[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE DODD-FRANK ACT FIVE YEARS
LATER: ARE WE MORE STABLE?
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
JULY 9, 2015
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-39
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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
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
July 9, 2015................................................. 1
Appendix:
July 9, 2015................................................. 69
WITNESSES
Thursday, July 9, 2015
Atkins, Hon. Paul S., Chief Executive Officer, Patomak Global
Partners LLC; and former Commissioner, U.S. Securities and
Exchange Commission............................................ 6
Calabria, Mark A., Director, Financial Regulation Studies, Cato
Institute...................................................... 7
Silvers, Damon A., Director of Policy and Special Counsel,
American Federation of Labor--Congress of Industrial
Organizations (AFL-CIO)........................................ 10
Zywicki, Todd J., Foundation Professor of Law and Executive
Director of the Law and Economics Center, George Mason
University School of Law....................................... 11
APPENDIX
Prepared statements:
Beatty, Hon. Joyce........................................... 70
Atkins, Hon. Paul S.......................................... 74
Calabria, Mark A............................................. 87
Silvers, Damon A............................................. 104
Zywicki, Todd J.............................................. 111
Additional Material Submitted for the Record
Ellison, Hon. Keith:
Forbes article entitled, ``The Highest-Paid CEOs Are The
Worst Performers, New Study Says,'' dated June 16, 2014.... 119
Himes, Hon. James:
Chart entitled, ``The Five Years Since Dodd-Frank''.......... 122
Messer, Hon. Luke:
American Action Forum article entitled, ``From Free Checking
to the Financial Fringe: A Tale of Two Regulations and Low-
Income Families,'' July 8, 2015............................ 123
Written responses to questions for the record submitted to
Todd Zywicki............................................... 128
Stivers, Hon. Steve:
Written statement of the Association for Corporate Growth.... 130
THE DODD-FRANK ACT FIVE YEARS
LATER: ARE WE MORE STABLE?
----------
Thursday, July 9, 2015
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Royce, Lucas,
Garrett, Neugebauer, McHenry, Pearce, Posey, Fitzpatrick,
Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt, Stivers,
Fincher, Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner,
Barr, Rothfus, Messer, Schweikert, Guinta, Tipton, Williams,
Poliquin, Love, Hill, Emmer; Waters, Maloney, Velazquez,
Sherman, Meeks, Capuano, Clay, Lynch, Scott, Green, Cleaver,
Moore, Ellison, Himes, Carney, Sewell, Foster, Kildee, Murphy,
Delaney, Sinema, Beatty, Heck, and Vargas.
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, ``The Dodd-Frank Act Five
Years Later: Are We More Stable?''
Before proceeding, I wish to yield to the gentleman from
Indiana for a very special introduction. The gentleman is
recognized.
Mr. Messer. Thank you, Mr. Chairman. This is unanticipated,
but I would like everybody here to meet my son Hudson Messer--
stand up, Hudson--who is joining us today. It is his first time
at a Financial Services Committee hearing. Thank you.
[applause]
Chairman Hensarling. Welcome, Hudson. Take very careful
notes. We are not always sure your father does.
Mr. Messer. He was watching the debt clock, though. He was
very impressed by that.
[laughter]
Chairman Hensarling. He will have to pay for it. I now
recognize myself for 3 minutes to give an opening statement.
Five years ago this month, Dodd-Frank was signed into law.
Undoubtedly, it is the most sweeping and dramatic rewrite of
banking and capital markets laws since the New Deal. Weighing
in at 2,300 pages, with 400 new rules, it is clearly, clearly
dramatic.
Whether fan or detractor, this committee would be negligent
if we weren't vigilant in our oversight of both the impact and
the implementation of Dodd-Frank. Negligent we will not be.
So today marks the first of three hearings to be held on
the Dodd-Frank bill, posing three different questions. Five
years after Dodd-Frank, are we more prosperous? Five years
after Dodd-Frank, are we more free? And the focus of today's
hearing, five years after Dodd-Frank, are we more stable?
I frankly believe it remains an open question as to whether
we have achieved greater stability. I fear the answer is
``no,'' but were the answer to be ``yes,'' when you look at the
damage Dodd-Frank has done to our economic growth, to family
finances and to consumer freedom, I am rather doubtful it would
be worth the cost.
Clearly, balance sheets have improved post-Dodd-Frank and
banks have delevered. This is a necessary and good thing, and I
strongly suspect that market forces would have brought about
these actions regardless of Dodd-Frank.
Regulators already possess the powers to have set more
prudent capital and leverage standards. Still, Dodd-Frank very
well may have been helpful in this regard.
What is undebatable is the fact that since the passage of
Dodd-Frank, the big banks are now bigger, and the small banks
are now fewer. In other words, even more banking assets are now
concentrated in the so-called too-big-to-fail firms. Pray tell,
how does this improve financial stability?
Dodd-Frank has codified too-big-to-fail into law and
provided a taxpayer-funded bailout system in Title I and Title
II of the Act. This simply leads to even greater moral hazard
and to greater instability.
According to the Richmond Federal Reserve, the explicit
Federal guarantees of financial sector liabilities have
increased to a whopping 60 percent post-Dodd-Frank. When
private investors and depositors and counterparties expect a
bailout, their incentives to monitor risk clearly wane.
Regulatory micromanagement is no substitute for market
discipline. By this measure, Dodd-Frank has clearly made our
financial system riskier.
Part of the extension of the Federal backstop has been the
creation of a whole new class of too-big-to-fail institutions,
namely centralized clearinghouses for derivatives. Here, Dodd-
Frank didn't lessen risk. It just centralized it and placed it
on a taxpayer balance sheet.
Next, Dodd-Frank's Volcker Rule, along with the Basel
accords, have caused a massive drop in corporate bonds
inventories. Many economists now believe the next financial
crisis could very well result from the illiquidity and
volatility in our bond market.
Senator Dodd of Dodd-Frank said, ``No one will know until
this is actually in place how it works.'' Five years later, we
have a clue, and we are learning that our financial system may
very well be less stable under Dodd-Frank.
I now yield 5 minutes to the ranking member for an opening
statement.
Ms. Waters. Thank you, Mr. Chairman. Today's hearing is the
first of two scheduled in recognition of the fifth anniversary
of the Dodd-Frank Wall Street Reform Act.
It is important to remember that the 2008 financial crisis
was not a natural disaster. Instead, it was the result of
deliberate choices, choices on the part of some on Wall Street
who put their own short-term interests ahead of the long-term
economic health of our Nation's investors and consumers.
As a result of choices on the part of some of our
regulators, we failed to respond as vulnerabilities and
illegalities in our financial system emerged. These choices had
tremendously damaging consequences. Our Nation became plagued
by small business closures, large drops in the stock market,
stunning job losses, rising foreclosures, and fears of a
looming repeat of the Great Depression.
In the 6 months before President Obama took office, our
economy hemorrhaged nearly 4 million private sector jobs, an
average of 650,000 per month. Nearly $16 trillion in household
wealth simply disappeared. The retirement accounts of many
hardworking Americans were swept away.
Around 9 million individuals were displaced from their
homes, many of whom may never again have the opportunity for
home ownership.
Once the economy was stabilized, Democrats worked
diligently on legislation to restore responsibility and
accountability to our financial system and instill confidence
that we have the tools in place to protect Americans from
another crisis.
Since Dodd-Frank was enacted 5 years ago, the American
economy has added nearly 13 million private-sector jobs and
unemployment has fallen by 4.7 percent points, its lowest level
since September 2008. The housing market is recovering, with
home prices rising, negative equity falling, and measures of
mortgage distress improving.
Retirees' investments are recovering as well. The S&P 500
has risen more than 250 percent since February 2009, and the
average 401(k) balance has reached a record high in 2014.
But even as we celebrate our success at avoiding a second
Great Depression, it is important to recognize that the events
of 2008 have cast a long shadow over our Nation's growth and
prosperity, one which has not been shared equally by all.
Research from Cornell University found that the foreclosure
crisis has resulted in an increasing level of resegregation in
many urban areas. Several institutions confirm the foreclosure
crisis likely had substantial negative impacts on child well-
being, with multiple moves and marital discord leading to
anxiety, depression, and poor performance in school.
The crisis also exacerbated what was already an
unacceptably large wealth gap between white and minority
households. The Pew Research Center found that the current
wealth gap between African-Americans and whites has reached its
highest point since 1989. The current white-to-Hispanic wealth
ratio has reached a level not seen since 2001.
We must go further to address these lingering challenges.
But make no mistake, we made progress. Most notably, in Dodd-
Frank we created a Consumer Financial Protection Bureau that in
just a few years has already returned $5.3 billion to 15
million consumers who have been subjected to unfair and
deceptive practices.
We have worked with the Bureau to create rules of the road
to make sure predatory mortgages never again strip wealth from
American families and endanger our economy.
And we worked with regulators to institute rules to protect
retirees and other investors from the practices that wreaked
havoc on savings in 2008.
But Mr. Chairman, too much time has been wasted in Congress
by the majority bent on austerity policies that leave workers,
retirees, and minority communities behind, while ignoring the
substantial progress we have made toward deficit reduction.
Too much energy has been spent trying to re-litigate the
causes of the 2008 crisis, which at this point everyone should
recognize is settled.
Finally, far too much effort has been spent by the
Republicans to weaken our regulatory apparatus, whether through
underfunding our regulators, relentlessly pursuing or
pressuring them to go soft on rules, or injecting unrelated
Wall Street giveaways into must-pass government funding bills.
I am tired of the Republicans' death-by-1,000-cuts strategy
to roll back the significant gains we have made since Dodd-
Frank enactment. Five years later, I urge my colleagues to take
stock of where we were and how far we have come.
And I suggest they recognize that much like the recent
Supreme Court decisions to uphold the Affordable Care Act, and
the disparate impact standard to prevent discrimination in
housing, Dodd-Frank is settled law.
Thank you, and I yield back the balance of my time.
Chairman Hensarling. The Chair now recognizes the gentleman
from Wisconsin, Mr. Duffy, chairman of our Oversight and
Investigations Subcommittee, for 2 minutes.
Mr. Duffy. Thank you, Mr. Chairman. When Dodd-Frank was
enacted 5 years ago this month, Senator Elizabeth Warren and
President Obama promised Americans that this law would lift the
economy, that their hard-earned money would be safer, that
markets would be more stable and that no one institution would
threaten the safety and soundness of the global financial
system.
As we have seen this law implemented, it has left much to
be desired. In large part, the 2008 financial crisis was a
result of Federal financial regulators failing to do their job,
and their inability to anticipate the looming issues in the
subprime mortgage market.
Dodd-Frank rewarded incompetency with more responsibility.
The law has created new areas of risk concentration, enshrined
too-big-to-fail institutions, made it more difficult for small
banks to compete, and done damage to the economy that is still
too difficult to quantify.
The law of unintended consequences has never been more
apparent than when we look at Dodd-Frank. The pursuit of
financial stability has come at a cost. While the goal may be
worthy, we must look at the collateral damage along the way and
ask ourselves if we are going down the right path.
Compliance burdens are crushing small institutions. And
though banks may be better capitalized, we are now seeing
negative market impacts stemming from these new regulations.
The FSOC and Treasury Secretary Lew don't really want to
admit that Dodd-Frank may be at the center of illiquidity that
was seen in the bond market. With banks having to hold on to
more capital and pulling out of market-making activities, these
markets are left withering in the wake of Dodd-Frank and other
international regulations.
Another product of Dodd-Frank is the Consumer Financial
Protection Bureau, the CFPB, which was tasked with protecting
consumers of financial products and services from
discrimination. Ironically, it has the worst track record of
all Federal financial agencies of EEO complaints, proving the
agency is inept at best, or negligent at worst, at protecting
its own employees from discrimination and retaliation.
Further, sources of small dollar credit products that
millions of Americans rely upon are now in the crosshairs of
the Bureau. The government-knows-best mentality, the nanny-
state mentality, has gone too far. Americans are capable of
choosing products and making decisions that they know are in
their best financial interests.
The CFPB is eliminating consumer freedom and imposing
political agendas that I just don't think work, Mr. Chairman.
This is the Gruber mentality, along with--well, I will go there
later. I will yield back.
Chairman Hensarling. Notwithstanding the fact the gentleman
was on a roll, the time of the gentleman has expired.
[laughter]
Today, we welcome the testimony of our distinguished panel.
I will introduce them at this time.
First, Mr. Paul Atkins is the CEO of Patomak Global
Partners. He is a former Commissioner of the U.S. Securities
and Exchange Commission, appointed by President George W. Bush.
I also note that he is a fellow member of the TARP Oversight
Panel.
Before his appointment to the Securities and Exchange
Commission, he served on the staff of two SEC Chairmen, and
worked as an attorney in private practice. He is a graduate of
the Vanderbilt University School of Law, and Wofford College.
Dr. Mark Calabria is the director of financial regulation
studies at the CATO Institute. Before serving at CATO, he
served on the staff of the Senate Banking Committee, and as
Deputy Assistant Secretary for Regulatory Affairs at the U.S.
Department of Housing and Urban Development. He owns a
doctorate in economics from George Mason University.
Mr. Damon Silvers is director of policy and special counsel
at the AFL-CIO where he has advised on a range of financial
services matters before the Treasury Department, the SEOC, and
the PCAOB. I also note he served as the Deputy Chair of the
Congressional Oversight Panel, another fellow alum. I think we
are maybe two shy of a full reunion. At this time, we might
leave it that way.
Professor Todd Zywicki is a foundation professor of law and
an executive director of the Law and Economics Center at George
Mason University. He was previously an attorney in private
practice, and a law clerk for Judge Jerry Smith, U.S. Court of
Appeals for the 5th Circuit. He is a graduate of the University
of Virginia Law School, Clemson University, and Dartmouth
College.
Each one of you gentlemen, I know, has testified before our
committee. So I trust you do not need a remedial tutorial on
our lighting system of red, yellow, and green.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. And without objection,
each of your written statements will be made a part of the
record.
Mr. Atkins, you are now recognized for 5 minutes to
summarize your testimony.
