Following a brief but intensive reconciliation period, the House passed the conference report of the updated financial reform legislation Wednesday, June 30. The voting divided along party lines, with only three Republicans among the 237 representatives supporting the legislation. The newly christened Dodd-Frank Wall Street Reform and Consumer Protection Act now moves to the Senate, where it will likely pass its final hurdle in mid-July before making its way to the president’s desk.
Senate passage is not guaranteed; the death of Senator Robert Byrd means that Democrats must lure one more Republican vote. Nor will passage into law bring financial reform to closure, since regulatory authorities must now decide on many specifics of implementation.
Bark Now, Bite Later
Even as many of its key provisions have been softened or eliminated altogether, the Dodd-Frank Act-which now includes more than 1,600 sections spread across more than 2,300 pages-has been heralded by its framers as the most significant overhaul of the financial sector’s ground rules since the reforms triggered by the Great Depression.
In a prepared statement released by the White House just after Wednesday’s vote, the president said that “it has been a long fight against the defenders of the status quo on Wall Street. … Today’s vote is a victory for every American who has been affected by the recklessness and irresponsibility that led to the loss of millions of jobs and trillions [of dollars] in wealth.”
Perspective is everything. In contrast with the president’s reading of the act, House Republican Leader John Boehner declared that the legislation “will actually kill more jobs, widen the gap between Wall Street and Main Street and force taxpayers to fund permanent bailouts.” Republican Whip Eric Cantor was equally blunt. The New York Times on Wednesday quoted Mr. Cantor as saying that “this legislation is a clear attack on capital formation in America.”
Provisions with muscle have struggled to survive the gauntlet; the meekest, on the other hand, have made their way through in extraordinary abundance.
Only the most jaundiced eyes will parse through the legislation’s labyrinthine text and uncover imminent threats or panaceas for the familiar order. Rather, divisive provisions with clearly defined implications have been the focus of intense lobbying efforts and partisan negotiations during the relatively opaque conference period. Provisions with muscle have struggled to survive the gauntlet; the meekest, on the other hand, have made their way through in extraordinary abundance.
For Senator Russ Feingold, the dilution of the legislation now precludes his support. In a June 28 statement, he wrote that “while there are some positive provisions in the final measure, the lack of strong reforms is clear confirmation that Wall Street lobbyists and their allies in Washington continue to wield significant influence on the process.”
One example of the conditions of compromise, a late tax provision designed to offset the act’s anticipated costs by raising approximately $18 billion from the nation’s largest financial institutions, was eliminated in 11th-hour negotiations. In a June 29 letter to Senator Chris Dodd and Representative Barney Frank, Senator Scott Brown wrote that “if the final version of this bill contains these higher taxes, I will not support it. … It is especially troubling that this provision was inserted in the conference report in the dead of night without hearings or economic analysis.”
Under an alternative plan, the cost of the act will be partially offset with unused funds from the Troubled Asset Relief Program, which the new legislation would bring to closure months ahead of schedule. Since that authority might have otherwise gone unused, the abrupt change of plans could be seen as adding billions of dollars to the federal deficit.
For commercial real estate credit markets, the elimination of the Senate bill’s Credit Rating Agency Board provision is one of the significant changes made during the conference period. This is a double-edged sword for opponents of the CRAB-as I detailed in my May 19 Lead Indicator column-since it leaves the door open for alternative proposals for oversight of rating agencies’ relationship to issuers. Provisions relating to the enhanced regulation of rating agencies begin with Section 932 of the conference report (on page 1351).
Among the provisions, the act will establish an Office of Credit Ratings that will “promote accuracy in credit ratings” and “ensure that such ratings are not unduly influenced by conflicts of interest.” As for how the new office will fulfill these mandates, the conference report focuses on rating agencies’ reporting and disclosure requirements.
Delegation and the Act
A reading of the new legislation reveals that it goes further in setting up new regulatory powers and structures than in taking direct action. This might be appropriate except that it delegates decision making about industry structure to the empowered agencies. In the short term, this extends uncertainties about financial-services market structure. It also emboldens lobbyists and elected officials to engage in further horse-trading, this time outside of the public spotlight.
For the long run, the legislation raises serious questions about where major decisions pertaining to market structure, with potentially far-reaching economic consequences, are made: by our elected officials, who generally must act without the benefit of subject-matter expertise, or in a more erudite setting, where subject-matter expertise may be stronger but where decisions are even further removed from public scrutiny?
In a July 1 opinion in The Wall Street Journal, Daniel Henninger opines that the legislation “lets the actual meaning of the ‘Volcker Rule’ on banks’ trading practices and much else pass into the hands of the translators at the Federal Reserve, FDIC, other federal agencies and the lobbyists who swarm around them.”
There are meaningful changes that will result directly from the passage of the Dodd-Frank Act, some for better and some for worse. Still, Mr. Henninger is right to draw attention to the delegation of decision making.
In fact, this delegation is not specific to the Dodd-Frank Act but pervades legislative efforts on a host of complex issues for which our strained political process affords neither the time nor the forum.
Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.