm elections, a more conservative Congress could further undermine the legislation.

Empowered House Republicans Take Aim at Dodd-Frank Financial Reform Bill

For example, the "Volcker Rule," named after former Federal Reserve Chairman Paul Volcker, was originally designed to prohibit banks from engaging in proprietary trading. The rule was loosened to allow limited investments in hedge funds and private equity funds, but even that is too much for newly elected House Republicans.

In a letter sent to the Financial Stability Oversight Council, U.S. Rep. Spencer Bachus, R-AL, said the Volcker Rule – even its weakened state – would "impose substantial costs on the American economy and market participants" with "doubtful" benefits.

"Depending on how U.S. regulators choose to implement it, the Volcker rule may spark a mass exodus of clients from U.S. banks to banks based abroad," he said.

Regulators currently are debating exactly how the rule will be applied, with U.S. policymakers and financial firms looking on.

Meanwhile, Bachus – who is in line to replace U.S. Rep. Barney Frank, D-MA, as chairman of the House Financial Services Committee – says he is determined to address "job-killing" regulations on the derivatives market, as well.

"The derivatives provisions in Dodd-Frank alone... as they stand now they're going to take a trillion dollars out of our economy," Bachus told the Financial Times. "Think how many jobs that's going to kill."

Bachus's data comes from the International Swaps and Derivatives Association (ISDA), which lobbied feverishly – spending more than $1 million in the first six months of 2010 – against regulating the $600 trillion over-the-counter derivatives market, which had played an enormous part in exacerbating the financial crisis.

Another point of contention is the Consumer Financial Protection Bureau (CFPB), which was established to protect Americans from manipulative and predatory behavior on the part of financial firms, credit card companies, and mortgage lenders.

U.S. Rep. Scott Garrett, R-NJ, last week called on the administration to dismantle the CFPB before it's even established.

"We don't need a CFPB," said Garrett, who hopes to chair the capital markets subcommittee. "That would be a great first step for this administration if they want to start showing how they are willing to work with us, to say that, 'We recognize the failure that this doesn't do anything to address the problems so let's start unwinding that.'"

Representative Bachus didn't go as far as Garrett, but said the bureau should have its funding cut and structure overhauled.

Indeed, squeezing regulatory budgets is one of the most immediate ways House Republicans could weaken the financial reform legislation. However, not everyone is convinced Congressional threats to withhold funding will be enough to deter regulators from following through on their agreed upon mandate.

Regulators "are not about to be browbeaten into doing something just because a group of congressman threaten them," retiring U.S. Sen. Christopher Dodd told The Wall Street Journal.

A more direct approach would be for the House to author a "corrections bill" as soon as next year.

Corrections bills are typically used to fix technical errors, but the content of the Dodd-Frank bill could also become the subject of intense lobbying and political opposition.

"That corrections bill is going to look a lot different than anything Dodd and Frank would have presented," Sam Geduldig, a GOP lobbyist told The Journal.

Still, Senate Democrats, who remained in control despite a narrow majority, have warned their House colleagues not to re-fight unwinnable battles.

"I don't think that major changes will take place on Dodd-Frank," said U.S. Sen. Tim Johnson, D-S.D., who is expected to chair the Senate Banking Committee next year. "It's a matter of minor changes taking place. There is not only resistance from the Senate, but the veto is possible, too. So we should focus on realistic solutions to our problems."

No doubt, much political infighting lies ahead for the newly divided Congress, and the financial reform bill is so large and unwieldy that changes will come slowly, if at all. The real question is how the new rules will be applied as regulators and policymakers attempt to balance their own agendas in accordance with the will of the people and lobbying of financial institutions.

"The changed political landscape "will make the process more time-consuming and difficult," Sarah R Wartell, executive vice president of the Center for American Progress, told The Journal. "I'm quite certain Wall Street believes the outcome of the elections will be a net positive. But I think they'll be surprised by some of the new dynamics."

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