STATEMENT OF THE HONORABLE PAUL S. ATKINS, CHIEF EXECUTIVE
OFFICER, PATOMAK GLOBAL PARTNERS LLC; AND FORMER COMMISSIONER,
U.S. SECURITIES AND EXCHANGE COMMISSION
Mr. Atkins. Thank you, Mr. Chairman. Good morning, Chairman
Hensarling, Ranking Member Waters, and members of the
committee, and thank you very much for inviting me to appear at
the hearing today.
Given my background, I am going to focus my remarks on the
impact of Dodd-Frank on the U.S. capital markets. I think the
single largest problem of the Act is Title I, titled
``Financial Stability.''
The conceit of the authors of Dodd-Frank is that if you get
enough smart people in a room with enough data, they can bring
stability to the marketplace. But just as human beings cannot
be counted on to be predictable and stable, those of us who
spend a lifetime engaged with the capital markets know that
they also are not always stable because human beings with other
foibles make up markets.
Ultimately, though, the freedom of individuals to make
their own decisions is not a curse, but a benefit.
A little over a year ago, I testified before this committee
on the FSOC's embarking on a misguided effort to apply bank
prudential regulation to the capital markets by designating
asset managers as systemically important financial
institutions, or SIFIs.
After much pushback, including by many of you on this
committee from both sides of the aisle, both the FSOC and the
International Organization of Securities Commissions now
indicate that they are moving away from designating asset
managers as SIFIs. But that decision is not carved in stone.
Take the Financial Stability Board, which seems not to have
changed its course to designate funds and asset managers as
global SIFIs, even though the only funds and managers that meet
their materiality threshold are American. That raises serious
competitive implications for the United States just as the
European Union embarks on an initiative to encourage Pan-
European capital markets.
In short, the story of attempted prudentialization of
capital markets is not going away. I fear that the U.S. capital
markets, which have been the driver of economic growth and job
creation in this country for decades, will be the collateral
damage in the elusive quest for, as I say, stability ``uber
alles.''
Another Dodd-Frank provision that is emblematic of a flawed
legislative process is the Volcker Rule. Despite not being
included in either the House or the Senate bill, and without
any substantive hearing to consider the specific language of
the Rule, potential effects or unintended consequences of the
provision, the Volcker Rule became law.
Basically, the Volcker Rule is aimed at banning proprietary
trading in commercial banks. Because it is easier to blame Wall
Street in excessive risk taking for the financial crisis than
the Federal Government's own housing policies, many have
trumpeted the Volcker Rule as the best reform of Dodd-Frank.
But even former Chairman Volcker himself has acknowledged
that, ``proprietary trading in commercial banks was not central
to the crisis.'' Yet, the statute and implementing regulations
turned regulators into amateur psychologists. They might as
well have a Ouija board to determine intent under the rule.
Rather than risking running afoul with regulations, banks
have reduced their market-making activities. Combining the
Volcker Rule with higher capital requirements at home and
abroad has literally sucked essential working capital out of
the market-making activities of banks.
Banks no longer act as principals in trading any more, but
as agents. That decreases market liquidity on a daily basis.
Even though Secretary Lew--who by the way does not have a
financial background--refuses to acknowledge it, the Volcker
Rule is the needless regulation that has caused and will
continue to cause harm to issuers and investors.
As the chairman quoted at the outset, former Senator Dodd
famously said, ``No one will know until this is actually in
place how it works.'' Five years later, the full effects of
Dodd-Frank are still unknown. But the costs certainly have been
borne not just by Wall Street but by ordinary investors and
businesses of all shapes and sizes who are no safer today than
they were in 2008.
Indeed, small investors will suffer more pain if the
Administration goes through with the proposed changes to the
ambit of fiduciary duty under ERISA. To say nothing of the
myriad special interest provisions in Dodd-Frank that had
absolutely nothing to do with the financial crisis such as
conflict minerals certification, mineral extraction disclosure,
and the CEO pay disclosure.
Moreover, until Congress claims some of the authority that
it gave regulators under Dodd-Frank, particularly the authority
given the FSOC and the Federal Reserve under Titles I and II,
the greatest risk to the U.S. capital markets remains that
government, and not the markets, will ultimately choose winners
and losers.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Atkins can be found on page
74 of the appendix.]
Chairman Hensarling. Thank you.
Dr. Calabria, you are now recognized for your testimony.
STATEMENT OF MARK A. CALABRIA, DIRECTOR, FINANCIAL REGULATION
STUDIES, CATO INSTITUTE
Mr. Calabria. Chairman Hensarling, Ranking Member Waters,
and distinguished members of the committee, thank you for the
invitation to appear at today's important hearing.
I will note that it has been almost a year since I appeared
before the committee, and I was starting to wonder if I had
worn out my welcome. So, it is a delight to be back, and of
course an honor to be part of such a distinguished panel.
The subtitle of today's hearing raises what I believe is
probably the single most important question in financial
regulation: Are we more stable? Let me cut the suspense and
give you my answer. I think it is ``no.'' Now, let me tell you
why.
I will note that there have been improvements. And I don't
think anybody would disagree with that. In my written
testimony, I talk about the improvements we have seen in bank
capital. But my own opinion is that the net improvements have
been outweighed by the net downsides.
This is also an extremely broad topic. I touch on a number
of things in my written testimony, which I will be delighted to
discuss later, but I am only going to focus on a few right now.
Let me first focus on what I believe is one of the more
important contributors to financial instability, which is the
moral hazard created by both implicit and explicit guarantees
of risk taking.
The chairman mentioned the Richmond Fed's Bailout
Barometer. As he noted, this is up to a full 60 percent of our
financial system liabilities, either explicitly or implicitly
backed by the Federal Government. I will note this is higher
than both before Dodd-Frank and before the crisis.
Part of the measure of the implied too-big-to-fail is the
too-big-to-fail subsidy of our largest banks. For reasons I
detail in my written remarks, I do not believe that Dodd-Frank
has ended too-big-to-fail. I will note that according to recent
polling, neither does a plurality of the American public
believe that either.
Some would claim that Title II's orderly liquidation
process ends bailouts. I will note that I worked on a similar
mechanism created under the Housing Economic Recovery Act for
Fannie Mae and Freddie Mac. And so let us not forget, we had
the tools to resolve Fannie and Freddie without a dime of cost
to the taxpayer. Those are on the books. Those were not used.
So maybe I will characterize my concern this way. The
ranking member mentioned choices. We are faced with that next
time.
Regulators will have the choice whether they resolve an
institution without relaying to the taxpayer, without taxing
the rest of the financial services industry, or whether they
impose losses on creditors. So let me emphasize that while I
agree that Dodd-Frank's Title II offers a path to imposing
losses on shareholders and creditors, I could not
overemphasize, it is a choice.
One of the reasons I believe that choice will not be taken
is if you simply compare an institution like Freddie Mac, which
is smaller and less complex than an institution like Citibank,
it suggests to me that it is very hard to believe that we would
actually let Citibank fail.
There are a number of other institutions that we may let
fail, but I don't think some of them would work.
I appreciate and commend the FDIC's attempts towards its
single point of entry to try and improve upon that process.
Setting aside its questionable legality, I would also emphasize
that it is an optional approach. Whether it is actually
followed or not is an open question.
Were it credible, markets would price holding company debt
and subsidiary debt differently. Recent research from the New
York Federal Reserve shows that this is not happening. So
apparently, the markets don't even believe the single point of
entry is going to be effective.
I will note that a handful of studies have found that
designating systemic entities as ``systemically important,'' as
is done under Title I, leads market participants to view these
entities as too-big-to-fail.
I will remind the committee that in this very room in 1984,
when the Comptroller of the Currency told us that the 11
biggest institutions were too-big-to-fail and they were going
to be heavily regulated, we still ended up bailing out some of
those institutions.
So, it is bad enough that unfortunately the implied
guarantees of our largest banks have been further backed. We
also have extended that privilege, as the chairman noted, to
financial market infrastructure such as clearinghouses.
Another important driver of instability is monetary policy.
Years of negative real interest rates incentivize all sorts of
reckless behavior, such as that which helped inflate the
housing bubble. I am certain that we are currently massively
distorting our financial markets with our current monetary
policy.
Let me be very clear in my opinion that the Fed's current
policies will be very painful when they unwind. Most of us
agree that mortgages play an important role in the crisis.
Dodd-Frank has indeed attempted to address problems in the
mortgage market. As I detail in my written testimony, I believe
these attempts have fallen short, and in many instances have
done more harm than good.
I believe the evidence is overwhelming coming from such
neutral parties as GAO that loan to value and borrower credit
are the main primary drivers of default, yet these have been
ignored.
I remind the committee that Congressman Frank sat at this
table last year and testified that he clearly meant that
downpayments should be a part of QM and QRM. The regulators
have gutted these provisions, making them worse than useless.
Perhaps worst of all is that Dodd-Frank has helped drive
almost all of the mortgage risk in the United States on the
backs of the taxpayer. Fannie, Freddie, and FHA all hold
essentially zero capital. When the housing market turns, which
it will, the taxpayer will face a very large bill.
Even the IMF, no lover of free markets, highlighted earlier
this week the instability risks from our housing finance
system. If we continue along this path, I estimate that at
least a million families will lose their homes in the next
downturn from the reckless underwriting practices of the FHA
alone.
Mr. Chairman, I commend you for calling today's important
hearing. As we painfully learned over the last decade,
financial crises are extremely costly and painful, both for the
economy and for American families.
Had Dodd-Frank brought more stability to our financial
system, I would be the first to applaud it. I do believe it has
not.
Without sufficient reform, I believe we are almost certain
to see another painful crisis within the next decade. Sadly,
the warning signs were ignored before the last crisis.
I urge Congress not to ignore the warning signs this time
around.
[The prepared statement of Dr. Calabria can be found on
page 87 of the appendix.]
Chairman Hensarling. Thank you.
Mr. Silvers, you are now recognized for your testimony.
STATEMENT OF DAMON A. SILVERS, DIRECTOR OF POLICY AND SPECIAL
COUNSEL, AMERICAN FEDERATION OF LABOR--CONGRESS OF INDUSTRIAL
ORGANIZATIONS (AFL-CIO)
Mr. Silvers. Good morning, Chairman Hensarling, Ranking
Member Waters, and members of the committee.
My testimony today is given on behalf of both the AFL-CIO,
and Americans for Financial Reform, a coalition of over 200
organizations.
The Dodd-Frank Act passed in the wake of a financial crisis
that cost the United States $22 trillion, according to the GAO.
In the course of that crisis, 10 million families were thrown
out of their homes and tens of millions lost their jobs. That
is what we are trying--the statute was seeking to prevent
occurring again.
But the Dodd-Frank Act was a compromise. It did not place
size limits on financial institutions, it did not restore the
Glass-Steagall Act, and it did not fundamentally change the
incentives in the executive compensation system of our
financial firms to take on excessive risk.
Rather than making these fundamental structural changes,
the Act gave regulators the possibility of making structural
change. This goes back to Dr. Calabria's point about choices.
What Dodd-Frank did do was resurrect fundamental principles
of financial regulation that had been forgotten in the race to
deregulate in the 1980s and 1990s. Most of all, the Dodd-Frank
Act created a clear, workable alternative to the bailout of
systemically significant institutions.
The resolutions process, contemplated in Title II, places
the responsibility for first-hour losses and distress
situations clearly where it should be, on the too-big-to-fail
firms, their equity holders, bond holders, and executives.
However, I would associate myself with Dr. Calabria's comments
that this requires the regulators to actually choose to use it.
The U.S. financial regulatory system prior to the Dodd-
Frank Act was a Swiss cheese system, full of holes allowing
financial actors to evade both capital and transparency
requirements for the price of a lawyer. The Act closed many,
but not all, of these loopholes.
Five years later, among the clear results of these changes
is a reduction in the credit market's perception that the
government will bail out the Nation's largest banks if they get
into trouble. GAO found that while there was a very large
subsidy--in the credit markets for too-big-to-fail banks in
2009 and 2010.
Between 2010 and 2014, that subsidy fell to near zero as
regulators showed through the progress of living wills, the
adoption of single point of entry and the refinement of stress
tests that they were serious about enforcing the provisions of
Title II.
But the Dodd-Frank Act was not simply about protecting the
financial system from itself. Its explicit purpose was to make
financial markets less of a rigged game from the perspective of
consumers and investors.
Here, the track record is impressive and expanding. For
example, the CFPB has returned $5.3 billion of improperly
obtained fees and penalties to over 15 million consumers and
their families. And the Securities and Exchange Commission
recently has begun using the Act to uncover widespread abuses
of investors by private equity and hedge fund managers.
However, the Act necessarily depends on regulators to
implement and enforce it, and all too often over the last 5
years regulators have succumbed to political pressures not to,
particularly in the area of executive compensation.
And then, there was the recurring impulse in Congress to
weaken financial regulation, that same impulse that brought us
to crisis in the first place. We saw this on display in the
Cromnibus negotiations last winter where Congress worked with
the Obama Administration to repeal the hard-fought derivatives
push out provisions and once again relink the derivatives
market to the deposits of American families.
Efforts to weaken the Dodd-Frank Act have involved the use
of a series of spurious arguments, including ``cost benefit
analyses'' that looked only at the costs and not at the
benefits. These sorts of arguments only have weight because of
the political and economic power of the people making them.
And this brings us back to the issue of too-big-to-fail
banks. The truth is that because Dodd-Frank was a compromise,
because it largely left to the regulators the question of
structural change, it has proven to be vulnerable to the
continuing political power of the handful of too-big-to-fail
banks that continue to dominate our financial system and exert
a disproportionate influence on our politics.
In this sense, the unfinished agenda of financial reform is
inextricably intertwined with the ability of the regulatory
system to effectively implement the Dodd-Frank Act as it is to
ensure the financial system does its job of efficiently
transforming savings into investment and to protect the U.S.
economy and the American public from a costly repeat of the
financial crisis that began in 2007.
My answer, Mr. Chairman, to the question posed in the title
of this hearing, is that the Dodd-Frank Act has definitely
helped make our financial system more stable, but unless we
deal with the too-big-to-fail problem more directly, the Dodd-
Frank Act itself is not stable.
Thank you.
[The prepared statement of Mr. Silvers can be found on page
104 of the appendix.]
Chairman Hensarling. Thank you.
Professor Zywicki, you are now recognized for your
testimony.
STATEMENT OF TODD J. ZYWICKI, FOUNDATION PROFESSOR OF LAW AND
EXECUTIVE DIRECTOR OF THE LAW AND ECONOMICS CENTER, GEORGE
MASON UNIVERSITY SCHOOL OF LAW
Mr. Zywicki. Thank you, Chairman Hensarling, Ranking Member
Waters, and members of the committee. I am a scholar of
consumer credit, a former FTC senior staffer, and as a result,
I was especially disappointed that Dodd-Frank had squandered an
opportunity to modernize our financial consumer protection
system, to a regime that would promote competition, consumer
choice, and innovation.
If you look back at the record over the past 5 years,
instead Dodd-Frank has substituted the judgment of Washington
bureaucrats for American families with respect to the financial
products that will make their lives better; thrown a blanket of
uniformity over the consumer credit market, strangling
innovation and crushing community banks; raised prices; and
reduced consumer choice with respect to financial services.
And by reducing access to financial services, and because
many small businesses use personal credit in their own
businesses, it has dampened the economic growth and recovery.
And I think most tragic of all, Dodd-Frank has done little to
increase consumer protection for American families, but by
driving millions of consumers out of the mainstream financial
system, and into the hands of payday lenders, check cashers,
pawn brokers, and all of the other alternative financial
providers, it has actually made life worse for the most
vulnerable members of society.
At the heart of Dodd-Frank was the Consumer Financial
Protection Bureau, which is both the most powerful and
unaccountable bureaucracy in American history, with the ability
to regulate virtually every consumer credit product under vague
and poorly defined standards.
If we look at the track record of the CFPB, and the way in
which Dodd-Frank has been implemented, we see a sweeping amount
of damage to American families as a result of this law.
First, Dodd-Frank has destroyed free checking for millions
of Americans. Prior to Dodd-Frank, 76 percent of Americans had
access to free checking; since Dodd-Frank was enacted, that
number has fallen to 38 percent. Bank fees have doubled as a
result of Dodd-Frank, driving approximately a million, if not
more, consumers out of bank accounts and into the alternative
financial sector.
With respect to credit cards, by interfering with the
ability of credit card issuers to accurately price their risk,
it is estimated that 275 million credit card accounts were
closed, and $1.7 trillion in credit lines were eliminated, and
again, those who bore the brunt of this were the lowest income
consumers. According to the Federal Reserve, the number of--
lowest quintile households with credit cards fell by 11
percentage points in the period since Dodd-Frank was enacted,
taking credit cards out of the hands of American families, and
forcing them to turn to payday loans and other alternatives to
try to pay the rent, and to try to prevent eviction.
With respect to mortgages, Dodd-Frank has raised the cost
and risk of lending, and continued to slow the housing recovery
and access to mortgages.
Yet by doing nothing about downpayments and many of the
other factors that led to the financial crisis, Dodd-Frank is
doing little to prevent the next financial crisis.
Perhaps most notably, Dodd-Frank's rules, by throwing this
blanket of uniformity and bureaucratic underwriting over the
mortgage market, have driven community banks out of the
mortgage market. According to a Mercatus study, for instance,
64 percent of community banks have changed their mortgage
offerings as a result of Dodd-Frank and the CFPB, and by
creating this new de facto plain vanilla rule, they have
eliminated the ability of community banks to compete on what
they do best, which is relationship lending.
One other area I would like to flag is this extraordinary
data mining operation that the CFPB has undertaken with respect
with consumer data. While--and perhaps this evidence is best,
the dangers of creating a super unaccountable bureaucracy like
the CFPB that--and the sort of egregious behavior that this
leads to. For those not familiar with this, it is estimated
that the CFPB is routinely scooping up 600 million credit card
accounts, 22 million mortgages, and 5\1/2\ million student
loans, all without the knowledge and consent of American
consumers.
And that is still not enough. They want 95 percent of
credit card accounts. According to one estimate, this is 70,000
percent more data than the CFPB needs in order to effectuate
its regulatory purposes. This is especially worrisome in light
of the fact that the Director of the CFPB himself has admitted
that this data could be reverse engineered in the light of
recent data breaches at the IRS, OPM, and elsewhere.
Thank you.
[The prepared statement of Mr. Zywicki can be found on page
111 of the appendix.]
Chairman Hensarling. Thank you.
The Chair now yields himself 5 minutes for questions.
Mr. Atkins, in your testimony, on page 8, you posit one
undisputed effect of the Volcker Rule has been a reduction in
corporate bond inventories of primary dealers. Next time you
posit that, I might suggest that you offer the caveat, ``unless
you are an economist employed by the Federal Reserve or the
Financial Stability Oversight Council.'' They seem to be the
only ones in the world who can't connect the Volcker Rule with
this undisputed reduction.
Even the Financial Stability Board, as you point out in
your testimony--Governor Mark Carney of the Bank of England
warned that the Volcker Rule ``could reduce global financial
resilience rather than increase it.''
So you cited in your testimony, I believe it was a 77
percent drop in primary dealer inventories of corporate bonds
since the crisis. Can you expound on your views of how this
could create greater instability in our markets?
Mr. Atkins. Thank you, Mr. Chairman.
Basically, because of the regulatory apparatus and the
uncertainty that the Volcker Rule has created with respect to
banks operating as--with their own money in the marketplace as
market makers, banks have tended to back away from doing any
propriety trading, because they feel that is only going to get
them in trouble.
And so, because of that, that just means on a day to day
basis, there is that much less participation by the banks in
the marketplace. So that creates a question with respect to
liquidity and a decrease of that on a day to day basis.
Chairman Hensarling. On page 4 of your testimony, you speak
of the potential for asset fund managers to be designated as
systemically important financial institutions under the Dodd-
Frank regime, and you question what this could do to risk
management or liquidity in the market.
If that takes place and fund managers are found to be
SIFIs, or in deference to you, SCIFIs--
Mr. Atkins. Right.
Chairman Hensarling. --give me your views about how this
impacts market stability?
Mr. Atkins. The real fear is the extension of prudential
bank-type regulation into the capital markets. Prudential
regulation grew up by the banking regulators, because their
mission is safety and soundness of the banking system. Whereas,
on the capital market side, we have created the goose that lays
the golden egg here in the United States where innovation and
competition really has made a very dynamic marketplace that
truly is the envy of the world.
Not too long ago, I was at dinner with the head of a
multilateral international lending operation, a government type
of lending operation. And he told me he could not believe what
the United States is doing to its capital markets, which, he
said, of course, with Asia and Europe, is truly the envy of the
world.
So that is really the ultimate worry, is that, because of
the Fed and the FSOC began able to have prudential regulatory
authority over the capital markets, that there will be less
activity there, and they will ultimately be able to direct--
either tell people not to trade or to acquire certain
securities.
Chairman Hensarling. Dr. Calabria, you mentioned this in
your testimony, and Professor Zywicki spoke about our housing
markets.
On page 15 of your testimony, you mentioned that Dodd-Frank
could very well result in an increase in the level of mortgage
defaults during the next housing bust. So, we have just have
come off a rather painful housing bust.
Could you expound on your views of how Dodd-Frank might
just bring us full circle?
Mr. Calabria. Sure, I would be happy to. Let me set aside
issues that might reduce defaults and talk about some of those
in the legislation that might increase defaults.
A number of scholars have found that the longer you delay
the foreclosure process, for instance, the more people who end
up in delinquency. And of course, a number of provisions in
Dodd-Frank extend the length of the foreclosure process, and of
course, things like letting borrowers know that they--if you
are in a non-recourse State, that they could walk away. If it
had any effect at all, it will be to encourage those borrowers
to walk away.
So there are a number of provisions that, to me, will drag
out the foreclosure process, resulting in larger foreclosures.
I would hope that one of the lessons we would take away from
the crisis, and for instance, if you compared judicial to non-
judicial foreclosure States, is that if you make it very hard
to foreclose, you get more foreclosures, in terms of the
reaction of borrowers.
Chairman Hensarling. In attempting to set precedent, I will
not go over my time.
The Chair now yields 5 minutes to the ranking member.
Ms. Waters. Thank you very much, Mr. Chairman.
Before I get to one of the main questions, I would like to
ask, I think it is Mr. Atkins, do you agree that the Consumer
Financial Protection Bureau has returned $5.3 billion to 15
million consumers who have been subjected to unfair and
subjective practices?
Mr. Atkins. I don't know the exact number, but from the
paper, they are even having trouble identifying supposedly who
has been harmed in some of those cases. So they collect money
from their settlements where people feel over the barrel that
they have to pay to get the regulator off of their back, but
the query is, who is being harmed, and how do you show who is
being harmed?
Ms. Waters. Mr. Silvers, as Deputy Chair of the
Congressional Oversight Panel created in order to oversee the
Troubled Asset Relief Program (TARP), you had a front-row seat
to our government's response to the crisis, starting with the
Bush Administration placing Fannie and Freddie into
conservatorship, and continuing with then-Treasury Secretary
Hank Paulsen injecting billions of dollars of capital into our
Nation's largest banks in order to forestall economic chaos.
Can you take us back to that time, and again, you have done
some of this in your testimony, but remind the committee just
how bad the economy was during the depths of the crisis. And
can you again remind us what was happening to American workers
in terms of home foreclosures, small businesses closures, and
401(k) plans being decimated?
Mr. Silvers. Ranking Member Waters, I am happy to do that.
It gives me a moment also to recall the time that I spent with
the chairman in that work, and to reflect on a lot of the
bipartisan things we did together, which I think is all too
rare in our time.
The story you asked me to tell is one that we don't have
time for the full horror of, but just a few anecdotes. I
remember then-Deputy Treasury Secretary Bob Steele, in the fall
of 2007, saying to me, we are going to have a big problem. We
might have as many as a million foreclosures. This is the
number that Dr. Calabria is worried about.
Of course by the time we were done, we had 10 million. That
is 40 million people set out in the street. The median net
worth in the course of that process of African-American
families fell from $18,000 to $6,000. It has never recovered.
We had as many as 25 million Americans out of work. We had
the economy contracting in the fall of 2009, according to Paul
Volcker, at a rate greater than it was contracting during the
depths of the Great Depression.
We put several hundred billion dollars into the Nation's
largest banks, being told at the time by the Treasury
Department that they were all solvent.
And it is my belief that--it has become quite clear that at
least two of them, CitiGroup and Bank of America, were
certainly insolvent at the time that they were given the money.
And it is unclear that if the money had not been given, that
any of them were solvent. We provided the money on terms that
were only 60 cents on the dollar to the American public.
Later, Treasury Secretary Geithner asserted that we got our
money back, but that statement assumed that the listener was
extraordinarily naive. We propped the banks up and then we
didn't get the upside. That is what those numbers meant. The
upside went to the people who caused the problem in the first
place.
I think we need to recognize in looking through this
history a couple of things. One of them is that had nothing
been done, we would certainly have been in a prolonged
situation like the Great Depression, and that--this will seem
like a strange thing for me to say, but the Bush Administration
and the Democratic Congress, and in particular Hank Paulsen,
deserve great credit for acting. But the failure then to
restructure our banks, the failure to restructure home mortgage
debt devastated our economy.
And although my fellow witness, Mr. Atkins, feels that our
capital markets are the envy of the world, and they may well be
now, at that time they were widely seen as having initiated--
our capital markets were widely seen as having initiated a
global financial crisis that cost the world economy $60
trillion and destabilized democratic societies around the
world. That is a heavy indictment.
Chairman Hensarling. The time of the gentlelady has
expired. The Chair now recognizes the gentleman from Michigan,
Mr. Huizenga, the chairman of our Monetary Policy and Trade
Subcommittee.
Mr. Huizenga. Thank you, Mr. Chairman. I appreciate that.
And gentlemen, it is good to see you all again. Mr.
Silvers, we have something that we agree on. I heard you say
that the Dodd-Frank bill was a compromise piece of legislation,
and by that I assume you mean a compromise between Senator Dodd
and Representative Frank, because there weren't any Republican
votes for that during that time.
But I do want to touch on a couple of quick issues that Mr.
Atkins had touched on, and I am going to go in a little
different direction because of some of the work that we have
been doing on the committee.
The first one is pay ratio. The rule is expected to come
out, I believe next month, from the SEC. I had an opportunity
to question Chair White back in March of this year, and her
quote from an October 2013 speech was that seeking to improve
safety of--I'm sorry, it is my next question.
The pay ratio rulemaking, really the SEC didn't have any
experience or expertise in this. At the time, it seemed the SEC
doesn't know exactly where it is going, whether it is going to
include part-time employees, contract employees which may be
temporary workers, it may be the cleaning crew who comes in,
who gets hired to come in, much less overseas employees.
So if you would maybe quickly touch base on that pay ratio
provision that is required, and what you expect as a former SEC
Commissioner, what might happen.
Mr. Atkins. I think it is an unfortunate diversion,
frankly, from what the SEC should really be focused on. It was
a sop to special interests who have their own ax to grind in
that regard.
And then as you touched on definitionally, it is very
difficult to implement. So I know the staff at the SEC is
struggling with how exactly to put this thing together, and I
expect that will be yet another divided vote.
Up until the time I left the SEC in 2008, I don't think
during my time there was any rulemaking divided vote upon
partisan lines. And unfortunately, that number has
skyrocketed--
Mr. Huizenga. And that has been very common, correct?
Mr. Atkins. Exactly. Under this Administration, it has been
very common.
Mr. Huizenga. I do want to quickly move on to something
else that has had great impact on manufacturers like Watts in
Michigan. I am very tied to the automotive industry. We have a
tremendous number of tier 1, tier 2, and tier 3 automotive
suppliers that are dependent on rare earths for their products
and products that are put in.
This is where in an October 2013 speech Chair White had
said, ``I may wholeheartedly may share some of the compelling
objectives as a citizen, but as Chair of the SEC I must
question as a policy matter the use of Federal securities laws
and the SEC's power of mandatory disclosure to accomplish these
goals.'' She is talking about the conflict minerals.
I had an opportunity just yesterday to meet with the
Rwandan Ambassador, Mathilde Mukantabana, minister of mines,
Mr. Imena, and a mine owner, Emery Rubagenga, who came to my
office expressing grave concern. The $20 million that the
government of Rwanda spends on its mining operations, $2
million of that is spent for exploration and surveying, $5
million to $6 million of that is spent on trying to comply with
Dodd-Frank conflict mineral rules.
And my fear is that there is a huge impact on our
manufacturers while other manufacturers throughout the world
are not subject to the same rules, and it is having little or
no positive effect on those it was intended to help.
This committee had a subcommittee hearing, I guess a term
or two ago, where we had some folks from the Democratic
Republic of Congo in, expressing that exact same thing.
I think it is imperative upon us--again, I would agree with
Chair White. Very laudable goals and objectives are missing the
mark because they are not truly helping those who are trying to
escape that conflict. And they are certainly not helping the
United States and our manufacturers as we are trying to compete
in the world economy.
Mr. Atkins, you had touched on that, so maybe a couple of
seconds on that?
Mr. Atkins. Yes, I agree. I think it is really unfortunate
that Congress foists on the SEC these disclosure provisions
that have nothing to do with materiality with respect to public
issuers. That is the basis of the 1934 Act, the Securities and
Exchange Act.
And to go off and to try to do social engineering through
the securities laws and disclosure, I think is really
unfortunate.
Mr. Huizenga. Thank you, and I will mention that her
response to a letter is, the SEC has spent over 21,000 hours
and approximately $2.7 million on that particular provision,
and to what end?
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, the ranking member of our Capital Markets
Subcommittee.
Mrs. Maloney. Thank you, Mr. Chairman, Ranking Member
Waters, and all of the panelists for your testimony today.
We need to remember that Dodd-Frank was a sweeping overhaul
of our entire financial regulatory system that was brought on
by the largest financial disaster in our history, where we
lost, according to the GAO, independent, $22 trillion.
Tens of millions of people lost their jobs. Millions were
out of work, and the economists who testified before this
committee and others said that this had economic shocks that
were 3 to 5 times stronger than the Great Depression, and it
was caused by mismanagement of the financial system. And it was
the only financial crisis that was totally self-inflicted.
I don't want to go through it again, so I am proud of any
effort to stop any type of financial abuse. But one of the
principal goals of Dodd-Frank was to improve the safety and
soundness of our core banking system, and it was a response to
a crisis which showed that many of our largest banks did not
have nearly enough capital or nearly enough liquidity.
So it is important to point out that 5 years later, the
biggest banks have more than doubled the amount of capital they
hold. In fact, they now hold more than $1.1 trillion in
capital, and the biggest banks have also nearly doubled their
liquidity since the crisis, and they go through now a required
annual stress test by the Federal Reserve that the IMF calls
state-of-the-art.
So I believe that Dodd-Frank has successfully achieved its
goal of shoring up safety and soundness of our banking system
that serves our people and serves our country, making it
stronger and more resilient. And this will make future
financial crises less likely. And I am proud of that
achievement.
Now I would like to ask Mr. Silvers about an important
financial reform that we passed before the crisis--during that
crisis--that I authored, and worked on for 4 years.
It was called the Credit Cardholders' Bill of Rights. Now,
some on the panel have claimed that it harmed consumers. But
there were two important studies. And I would like to put them
into the record. I don't have them with me today. One was done
by the Pew Foundation, which said this bill alone saved the
American consumers $10 billion a year.
A joint report from New York University, Columbia and
another university claimed it saved a whopping $20 billion a
year. I call it the ``Maloney Stimulus Package'' because I for
one would like to keep that money in the hands of consumers and
not in institutions that by all accounts were performing--not
all of them--unfair, deceptive, abusive, and anti-competitive
practices.
So I would hear stories. It was hard to walk 2 feet without
hearing a credit card story. One man was promised $8,000 on
your interest. You can buy a car. He bought a car. Two months
later, the financial institution raised his interest rate to 30
percent a year--30 percent. He was trapped in debt.
He paid off the car 2 or 3 times. He couldn't get out of
debt. And so the Credit Card Bill of Rights cut out lies, cut
out abusive practices, and made it fair. Now, banks tell me and
the Consumer Financial Protection Bureau that they get very few
complaints on credit cards.
People are not complaining because they are fair and that
is what we want. We want fair practices in our financial
system. So I don't--I would like to ask Mr. Silvers about the
CARD Act. By the way, Rahm Emanuel told me that it continues to
poll better than anything the Administration ever did because
it touched every consumer in this country.
And I would say that this was a bill that passed with
support from both sides of the aisle overwhelmingly.
Do you think the Credit Card Bill of Rights is abusive to
American consumers? Do you think keeping their money in their
hands is an abusive practice? I would like you to expand on
this, if you would, Mr. Silvers.
Mr. Silvers. I have 17 seconds to do so.
Mrs. Maloney. We can take your written testimony.
Mr. Silvers. I will just say this, what I think it is not
as important as what people who have done peer-reviewed
academic research think. And what they--and what the premier
study in this area, done by a team at the University of
Singapore and the University of Chicago--found that for lower
income credit cardholders, those with FICO Scores with credit
ratings under 600, the Act and the banning of the tricks and
traps you were talking about reduced credit card cost by 5.3
percent of balances, a very big number, and did so without
impairing access to credit in any way they could detect.
Chairman Hensarling. The time of the gentlelady has
expired. The Chair now recognizes the gentleman from North
Carolina, Mr. McHenry, vice chairman of the committee.
Mr. McHenry. Well, happy anniversary. America has been
saved. We are just living with the consequences of that savior,
Dodd-Frank. And the consequences of that are lower growth, and
impaired lending for community institutions and large
institutions as well.
It means we have less job creation than we otherwise would
have. And historically, Dodd-Frank is an anomaly in how
Congress is legislated. And so, Dr. Calabria, I want to ask a
little bit about this.
If you look at the last major crisis that my Democrat
colleagues point to and say that this was an analogous
situation we have lived through and that is the Great
Depression. So out of the Great Depression, you have the Pecora
Commission that reviewed the finite causes of what they were
experiencing.
You had Congress in a bipartisan way--did they not write
securities law, but the 1933 and 1934 Acts, right? These were
not partisan endeavors as a result of that great crisis. Is
there some context you could provide to that, Dr. Calabria?
Mr. Calabria. I appreciate the gentleman's point. First,
let me respond to an earlier point. We all agree the crisis was
bad. I don't think anybody here disagrees with that, certainly
not on the panel. I think we all agree we would like to avoid
future crises. I don't think there is any disagreement on that.
I think we all agree that in the crisis we should have done
something. The question is, what should it have been? I would
have preferred debt to equity swaps that would have imposed
losses on creditors to recapitalize the banks very quickly.
I will not--we certainly didn't do nothing during the Great
Depression. Lots of things were done, many things in my opinion
that made it a longer, while we do not know what the counter
factual would have been had we done other things, I am always
puzzled by the argument of, it was really bad, so I am glad we
did this. Well, maybe it wouldn't have been so bad if we
hadn't.
Personally, I think and again this is not a partisan issue
because I think when a Republican President and a Republican
Treasury Secretary go on TV and say, ``If you don't pass `X' by
Monday, we won't have an economy.'' If that doesn't cause
panic, I don't know what will.
So, again, I think we need to get away from the keeping
score. I think it is unfortunate to me. Certainly, you go back
and S&L crisis, things like FDICIA and FIRREA passed with large
bipartisan numbers.
I do think it was possible to get a very good bill that
would have gotten say 80 votes in the Senate. It would have
been very bipartisan here if we had gone that path. I think
that was doable. It would look very different. Some of the
things that to me don't have to do with the crisis like the pay
ratio are--there is literally more discussion in Dodd-Frank
about payday lenders than there is about Fannie Mae.
Who thinks payday lenders caused the crisis? Whatever you
think about them, really? Okay. Thank you. My point is, I think
we could have done this in a better way. It would have been
narrower. I think there are a number of things that are still
off the table.
But again, this is not about wanting to relive--nobody
wants to relive this again. It is really a question of, did we
do something that was effective? Let me end with saying, I
worked on the Housing Economic Recovery Act, and I'm proud of
my efforts on it.
We failed to avoid the failures of Fannie and Freddie in
that Act. I will own up to we didn't get that bill done right.
Too little, too late. I am willing to lay that on the table. I
think if we could all own up to the mistakes we made, I will
actually to anybody who looks at it. I have done a couple of
blog posts on mistakes I made. So I am willing--
Mr. McHenry. All right. Regarding--okay. I am reclaiming my
time, Dr. Calabria. Although, you are rolling, I am sorry to
interrupt. But I do want to get to a couple of other points,
which is Dodd-Frank didn't eliminate risk in the financial
system. It moved risk. The claim is that it mitigated risk, but
there was movement into a different array of new risky
institutions.
So financial market utilities, very important--even more
important post-crisis than pre-crisis. And there is a grave
concern that there is--there is a new group that will need a
bailout going--in the event of another crisis. So in that
regard, Dr. Calabria, not to interrupt your train of thought,
but the concerns there that we have global clearinghouses that
are so important here. What does that look like?
Mr. Calabria. I very much fear that we will have to provide
assistance, if not actually have to bail out a clearinghouse.
As we know, Dodd-Frank allows access to the Federal Reserve
discount window for clearinghouses.
It is important to keep in mind that there are essentially
two risks: the instrument risk; and the counterparty risk in
derivatives. What we essentially did was centralize that
counterparty risk. It did not go away. It didn't go ``poof.''
It just went all in one place. Again, I would say we should
learn from the lessons of Fannie and Freddie, when you
concentrate all the risks in a few nodes, you really do make
systemic risk greater, not less.
Mr. McHenry. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman. And I want to also
thank Ranking Member Waters. Professor Zywicki, in your
testimony you stated that the CFPB was to blame for a decline
in new business starts.
Are you aware that the Small Business Administration is on
track this year to having the highest record of small business
lending since Dodd-Frank was enacted? And also, the NFYV in the
latest report of small businesses shows that the optimism index
is the highest since Dodd-Frank was enacted.
You even cited a report by the Brookings Institution, and I
have it here. I read that report and there is no mention, sir,
of the CFPB as a cause for that decline. In fact, the authors
say that allowing more highly skilled immigrants into the
United States may reverse this downward trend.
By the way, I should tell Mr. Donald Trump that he should
read this document and get the story since he said the Latinos
are going to love him because he is going to be the President
creating jobs. Well, this is the answer to creating jobs.
Instead of dismantling the one Federal agency that looks
out for consumers and has refunded them $5.3 billion, don't you
think we should instead focus on immigration reform to help
spur small business revival as the authors actually stated?
Since you brought up this study, I think it is a fair question.
Mr. Zywicki. I would focus on immigration reform as well as
fixing Dodd-Frank. And I totally agree with the idea of more
immigration. Legal immigration for highly skilled workers is
undeniably, in my view, a boon to the American economy, in my
own personal opinion.
Ms. Velazquez. Right. So that is the central point of this
study. It wasn't that Dodd-Frank and the CFPB was the cause.
Mr. Zywicki. What the study shows--what we know about it--
according to a paper in, I think 2009, by Tom Durkin, a former
Federal Reserve economist, he documents the number of small
businesses that rely on personal credit in order to start and
grow their businesses--credit cards, home equity loans, and
even in my own research auto title loans, things like that.
And that people rely on these--for these kitchen table
businesses, landscaping businesses, handyman businesses. They
use their own personal credit to do this and he--and I don't
remember the exact estimate, but he documented the fact that
drying up access to personal credit would damage small business
growth and creation.
The Brookings study that I point to notes that for, I think
it was 2 years ago for the first time in American history, more
businesses were destroyed than were created. That is what that
Brookings study shows and a lack of access of consumer credit
for small businesses I think is undeniably a contributor to
that.
Ms. Velazquez. Well, sir, there is no mention of the CFPB
in this study.
Mr. Silvers, as you know, the Dodd-Frank Act was a complex
framework to shore up the financial sectors to prevent future
economic collapse.
Five years later, can you tell us what work remains in
terms of fulfilling the original intent of Dodd-Frank?
Mr. Silvers. Congresswoman, there are significant
regulatory steps that remain to be taken. In my view, one of
the most significant is the Federal Reserve issuing the rules
around executive compensation and excessive risk taking within
financial institutions that have been delayed since 2011.
And similarly, the SEC issuing the executive pay ratio rule
to median employees which is an important source of information
and check on excessive executive pay in public companies has
been mandated by Congress and not issued.
On the statutory side, as my testimony went through, there
are a series of structural changes that are necessary if we
want our financial system to do its job, including to provide
credit to small business.
The key ones that have been identified over and over again
by financial regulatory experts are the separation of
investment, of stock market activities and derivatives from
federally insured commercial banking, essentially the
restoration of a modern Glass-Steagall Act, a more aggressive
approach to regulatory capital on a size basis and a financial
transactions tax.
Chairman Hensarling. The time of the gentlelady has
expired.
Ms. Velazquez. Thank you.
Chairman Hensarling. The Chair now recognizes the gentleman
from New Jersey, Mr. Garrett, the chairman of our Capital
Markets Subcommittee.
Mr. Garrett. I thank the chairman for holding this very
important hearing. The ranking member started out by saying the
crisis of 2008 was not a natural disaster, and I agree that it
was inflicted--as a matter of fact, the ranking member of the
Capital Markets Subcommittee said it was self-inflicted, which
I tend to agree with as well. But who was doing the infliction,
is the question.
Mr. Silvers, you indicate that there was a failure of
regulation and failure by the regulators. And I would agree
with that. But you also said that they did not have the
authority to prevent the crisis. That is factually incorrect
based upon the multiple hearings that we had in this room.
Seven years ago, after 2008, Chairman Barney Frank at the
time had multiple hearings, brought in the regulators at the
time and I and others specifically asked each and every
regulator, ``Knowing now what happened, did you have the
authority in your area?'' They all said, ``Yes, we did.''
``Did you actually have personnel stationed in the banks
that failed?'' ``Yes, we did.'' So they had people, staff
members working in these very banks that failed, that involved
themselves in these risky trades and what have you, but they
had the authority, at least they testified it to us repeatedly
at that time.
Now, back to that period of time, my predecessor as
chairman at that time was Paul Kanjorski, a Democrat from
Pennsylvania. He said what we really needed was to--and he said
this many times--have greater market discipline.
I don't know, I see some nodding heads by the panel here
that that would have been a good thing then, and I see nodding
heads that it would probably be a good thing now. The question
is, how do you go about getting that?
Let's see, do you get more market discipline by increased
regulation? Again, Mr. Silvers, you told us in your testimony
just now that the regulators are still not doing their jobs. I
will just throw a question out. Mr. Atkins, which
Administration appointed the current SEC Chair?
Mr. Atkins. The current Administration.
Mr. Garrett. Which Administration appointed the current
Federal Reserve Chair?
Mr. Atkins. The current Administration.
Mr. Garrett. Which Administration appointed the head of the
CFTC currently?
Mr. Atkins. The current Administration.
Mr. Garrett. And how about the CFPB?
Mr. Atkins. The same.
Mr. Garrett. So if Mr. Silvers is correct that the current
regulators are not doing their job, which Administration is
responsible for appointing all of those regulators?
Mr. Atkins. The current one.
Mr. Garrett. Oh, okay. So the solution then perhaps is not
looking to this Administration for additional regulation or
additional regulators; of course, as Mr. Silvers pointed out,
they are not doing their jobs still.
And if Mr. Kanjorski is correct that additional market
discipline is the answer--I will throw this out to Mr. Atkins--
additional regulations, is that the solution or is it
additional market discipline?
Mr. Atkins. Yes, I think, I agree with you, additional
market discipline. I think it is really not correct to say that
there was no regulation or deregulation, especially in the wake
of Sarbanes-Oxley and that sort of thing.
Mr. Garrett. Okay.
Mr. Atkins. There is enough to fill a big rulebook.
Mr. Garrett. That is true because the ranking member also
started out her testimony by saying, ``It was death by a
thousand cuts'' what is happening now, she is asserting. Would
you suggest that the reason we have the doldrums in the economy
and the fact that we are in a morass as far as job creation and
the rest is actually death by thousands of pages of regulation?
Mr. Atkins. Yes. That is true. It is costly to comply.
Mr. Garrett. And does anyone--I will throw this out to the
panel as well, does anyone actually know the total cost of all
these regulations based upon the testimony that we have heard
in this hearing previously?
And does anyone actually know the implications of the
overlap capital requirements of these regulations? I will throw
out to Mr. Calabria or Mr. Atkins, I guess.
Mr. Atkins. Well, I will say one thing really quickly is
that it is not just the out-of-pocket expense to comply, but it
is also the uncertainty and all the latitude that the
regulators have to second-guess.
Mr. Garrett. Right. We had hearings on this. We asked the
head of the Fed. We asked the head of the Treasury Department,
do they actually know the cost? And Secretary Lew's response
was, ``No.'' And he said it was our job to figure that out.
But I will close on this in 29 seconds. Mr. Atkins then,
since even the people, the regulators whom we are told are not
doing their jobs, and even though they tell us they can't
compile the total cost to the economy of Dodd-Frank, are you
able to make an assessment of whether it is a positive or a
negative impact?
Mr. Atkins. Oh, I completely think that Dodd-Frank has a
negative impact.
Mr. Garrett. And it is a negative impact on liquidity,
credit availability, and job creation?
Mr. Atkins. All of those, yes.
Mr. Garrett. I yield back.
Chairman Hensarling. The gentleman yields back. The Chair
now recognizes the gentleman from New York, Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman. And thank you, Ranking
Member Waters. I get confused sometimes, but I think I heard
Mr. Calabria say that he agreed that we did have a crisis in
this country. Is that correct?
Mr. Calabria. Yes. I am not sure anybody disagrees with
that.
Mr. Meeks. Because I want to make sure, does anybody
disagree with the fact that there was a major crisis in this
country? Okay. So when we had this crisis, we who are Members
of Congress represent this country. We take an oath to try to
do the best that we can in this country. So something should be
done when you had this crisis because we were in freefall.
If I recall--I can recall individuals coming to tell me
that if we didn't do something and do it quickly, our whole
financial structure would be in failure, and as a result of
that, not only would we be devastated, but the financial
institutions across the world would be devastated.
That is how bad it was. In fact, I can recall that we first
voted to do nothing and then we had to come back because--we
hear the stock market fell about 800 points and everything was
going in and it was panic. And so--and at that time it wasn't,
I heard some people say, well, under President Obama, President
Obama wasn't here yet. So he didn't cause this crisis. Can we
all agree on that?
Mr. Calabria. Nobody here is blaming the crisis on
President Obama.
Mr. Meeks. Okay. So this crisis happened. Things were done
and at that time, the regulations that you are talking about
that are costing a lot of money now, we didn't have anything in
place then.
And so, that was--things were starting to fall and we are
going down. Now, we passed Dodd-Frank. And I am the first to
say that I don't know since I have been in Congress now close
to 18 years. I don't know of any perfect bill, so I am not
claiming that Dodd-Frank is a perfect bill. But I do know that
as we put things in place in regards to Dodd-Frank and I do
know that there were some Republican ideas.
Maybe we didn't get a single Republican vote, but I do know
that Mr. Frank worked across lines and got Republican ideas and
put those ideas into the Dodd-Frank legislation.
So it was, in fact, not just Democrat ideas in Dodd-Frank.
It was both Democrat and Republican ideas in Dodd-Frank, but
politics dictated that no Republican vote for it.
But it was a fact when you look at the document itself. So
here we are now 5 years later, and I look at the title of this
hearing, ``Dodd-Frank Act Five Years Later: Are We More
Stable?'' And from what I am hearing from all of you where we
were then, we were not stable at all. We were headed downhill
into catastrophic areas. So I think that just by the very logic
of the hearing itself that any logical person would have to say
5 years later, we are more stable with Dodd-Frank than we were
without Dodd-Frank because Dodd-Frank didn't exist 5 years ago
and we were in bad shape.
And we are in better shape now, so there is no question
that we are more stable now than we were then. And in fact,
from what I hear, especially with private sector jobs, I
understand that the private sector has created over 12.8
million new jobs over 64 consecutive months of job growth.
And I know before then we were losing 400,000 to 500,000
jobs per month. So we have to be in better shape now and more
stable now than we were then just based upon sheer numbers.
Normal household net worth has grown by about $30 trillion
exceeding the pre-crisis levels.
So you may have your issues with Dodd-Frank, but you can't
tell me Dodd-Frank is what caused some--we have problems
because of Dodd-Frank, because without it we were in
catastrophic problems.
With it, we are moving in a better direction and yes, I
will grant to you, it is not a perfect bill and maybe there
need to be some fixes we can work together on, but to say as I
have heard from some, ``Let's do away with Dodd-Frank,'' to me
that says, ``Let's go back to 2008,'' and that we cannot do.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Neugebauer, chairman of our Financial Institutions
Subcommittee.
Mr. Neugebauer. Thank you, Mr. Chairman.
Mr. Zywicki, you spent quite a bit of your time on your
academic research on consumer credit issues, and I have a bill,
H.R. 1266, which would take the CFPB from a single director to
a five-person commission, which I think would make that a more
stable and sustainable organization. Could you elaborate on how
that would help make it a more consistent and stable
organization, if it was a five-person commission?
Mr. Zywicki. I would strongly endorse that legislation,
which is that the fundamental problems of the CFPB go back to
this fundamental defect in the way in which it is structured,
which is no budgetary appropriations, a single director
supposedly removable only for a cause. We have decades of
academic studies on bureaucracies and how bureaucracies behave
when they are not subject to Democratic accountability and the
CFPB is basically a poster child for how that operates.
So I think over time we have learned that there are two
ways that we can structure agencies, as an executive agency
like a department accountable to the President through the
democratic process, or a bipartisan agency. And I think for an
entity like this, the Federal Trade Commission is exactly the
model we need. The Federal Trade Commission has been around for
100 years. It is a bipartisan agency, on budget, and it does
more or less exactly the same thing as the CFPB.
And I think that the FTC has proven the test of time as an
agency that is responsive, that takes into account the impact
on the economy, questions like competition and consumer choice
with respect to any product. And I think that is not only a
good idea for this agency, but really the only way that we are
going to get this agency back on track and really looking out
for the American consumers rather than their own narrow
bureaucratic empire-building.
Mr. Neugebauer. Well, the--
Mr. Calabria. I was going to just simply remind the
committee that the original proposal for the CFPB introduced by
Senator Kennedy, written by Elizabeth Warren, was a five-member
bipartisan position in the appropriations process. So, you go
back and look at that bill, it is not some radical free market
proposal.
Mr. Neugebauer. Yes. And I think when we--the purpose of
this hearing is to talk about, are we more stable. And one of
the things that when you look at consumer credit, that, how you
design consumer credit or restrict or enhance consumer credit
has long-term replications, doesn't it, for the economy in the
long term?
Mr. Zywicki. Absolutely. It is the engine for the economy
first. But more important to me, it is the engine by which
people make their lives better. It is the way--if you need--you
cannot wish away the need for credit. If you need $500 to fix
your transmission to get to work on Monday or you lose your
job, you need $500 regardless of whether you have it in the
bank or not.
People use consumer credit to make their lives better. And
when we shut off access to consumer credit, when we take credit
cards out of people's hands, when we take bank accounts out of
people's hands, when we take mortgages out of people's hands,
we are making their lives worse. And I think that is a real
tragedy not only for the economy at large but for every single
American family.
Mr. Neugebauer. Mr. Atkins, you served on the SEC, which is
a commission. Did you find that was a productive organizational
structure?
Mr. Atkins. There are benefits and detriments to it. But I
think the problem with the CFPB is, of course you can work on
procedure and organization, but you also have to look at other
aspects of it. I think the current construct of it has
constitutional problems. The appointments cause issues,
separation of powers issues and those sorts of things.
And then also just the substance of the statutes, Dodd-
Frank that empowers it and has sort of vague statutory
provisions like abusive practices and how that is defined. I
think those substantive aspects are important as well.
Mr. Neugebauer. In that interaction with really, and
sometimes different political viewpoints, different opinions,
you didn't always get things the way you wanted, it looks like
it promoted dialogue and some negotiation, whereas in the
current structure there is no negotiation.
Mr. Zywicki. Right. As I mentioned before, back when I was
doing the work, I don't think there were any divided bipartisan
lines on rulemaking. And that just shows that I think there was
a lot of give-and-take between the different sides.
Mr. Neugebauer. Mr. Silvers, is the AFL-CIO governed by an
executive committee?
Mr. Silvers. The AFL-CIO has a president who has day-to-day
management authority.
Mr. Neugebauer. But is he responsible to a board of
directors?
Mr. Silvers. Yes, he is responsible to the executive
council of the federation, which meets twice a year.
Mr. Neugebauer. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
Chair now recognizes the gentleman from Massachusetts, Mr.
Capuano.
Mr. Capuano. Thank you, Mr. Chairman. Mr. Chairman, I have
heard a lot of interesting philosophical talking points this
morning, but I have heard them before and I am sure I will hear
them again and again and again and again. But I haven't heard
too many figures. From the panel, it was one statistic, which
is that there are fewer people with free checking than there
used to be. My God, what a terrible crisis that is. People have
to pay for a service. That is complete ruination to our system.
Yet some other statistics I have show some things from the
day of Dodd-Frank, July 21, 2010. The Dow Jones was at
10,120.53. As of yesterday, it was 17,776.91, and today it is
up a little more. That is a 76 percent increase and that is
true about all the markets, Dow just being one, but it is true
about S&P, NASDAQ, and all of them, all of them are.
The unemployment rate in July 2010 was 9.4 percent. The
most recent one in June was 5.3 percent, the lowest it has been
since before the crash. The average house price in July 2010
was $252,100. Today, as of May 2015, it is $337,000. That is
$84,900 more, a 34 percent increase. The GDP in July 2010 was
$14,784,000,000. Today, it is $16,288,000,000, a trillion five
increase, a 10 percent increase.
Housing starts. In July 2010, there was 604,000 in calendar
year 2014. It was 1,046--I am sorry--1,046,000, 442,000 more,
73 percent increase in housing starts. Total construction value
also a 19 percent increase and on and on and on.
Could Dodd-Frank be better? Yes. As a matter of fact, I
have a proposal, because I agree with some of my friends that
too-big-to-fail, I think we did some good work, but I think we
didn't go far enough. I would love some of my colleagues on the
other side to join me in reinstituting Glass-Steagall. I voted
against the repeal of Glass-Steagall. Join us. Bring it back.
If you don't want to do that, join us in trying to deal with
other issues.
I have a proposal, H.R. 888, that not a single Republican
will join, yet it is supported by the community bankers, the
people you say you care about. They are looking for a
Republican co-sponsor. We can't find one.
And, by the way, it is not my idea. I simply took the idea
of an economics professor from Boston University and a scholar
at AEI who happened to be the former Chief Counsel to Ronald
Reagan. Not my idea, but yet can't do it, can't touch it. We
can only talk about repealing Dodd-Frank and how bad certain
sections of it are.
Why don't we get to fixing the problems we have. I have had
my fights with the CFPB. I have certainly had my fights with
the SEC and the Fed. Mr. Garrett and I have a bill to deal with
some of the issues we have with the Fed. Now, if Scott Garrett
and I could agree on an issue, we can find common ground with
everybody over there. But yet, it can't be done. Why? Because
if you actually try to fix the problems you identify as opposed
to pontificate about them, you don't get any points with the
outside groups.
Fixing a problem is a problem in and of itself. We are here
to pontificate and we do a heck of a good job. So for me, all
very interesting, but numbers don't lie. The numbers are almost
all good. Are there a few bad ones? Yes. Can we do better?
Sure, we can. Are we going to do better by simply nitpicking at
everything? Now, nitpicking is not a bad thing, but nitpicking
is what you do once you have fixed your other problems. There
has not been one substantive proposal to deal with too-big-to-
fail from the other side, not one, yet we still love to
complain about it.
With that, Mr. Chairman, I yield back. I actually thought I
wouldn't take the whole 5 minutes, but I am glad I did.
Chairman Hensarling. The gentleman yields back. The Chair
now recognizes the gentleman from Missouri, Mr. Luetkemeyer,
chairman of our Housing and Insurance Subcommittee.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
One of the things I want to talk about is the Financial
Stability Oversight Council (FSOC.) We are talking about, are
we more stable as a result of Dodd-Frank?
FSOC was a creation of Dodd-Frank that was supposed to
judge the stability of our economy and how we are doing. And
one of the things that they were empowered to do was to
identify different risks within the financial system, in
particular banks and non-bank, non-financial institutions if
they are systemically important.
At this point, FSOC has evaluated and designated three
insurance companies and one finance company as systemically
important, such that if it goes down, the entire economy goes
down.
Dr. Calabria, would you like to comment on that? Is that
possible?
Mr. Calabria. First of all, let me say, I think often we
are given, to me, the false choice of bailout or liquidate.
Many of these institutions can be restructured, can be
reorganized.
Again, my proposal during the crisis was to do a debt
equity swap as a recap that wouldn't have cost the taxpayer. So
I am of the view that no one institution is so special that we
need to put taxpayer money in and can't be resolved without a
reasonable bankruptcy framework.
That said, insurance companies are very different than
banks. They don't have short run runable--some of the analysis
you see, particularly the MetLife case, is just ridiculous.
For instance, the FSOC asserts that because State
regulators can place stays on policyholder redemptions, the
State regulatory system for insurance is itself a source of
systemic risk.
So it seems like if you go back and read these
justifications, quite frankly, they all look like they are made
up. And if I could channel the good gentlemen who left the
room, no numbers, no statistics, all just opinion.
Mr. Luetkemeyer. Yesterday, we had a hearing with regard to
systemically important financial institutions that we are
looking at, the mid-sized and regional banks. And it is
interesting because there are a lot of folks in order to be
able to--I have a bill to try and define that rather than have
criteria for it versus a strict threshold. And it is
interesting because they are trying to redefine what supposedly
was in Dodd-Frank, which was to define those entities that
would be able to bring down the entire system, and other trying
to redefine it as something that would happen on a regional
basis or whatever.
So, it really strikes to me at the heart of the ability of
FSOC and other entities within this to be able to adequately
point out risk. And I would ask along that line, we had
Secretary Lew here a couple of weeks ago. He gave us the
official report, the 2015 annual report of FSOC. And there are
11 different risks that he pointed out. They were important to
be able to be aware of and watch and take very special note of.
And one of them that was noted that very same day that he
presented this report to us was the CBO came out with a
scathing report that talked about our debt. Could you believe
that debt was not even listed as a risk to our economy? It
strikes at the very heart of what I believe is the credibility
of FSOC to be able to even analyze what is wrong with our
economy.
Professor Zywicki, would you like to comment on that?
Mr. Zywicki. I don't think I have anything to add other
than it seems obvious to me that you are correct.
Mr. Luetkemeyer. Director Calabria?
Mr. Calabria. If I could add, while I have some skepticism
about the Office of Financial Research (OFR), if we are going
to have it, it should be independent of Treasury. I have read
these reports and they are very dismissive of concerns about
the treasury market. And ultimately, the OFR has essentially
been set up to be a political research outfit for the Treasury
Department, which by its very nature is a political animal.
Mr. Luetkemeyer. Okay.
Mr. Calabria. We want independent research of the financial
system. It needs to be independent of politics.
Mr. Luetkemeyer. Along the lines of what I was talking
about with regard to the credibility of the FSOC and some of
the concerns with regard to debt, Dr. Calabria, in your
testimony a while ago, you talked about the explicit and
implicit guarantees and extreme amount of liabilities that our
government has as a result of the Richmond Fed study. Would you
elaborate just a bit on that very quickly--I have about 30
seconds left here--about how important it is to have all of
this data and look at the big picture of what kind of risk in
system and actual stability we have with regards to all that?
Mr. Calabria. Absolutely, sir. And, first, I will direct
anybody if you are curious to go to the Richmond Fed's website
whether a bailout barometer is there. And what they try to
measure is the explicit guarantees we know about such as the
expense and deposit and service.
I mentioned in my testimony that we have $2 trillion more
in insured deposits than we did before Dodd-Frank without
expansion. And they also try to estimate the implied
guarantees. And, of course, we have no way of knowing the exact
number, but these are the potential guarantees that the
taxpayer is on the hook.
And as was mentioned in the chairman's opening statement as
well as in mine, about 60 percent of financial liabilities in
the financial sector are either explicitly or implied to be
backed by the taxpayer.
Mr. Luetkemeyer. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Clay, the ranking member of our Financial Institutions
Subcommittee.
Mr. Clay. Thank you, Mr. Chairman. And I thank the ranking
member for calling this hearing today to celebrate the fifth
anniversary of Dodd-Frank.
Let me start with Dr. Calabria about the housing crisis.
You say in your testimony that you don't believe we have
sufficiently addressed the distortions in the housing industry.
Let me ask you about mortgage modifications. Do you think
that will help our economy--how do we help those homeowners who
are underwater and give them hope--homeowners who, for the most
part, were steered into high-cost predatory loans. Do you have
any--
Mr. Calabria. First of all, the first thing to do about
trying to help underwater homeowners is not to get them
underwater in the first place.
So for instance, historically, one in four FHA borrowers
left the closing table underwater. If that is not reckless, I
don't know what is.
And as Congressman Frank said here last year at this very
table, he intended for downpayments to be part of the Qualified
Mortgage (QM) Rule.
As I mentioned in my testimony, regulators completely
gutted that provision, so that the two factors that matter most
in terms of keeping a household out of foreclosure, which is
the downpayment, which gives you a cushion when prices fall,
and of course trying to make sure borrowers are actually ready,
by us and not getting people with very low FICO scores, who are
not ready to go into homeownership.
I think we need to be a little more responsible. But that
said, first, try not to get into that problem in the first
place.
If you are in the problem, that is a different issue, and
so, let's talk about that, because I know that is the more
immediate concern. The immediate concern would be, how do we
address the triggers that get you in that problem?
One of the things we know, and there is tons of data on
this, is that the primary reason that somebody cannot pay their
mortgage is because they have lost their job.
Congressman Frank, during his last year here, I believe,
had a proposal that would have provided assistance in the
mortgage modifications if people have lost their job.
So I think we need clear thinking about what are the
drivers here, address those drivers directly, obviously a
growing economy that creates jobs that goes with that as well.
Mr. Clay. Let me share with you a situation in my district
for instance, in Missouri, where we have entire communities who
were steered into these high-cost loans when normally they
would have qualified for conventional mortgages.
Do we write down principal--or how do we address that to
help these homeowners to keep them from foreclosing, to keep
them in their homes, and to keep neighborhoods together? How do
we do that?
Mr. Calabria. Again, it is hard for me to speak to any
individual case without looking at the case--where people were
defrauded, they need to be made whole by the people who
defrauded them; which in my opinion, the taxpayer did not
defraud, they need to be made whole by the institutions that
defrauded them.
Mr. Clay. Sure.
Mr. Calabria. So that is number one.
I would remind us that there is nothing specifically about
being underwater that triggers a foreclosure. There is nothing
in the mortgage documents that says, oh, you are underwater, so
we can come and take your home. In fact, it is quite the
opposite. They don't want your home if it is underwater, if
anything.
So we do need to think clearly about what are the factors--
as I had mentioned, again, unemployment is a big driver. There
might be unexplained healthcare expenses. We will see whether
healthcare fixes that or not. But you have to deal with the
life events that cause this sort of foreclosures. All that
being underwater does is change your incentive, whether to walk
away or not. And quite frankly, I don't think we should reward
that.
Mr. Clay. Let me ask Mr. Silvers, can you share any
solutions to the housing crisis and how we get people whole who
happen to be underwater in their mortgages? Have you all
addressed it?
Mr. Silvers. Yes, Congressman Clay, you are pointing to
the--one of the critical problems in the way in which we
addressed the housing crisis which led--which slowed down our
economic recovery and led the cost of the recovery to be borne
by the people who could least afford to do so with devastating
social impact.
The failure to write--the failure to restructure debt in
the housing market and to instead insist that poor people pay
the banks a hundred cents on the dollar when every American
businessperson in commercial real-estate in a similar situation
never does, right, is how we gutted the median net wealth of
African-American households from $18,000 to $6,000.
The solution is simple. It is to restructure those loans
around what the real value of that property was. If we had done
so, and as my colleague, Dr. Calabria, has said, if we had done
so and forced the banks to restructure their capital at the
same time, we would not have a too-big-to-fail problem. We
would have a healthy housing market and a healthy small
business consumer credit market.
Mr. Clay. Thank you. My time is up.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Duffy, chairman of our Oversight and Investigations
Subcommittee.
Mr. Duffy. Thank you, Mr. Chairman. I just want to make a
quick comment in regard to one of the championed agencies of
Dodd-Frank, the Consumer Financial Protection Bureau. I am not
sure if any of the witnesses are aware of a hearing we had a
couple of weeks ago, which was a takeoff of a hearing that we
had a year ago in regard to racism and sexism at the CFPB.
Angela Martin testified a year ago, and a couple of weeks
ago, Florine Williams testified. We have had a pretty robust
debate about racism in America over the past several months.
And I have to tell you, I am astounded that Barack Obama hasn't
said anything about racism and sexism at the CFPB.
That Richard Cordray still has his position at the CFPB is
amazing to me. That Senator Elizabeth Warren, who is the
champion of this agency that brought Richard Cordray in, his
protege--that she is saying nothing about racism and sexism.
Their silence is deafening, stunning. But that's a side
note.
I want to talk about the crisis--I think my friends across
the aisle want to talk about markets and market failure. But if
we look at the root causes of the crisis, wasn't there an issue
with subprime mortgages?
Wasn't there an issue with Fannie and Freddie, Mr. Atkins?
Mr. Atkins. Absolutely. And you have to remember that I
think the figure of $22 trillion was thrown around as far as
losses in the financial crisis. I don't know if that is correct
or not. But you have to remember it was a bubble. It was a
bubble created by Federal housing policies, so most of that
stuff was illusory.
Mr. Duffy. Federal housing policy by Fannie and Freddie,
right?
Mr. Atkins. Right. Among others.
Mr. Duffy. Among others. And did we deal in the--in your
review of Dodd-Frank, did we deal with Fannie and Freddie
reform in Dodd-Frank?
Mr. Atkins. Not at all.
Mr. Duffy. So one of the root causes of the crisis isn't
even addressed in the Dodd-Frank Act. And we note that
regulators were on the beat and they didn't see this looming
crisis. And so instead of faulting regulators, we have given
regulators more power and authority.
They didn't get it right in 2008. What makes us think they
are going to get it right in the next crisis?
I would also just note that as Dodd-Frank, as I watched on
the sidelines as this bill was passed 5 years ago, there was a
lot of conversation about the fact that we have to end too-big-
to-fail. It has to go away. We have to protect the American
taxpayer.
But I don't know if you have noticed there has been a
change of tone from my friends across the aisle because now
they say, ``We actually haven't ended too-big-to-fail.''
Sweeping, massive Dodd-Frank reform, right, and too-big-to-fail
still exists.
Actually, Elizabeth Warren just came out with a new bill to
say, guess what, sweeping industry reform and you still haven't
addressed too-big-to-fail. So now, she has new legislation, am
I right, Mr. Atkins?
Mr. Atkins. That is being introduced, yes.
Mr. Duffy. Yes. They admit that with all of this massive
reform, they didn't get it right.
There is still more to do.
But I do want to move to the lack of liquidity, fixed
income markets, the Volcker Rule regulation. You see that as a
problem, yes?
Mr. Atkins. Absolutely. Yes.
Mr. Duffy. Do you think the cause of the crisis or the
cause of the lack of liquidity is the Volcker Rule?
Mr. Atkins. Up to a large part, the Volcker Rule and other
associated regulations, and increased capital requirements
also.
Mr. Duffy. And does that lack of liquidity create more risk
in the market?
Mr. Atkins. Yes, it means there is less cushion there and
less information as far as pricing.
Mr. Duffy. So, do smaller shocks have bigger impacts when
there is less liquidity, Mr. Calabria?
Mr. Calabria. Absolutely. And I would note that even though
the authors of Dodd-Frank recognized the liquidity constraints
by purposely exempting treasuries and agencies from the
provisions of the Volcker Rule, let's not forget that a number
of institutions in history have done themselves in by bad bets
on the treasury market.
Mr. Duffy. Does time heal this issue? If you see banks
because of Volcker getting out of their market-making game, is
someone else going to step in and take that role? Do we just
have to wait a little bit longer? How does this play out, Mr.
Calabria or Mr. Atkins, either one of you?
Mr. Atkins. There is a lot of capital we--asset managers
and just basic everyday people who are investing money in the
markets are there, so these fixed-income products are being
held. It is just a question of, what is the market, what is the
everyday liquidity of the marketplace?
Mr. Duffy. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Lynch.
Mr. Lynch. Thank you, Mr. Chairman. I want to thank the
panelists as well. You have all been very helpful with the
committee.
I do want to just respond to my friend, the gentleman from
North Carolina, who said earlier in this hearing that, and I
will quote him, ``Dodd-Frank is an anomaly,'' an anomaly, of
course, being something that deviates from what is regular or
expected or what is standard.
The only reason that Dodd-Frank seems like an anomaly is
because that is the last time Congress did anything, passed
anything significant. And so, if you are in an environment that
is inertia, a do-nothing Congress, and you look at something
that actually moved, that seems like an anomaly. But it is just
the illusion that motion causes when you are standing still.
I want to talk about--if we are going to go back to the
crisis and sort of do some of this analysis on what went right
and what went wrong, I actually opposed the bailout, the $700
billion in bailout we gave to the banks.
About 25 percent of people in my district don't even have
bank accounts. I have a very diverse district. And so, we went
and took their money, their tax money, and gave it to these
banks, $700 billion.
And, it just--if we are going to go back and look what at
we did, why don't we go back and look at that? Why don't we go
back--and I am not just saying--I am not saying that some folks
on Wall Street should go to jail; I will leave that to a judge
and jury.
But some of their conduct seemed criminal, it really did.
And we ended up taking taxpayer money, $700 billion, giving to
the banks and like in the case of AIG I remember $9 billion
of--we gave them $70 billion to help out AIG. But the $9
billion that we gave, the taxpayer money, was directly to
satisfy the debt obligations that were held by Goldman Sachs.
So, it was just a pass through. It went right in one door
of AIG and then right to Goldman Sachs--$9 billion. And it paid
bonuses to a lot of people who were at the heart of this, like
I said, I am not saying they should go to jail but I would say
we should be revisiting the bonuses that we paid to folks who
caused a lot of this mess.
And we are not talking about any of that. We are talking
about dismantling Dodd-Frank. We are talking about dismantling
the one and only consumer protection agency that we created.
So, we have all these agencies out there, we have one, the
CFPB, the only agency that we have created to protect the
consumer.
And we look back at the problem of the crisis and we say,
my God, the thing we have to do is get rid of that CFPB, the
one agency that is actually protecting the consumer. It
astounds me that is how we view this problem in retrospect.
I think that we would better serve the people whom we
represent if we try to figure out ways to help them. And, sure,
the CFPB is not perfect. It needs tweaking. We need to help it
to be more effective and we need to address some of the
concerns that the gentleman just raised regarding their
treatment of employees and the disparate impact of some of
their policies.
But, Mr. Silvers, in this last minute that I have, would
you think that there are other priorities that we could focus
on in terms of really trying to get at the root of what
originally caused the--oh, the other thing that strikes me is
getting rid of the Volcker Rule--allowing the banks to go back
and do what they were doing before they got us into this whole
mess, trading on their book of business, it doesn't make sense.
But, Mr. Silvers, if you have any other suggestions on how
we might re-establish priorities here that would actually help
the American consumer and the American people, I would love to
hear them.
Mr. Silvers. Congressman, I think that for starters, you
have to stop telling lies about what happened in the past.
Mr. Lynch. Right.
Mr. Silvers. And the notion, for example, that insurance
companies had nothing to do with this--my memory is that AIG
was an insurance company, right? The notion that Fannie and
Freddie caused this crisis? They contributed to it.
What caused it was the very thing that Mr. Garrett was
referring to earlier, which was that the Federal Reserve had
the power to act and let subprime providers of mortgages funded
by our largest banks destroy our communities and then hand us
the bill.
Until we stop telling lies, I don't see how we can move
forward.
Chairman Hensarling. The time of the gentleman has expired.
Mr. Lynch. Thank you very much. Thank you, Mr. Chairman.
Chairman Hensarling. The Chair now recognizes the gentleman
from New Mexico, Mr. Pearce.
Mr. Pearce. Thank you, Mr. Chairman. I appreciate the
lively discussion going on here. If we were to pursue this last
thought here that the subprime lenders are the ones that
destroyed the communities, I would kind of like to investigate
that--Mr. Capuano said we ought to be digging a little deeper
into it. And Mr. Lynch had some good points about looking at
the situation.
So, Mr. Atkins, you said in response to Mr. Duffy that
Fannie and Freddie had something to do with it, among others.
Who might the among others be?
Mr. Atkins. Well, you had a long history of both Congress
and--
Mr. Pearce. Anybody close to this room, because Congress
itself--
Mr. Atkins. Congress itself.
Mr. Pearce. --Congress itself was expressing a tremendous
desire that everyone should own a home, that homeownership was
not a responsibility but a right. Is that somewhat correct? I
am sensitive to what Mr. Silvers said, that we shouldn't be
telling lies here.
So, did Congress led by Mr. Frank himself, suggest that the
agencies led by Fannie and Freddie should loosen the standards
by which they repurchased on the secondary market, wasn't that
occurring?
Mr. Atkins. Oh, that was Federal policy.
Mr. Pearce. So, would it be a truth that the financial
institutions could not have continued to lend to borrowers who
could not afford it, they couldn't have done the liar loans,
they couldn't have done the no-doc loans, if those loans hadn't
been repurchased into the secondary market, is that more or
less correct, Dr. Calabria? Would you like to comment on that?
Mr. Calabria. Let me first as an aside say that none of
this would have happened without essentially a Federal Reserve-
driven bubble--the amount of liquidity the Fed just pushed into
the system in the mid-2000s was simply nothing short of insane.
And so, prices drove a lot of this. But to get back to the
point of we know during the crisis for instance that at the top
of the market Fannie and Freddie bought about 40 percent of the
private label mortgage-backed securities in subprime. And to
echo what my friend Damon said, they were a contributor. I
don't--I would never say that they were the sole cause by any
extent of the imagination.
Mr. Pearce. Could the subprime lenders have done much
without the secondary market, and could the rest of the
secondary market have dropped its underwriting standards
without Fannie and Freddie dropping theirs?
Mr. Calabria. They could have not have.
Mr. Pearce. So, at the end of the day, Fannie and Freddie
weren't just kind of innocent bystanders or bystanders I
think--that was not a correct characterization of Mr. Silvers'
comments, but they were more central than any of our friends on
the other side are willing to say.
The description is that the problem--and, again, I think
that as Mr. Capuano said, if we don't analyze exactly why the
problem came up, we are not going to get the right answer. And
one of the fundamental things was that the underwriting
standards by which the secondary market operated took bad loans
away from the banks. They weren't given any incentive then to
make the loans good, and that just seems like a very
fundamental problem. Is that more or less correct?
Mr. Calabria. That is absolutely correct.
Mr. Pearce. Okay. Mr. Silvers, would you like to comment on
that?
Mr. Silvers. Yes. Thank you for the opportunity. There is a
subtlety to this that the conversation is missing. The subprime
loans that triggered the crisis were largely in the private
market and were largely securitized through private offerings.
That created competitive pressure on Fannie and Freddie
that had been privatized and whose executives wanted to hit the
profit margins that would inflate their pay packages.
Mr. Pearce. You are saying the competitive pressure--with
all due respect, sir, didn't the head of Fannie Mae, Mr.
Johnson, take about $100 million? Wasn't he beginning to change
the standards of accounting? Didn't Franklin Raines take a $29
million bonus out of that?
That feels like they were driving the process themselves.
In fact, if you read the book where Mr. Johnson was coming in
here lobbying this group in order to change the rules and
change the laws to where he could go ahead and make more--could
bring more of the product in to his market, that seems far
different than kind of a nuance.
Mr. Silvers. No, the nuance is not the fact that the
executives of those companies sought to make a lot of money in
disreputable ways. I fully agree with you. The nuance is is
that they were latecomers to the crisis. Fannie and Freddie
bought bad securities at the very end that had been issued in
the private markets. That is how they bankrupted themselves.
Mr. Pearce. If that is correct--we are running out of
time--how did Mr. Johnson make his $100 million? He was way
ahead of the time. And Mr. Raines was in that period.
I yield back, Mr. Chairman. Thanks for your--
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Cleaver, ranking member of our Housing and Insurance
Subcommittee.
Mr. Cleaver. Thank you, Mr. Chairman, and Ranking Member
Waters.
No matter what our ideology is, political affiliation or
fussiness, facts tend to be extremely obstinate. They just are
finicky like that. They just want to remain what they are. And
so, in this environment up on this Hill, we have become in a
sense a fact-free environment.
Or in other words, if the facts don't fit, then bit by bit
we refit the facts. It is so frustrating when you think about
how the CFPB has returned $5.3 billion to 15 million victims of
unfair and deceptive practices.
Dr. Calabria, do you believe that is a fact?
Mr. Calabria. To the best of my knowledge. I haven't
verified the number so it sounds about right.
Mr. Cleaver. In Missouri, the number is about almost 4,000,
I think, and which is a fact incidentally. And I am a little
concerned, for example, I Chair the Congressional Black Caucus,
and I receive complaints almost every single day from every
agency in the Federal Government, from the Capitol Police to
the people who work for the Forest Service.
I would have done nothing as the Chair but talk about
discrimination if I had tried to just pour it out every day and
so, the President can't--if the President says I have a black
suit on, he is going to be criticized in a few hours of
bringing out the race card, if he says Black Sunday, black
market, anything.
And so, I think we need to really be careful on this whole
issue of who attacks bigotry because there are problems in
every single agency. I am speaking experientially.
Now, one of the things I wanted to ask you, Mr. Calabria,
is do you believe that the CFPB has in fact been responsive and
flexible?
Mr. Calabria. Maybe the satisfactory answer is, it depends.
It certainly seems like they have listened to a lot of people
in the industry on some subjects. So, have they necessarily
beat up on Goldman Sachs, not that I can tell.
Have they gone after Main Street lenders? It looks that
way. So, again, I think it is important to keep in mind it is
not all one homogenous response. It has been different by
industry.
I do want to bring up a point. And first of all, let me
very clearly say consumers who are defrauded should be made
whole by the people who defrauded them. No debate about that.
And we should be aggressive about that.
The question over whether certain products should be
available, that is a whole different matter. But I also think
it is important to keep in mind whether somebody was taken
advantage of by a debt collector can be a bad thing, you should
deal with it.
It is not at all clear how that is necessarily connected to
the massive housing boom we had. So, you can have a fairer
society that is less stable. You can have a fairer society that
is more stable. They are connected but they are not necessarily
the same thing.
Mr. Cleaver. So, a fact, was there a Federal agency that
was responding to consumer concerns and complaints and offenses
against consumers?
Mr. Calabria. In the finance world before--
Mr. Cleaver. Before Dodd-Frank.
Mr. Calabria. The financial rate--first of all, as a former
staffer for the Banking Committee, I had a lot of complaints
and helped a lot of people. I am very proud of that. And--
Mr. Cleaver. No, sir. That is not the question I asked of
you.
Mr. Calabria. --the Federal Reserve, the OCC, HUD, I ran
the RESPA office at HUD and we spent a lot of time--
Mr. Cleaver. That is not the--
Mr. Calabria. Oh, yes, were there--okay, there were
agencies. If the question is, is consolidating these things a
good thing, that may well be, depending on how you look at it.
Mr. Cleaver. I know you are answering your question that
you want me to ask.
Mr. Calabria. My apologies.
Mr. Cleaver. My time has run out. You wouldn't answer my
question. You are a nice person though. I am not mad at you.
Chairman Hensarling. The time of both nice gentlemen has
expired.
The Chair now recognizes the gentleman from California, Mr.
Royce, chairman of the House Foreign Affairs Committee.
Mr. Royce. Thank you very much, Mr. Chairman. As we examine
the Dodd-Frank Act 5 years later and if I were to go down a
checklist with the panel here, too-big-to-fail continues. In
fact, Dodd-Frank institutionalized it.
Our secondary mortgage market remains in limbo with Fannie
Mae and Freddie Mac CEOs set to make $4 million salaries on the
backs of the American taxpayers who had bailed out Fannie Mae
and Freddie Mac.
Insurance regulation remains fragmented. Securities
regulatory arbitrage is still possible, but with the SEC and
the CFTC as competing regulators. So, I think the answer to the
question, is our financial system more stable, as Dr. Calabria
succinctly put it, I think the answer to that is ``no.''
Dodd-Frank abolished one failed regulator, the OTS, and
gave us three more--the CFPB, the OFR, and the FSOC. So, the
Office of Financial Research was set up to look around corners
and identify potential systemic risks, to improve
standardization of financial data and fill gaps in data
collection, and support the FSOC in its work. That was the
concept.
And, Mr. Atkins, as you know, the OFR performed an analysis
of the asset management industry at the request of the FSOC in
order to determine whether asset management firms should be
designated as SIFIs and subjected to oversight by the Federal
Reserve.
The OFR's conclusions were described by SEC Commissioner
Gallagher as, in his words, ``fundamentally flawed.'' And the
inevitable results of the OFR not only inaccurately defining
and describing the activities and participants in the asset
management business but also ``analyzing the purported risk
posed by asset managers in a vacuum instead of in the context
of the broader financial markets.''
Mr. Atkins, do you think the work of the OFR was flawed?
Mr. Atkins. Absolutely. I thought it was a travesty
actually of--I couldn't even describe it as scholarship; it was
riddled with errors.
Mr. Royce. Last year, Congressman Murphy and I put forward
a bipartisan bill, the Office of Financial Research
Accountability Act. Members of this committee on both sides of
the aisle have heard constant criticism about the quality of
research at the OFR and the lack of real coordination between
the Office and Federal financial regulators.
The bill would address these issues, I think in a very
thoughtful way. The bill as drafted would require the OFR to
submit for public notice and comment an annual report that
details the Office's work for the upcoming year.
Additionally, the bill would require the OFR to coordinate
with financial regulators when they conduct future studies, and
I would ask you--I know you and I both might want to go further
on reforms of the OFR but would you support these balanced
bipartisan reforms to the Office?
Mr. Atkins. Yes. That is a great start.
Mr. Royce. And I will ask Mr. Calabria this same question.
Mr. Calabria. I would say that I have been here too long to
think anything other than the devil is in the details. So let
me say, conceptually it sounds good, but without having read
the bill, I would want to take a look at it before I would say
anything stronger.
Mr. Royce. I appreciate your support at least for the
conceptual concept behind it. And I will yield back the balance
of my time to the Chair. Thank you, Mr. Chairman. And thank
you, panel.
Chairman Hensarling. The gentleman yields back.
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 I want to
thank the witnesses for coming here and bringing their
tremendous expertise to this committee.
I guess I will start out with the Honorable Paul Atkins and
talk to you a little bit about your testimony and your role at
the SEC. In your testimony, I think you make a lot of excellent
points with regard to some of the misaligned incentives that
people have just generally in financial markets.
And then you go on and on and on to indict various
provisions of the Dodd-Frank Act up to and including the fact
that Dodd-Frank is 2,319 pages long.
The bill that we got from Mr. Paulsen was like 4 pages
long, asking us for $700 billion, I just want to remind you of
that. But I guess the question that I have is that I agree with
a lot of points you make here and I am going to commit to
really reading this in some depth.
But I guess what I feel confused about is, or I have a
question about is, while you seem to indict the free market,
just laissez-faire, you don't really give us any prescription
of what you would have done to prevent this crisis other than
to just indict the ``housing market,'' the purchasers of homes.
People purchase their homes; it is like a one-time event
for most people. And you don't seem to have much criticism for
all of the guys in the fancy suits, the appraisers, the
underwriters, the credit rating agencies, the private label
mortgage originators, Lehman Brothers, Countrywide.
And so I am interested in hearing how you square that with
housing policy. Countrywide and Lehman Brothers, for example,
were not subject to CRA and bowers that came in were--as I said
people who do this once in their lives, they were not the
appraisers, they were not the underwriters.
Mr. Atkins. Thank you. Clearly, there were a lot, there is
not just one thing that led to the financial crisis and you
have to remember a lot of the foreclosures had to do with
speculators who were buying houses to flip them and that was
all encouraged by regulatory policy and other things as well.
But I will point to one thing that when I was at the SEC, I
pushed for a number of years, and that was reform of the credit
rating agency aspect. And I think that was one of the big
drivers frankly of the crisis because people put way too much
store in the AAA ratings and all of that from those rating
agencies.
And back in 2006, Senator Shelby pushed through a bill
that, of course, was enacted, the Credit Ratings Agency Reform
Act. And so, that was at least a start. But the real problem
was at the SEC where there was no real process to allow for
competition among credit rating agencies, and basically the big
three, their word was taken as gospel and that was a real
fundamental problem that--
Ms. Moore. And a misalignment of incentives. People had to
pay the credit rating agencies so they would give them a good
credit rating and nobody is going to jail. I know people in my
district who have gone to jail for writing bad checks for
$1,000 and yet these people are still walking around.
Let me ask you Mr. Zywicki, you say that Dodd-Frank has
pushed consumers into payday lending and other non-traditional
financial services? I guess I am not familiar with the data
which indicate that is the case.
I am not in love with non-traditional financial providers
myself, but I wonder if that means that you welcome the
activity of the CFPB to protect these consumers? I think my
good friend, Mr. Cleaver, indicated that the CFPB has returned
about $5 billion to 15 million consumers. And so, I am
wondering how you think the free market would do a better job
of protecting these financial consumers than the CFPB?
Mr. Zywicki. What we know is that you can't wish away the
need for credit. We have known that forever. But we have tried
that in the past where we tried usury ceilings, that sort of
thing, and we know how that ends.
So in the 1970s or in 1968, the United States Senate did a
report and they found that the second largest revenue source of
the Mafia was loan sharking.
When Anthony ``Fat Tony'' Salerno, the head of the Genovese
crime family was indicted for loan sharking and breaking
people's legs in 1973, he was running $80 million a day on the
streets of New York City. Why? Because we had a regulatory
regime that pretended like people didn't need credit.
We are reliving this in fast motion really. We have taken
away credit cards. We have taken away bank accounts. People
still need money. They are going to check cashers, they are
going to payday lenders, and of course, the next thing we see
in the sights are they going after the payday lenders.
And we know what happens when we take away payday loans,
people bounce checks, people get evicted, people get their
utilities terminated.
Mr. Huizenga [presiding]. Excuse me, Mr. Zywicki, the time
of the gentlelady has expired. As entertaining as ``Fat Tony''
is, the time has expired.
Mr. Zywicki. Thank you, sir.
Mr. Huizenga. And we do need to move along. So, with that,
the Chair recognizes the gentleman from Florida, Mr. Ross, for
5 minutes.
Mr. Ross. Thank you, Mr. Chairman, and witnesses, I
appreciate you being here, specifically Commissioner Atkins.
You addressed something that I think is very important when we
talk about systemically important financial institutions,
especially as it relates to asset managers.
I think what is even more compelling is that your
pronunciation of the acronym for systemically important
financial institutions as ``sci-fi'' is just that when it comes
to asset managers--science fiction. And I think that this is an
unintended consequence of Dodd-Frank. What risk do asset
managers have?
They are essentially agents, they are not leveraged, and
yet here we are looking at making them a systemically important
financial institution as I understand it in your testimony
would then make that asset manager as a SIFI or sci-fi jointly
and separately liable for any other SIFI or sci-fi that might
have a need for liquidity, is that correct?
Mr. Atkins. Yes, under Dodd-Frank--even for the bailout
fund.
Mr. Ross. Yes, exactly. And what you have here is you have
a non-leveraged asset manager now responsible, which really is
not him, it is his investors who are responsible. And who makes
up those investors? Mutual fund holders, pension funds, grandma
and grandpas, people living on fixed incomes.
So I guess what I am getting at is here we are trying to
find out if too-big-to-fail is really something that has been
put to an end with Dodd-Frank, but in fact it hasn't, and not
only has it not, but it has given an incentive for another
source of liquidity to bail out those that are deemed
systemically important financial institutions, would you agree?
Mr. Atkins. You can certainly ascribe.
Mr. Ross. And now, would you believe that just a couple of
weeks ago our Secretary of the Treasury, Jack Lew, was sitting
there, and I asked him the question of whether a SIFI would be
jointly and severally liable for other SIFIs if they were
deemed so, and he denied that.
He looked back at his staff and denied it. And so, I give
you credit in your opening statement to not only recognize that
as a plain anomaly, if you will, of Dodd-Frank, but also to
cite the fact that it is found in 12 USC Section 5390.
Mr. Calabria, let's talk about insurance just for a quick
second. Now, we have in place probably one of the best systems
of regulatory environment for insurance companies, and that is
our State-regulated systems, would you not agree?
Mr. Calabria. Absolutely.
Mr. Ross. And now, you have FSOC coming in there and saying
that there might be some gaps, we need them, we have a Federal
Insurance Office. It doesn't have any regulatory control, but,
yes, we want to make sure everything is in sync.
Would you have an opinion as to where there are some gaps
there that would require a system better than what we have in
place on behalf of our consumers?
Mr. Calabria. Certainly, you can make some improvements in
the State-based system. I don't think anybody would argue with
that. I do worry that labeling these institutions as
systemically important will create really bad incentives.
So, let's give you a contrast where, say, JPMorgan's
balance sheet is 40 percent long-term debt, MetLife's is only
about 4 or 5 percent, and we know that being labeled
systemically important unfortunately seems to send signals to
the debt markets that you will be rescued and it encourages you
to be more highly leveraged.
So, to me, I think by putting insurance companies under
this framework, we risk making them actually more leveraged and
more dangerous.
Mr. Ross. More leveraged, greater capital requirements,
more detriment to the consumer or to the insured, which also
gives unfair competitive advantage maybe even to those
internationally in the insurance markets. Which leads me to my
next point with the the International Association of Insurance
Suppliers (IAIS). Do you feel the FSB is making enough effort
as an advocate to protect our interest in those negotiations?
Mr. Calabria. I don't think they are, and I think the
suggestion that some have offered that our representatives, the
U.S. representatives should not declare any institution
systemic until FSOC has already acted to me is the right
approach rather than trying to back the FSOC into a corner.
Let me say that one of the problems is the argument that
somehow we need to subject asset managers or insurance
companies to bank-like regulation assumes that bank-like
regulation works well.
Mr. Ross. Well put, and it would work well in an industry
that is not bank-like. So, Mr. Zywicki, quickly, since the
recession in 2008, have we seen a great deal of capital
reformation?
Mr. Zywicki. Not that I have seen, but these gentleman may
know better than I.
Mr. Ross. Could somebody answer that? Have we not seen a
greater increase in capital with the formation of capital?
Mr. Atkins. With a zero interest environment, you would
expect I think--
Mr. Ross. And have we seen since in the last 5 years any
greater access to that capital?
Mr. Silvers. I think, sir, that you are asking a question
about whether or not our banking system is doing its job
since--
Mr. Ross. Or our capital markets.
Mr. Silvers. Our capital markets and our banking system are
somewhat different questions.
Mr. Ross. But what we are doing is we are seeing more and
more private capital being formed, but we are not seeing access
to that capital being allowed to the consumers as a result of
Dodd-Frank.
Mr. Silvers. No, well essentially, I think you are pointing
to the wrong cause. We didn't restructure our banks so our
banks didn't do their job.
Mr. Huizenga. The gentleman's time has expired.
Mr. Ross. Thank you.
Mr. Huizenga. With that, the Chair recognizes the gentleman
from California, Mr. Sherman, for 5 minutes.
Mr. Sherman. Thank you. I am one of those who was here when
Dodd-Frank was written. I am here to report that it was written
in this room, not on Mount Sinai, nor was it written by
Beelzebub in the nether regions.
It is not sacrosanct but that does not mean it should be
discarded. We need to improve it, not dismantle it. And in
spite of its great length, it lacks a whole lot of specificity.
It gives tremendous power to the regulators. And God forbid
if we get an Administration of the other party, we will see
just how much discretion it is; a well-drafted statue means the
same thing whether you elect a Democrat to administer the law
or a Republican to administer the law.
I think if we ever get a Republican Administration, heaven
forbid, we will find out how much latitude there is in that
statute and how Congress should have been more specific.
As to SIFIs, I join with the gentleman from Florida who
should be praised at length except he is not here anymore about
designating money and mutual fund managers as SIFIs, as I bored
some of my colleagues with before Lehman Brothers didn't cause
a problem because it had too many assets.
If you are trying to determine whether an entity is a
problem, you say, what are its liabilities, who loses if it
doesn't pay its debts? And a mutual fund doesn't have any debts
in almost every case.
So the idea that we would designate mutual funds as SIFIs
because Countrywide made bad mortgages seems rather extreme.
Mr. Atkins, I want to focus with you on these credit rating
agencies.
You put forward the idea that the fault is the people who
pay attention to the credit rating agencies, who rely on the
credit rating agencies.
Let's say you are an ordinary consumer, you have $50,000 to
invest, and you are trying to compare the Vanguard bond fund
with the T Rowe Price bond fund.
And they both have the exact same portfolio in ratings, 20
percent AAA, 30 percent AA, 40 percent, exactly the same and
one is yielding 10 basis points more than the other. How would
you, knowing that you have $50,000 to invest, which means you
can't hire Deloitte and Touche to give you a report. How would
you decide to forego the extra point 1 percent of return when
you see the only way you have of evaluating those two bond
portfolios is how the individual bonds are rated by the credit
rating agencies? How would you take your own advice and not
rely too much on the credit rating agency?
Mr. Atkins. You make a good point, but what I was trying to
refer to before was to government regulators who actually
should have known better. And to the SEC where--
Mr. Sherman. We all should have known better when they gave
AAA to alt-A, when they gave the highest rating to liars'
loans.
But how are they ever going to stop doing that when they
are selected and paid by the issuer? We dealt with that in the
Frank and Sherman amendment to Dodd-Frank, but it went into
conference, and it got diluted just enough that the SEC could
wiggle its way around it and issue a report saying they don't
want to do anything.
And so now, we have pretty much the same system we had
before. That is to say, you can make a million bucks by giving
somebody a good grade. And if you give them a good grade,
somebody else will hire you to give them a good grade.
I don't think that it will be mortgage debt which causes
the next crisis, or at least not in the next few years, because
we have some sort of memory, slightly longer than goldfish. And
we won't let that mistake happen right away.
But whether it is corporate bonds, whether it is sovereign
debt, there are so many opportunities people have--put together
a package of debt, buy a good rating, sell it, and then you as
an investor almost have to buy it.
And the money--and imagine yourself working for T Rowe
Price or working for Vanguard, would you put together the bond
portfolio that had 10 basis points less yield but had the same
ratings as your competitor knowing that you as the investor
would choose not to invest in your fund?
I would say the credit rating agencies cannot be ignored.
They are not ignored by investors. They cannot be ignored by
money managers. And as long as they are selected by the issuer,
we are just waiting for the next crisis. I yield back.
Mr. Huizenga. The gentleman's time has expired. With that,
the Chair recognizes the gentleman from North Carolina, Mr.
Pittenger, for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman. I would like to
respond to Mr. Capuano's references earlier. He was lauding the
merits of the Dodd-Frank Act and attributes of it and what it
had done on behalf of our economy and our housing market.
I am from Charlotte. Charlotte is one of the better
economic regions of the country. According to a Metro Study,
which is a nationwide data company, in 2006 we had 24,415
housing starts. In 2014, we had 9,238 housing starts.
We are up 40 percent from where we were. And I think stats
are relative. You can convey a stat in whatever way that you
want to make them sound good, and I would compliment
Representative Cleaver that we need the facts and those are the
facts.
So while I always appreciate the enthusiasm of Mr. Capuano,
I think we need to be clear that we have not seen the return in
the market, in the housing market which my former company was
involved in for 25 years in, throughout the country.
Access to capital is critical, and it is not there. The
impediments in getting that capital are clear. These developers
had to go outside. They had to go private equity and other
firms that are much more costly.
So for clarification, I felt that was prudent.
Dr. Calabria, as you know, the insurance companies are
under extensive supervision by the States. State laws or
regulations are designed to do three things: stop serious
financial distress in an insurance company from ever
developing; redress material financial distress when it occurs;
and limit the scope and impact of a stress event by
facilitating interstate coordination and remedial action.
Do you believe that there exist gaps and regulation of
insurers than have made FSOC designation of insurers necessary?
Mr. Calabria. I do not.
Mr. Pittenger. Well, if no gaps exist, why do you believe
FSOC has moved forward with the designation of insurers--
Mr. Calabria. What I would submit and this has been a
really consistent theme under both Republican and Democrat
treasuries is there has long been a suspicion of the State
insurance regulatory system, one of the few things that for
instance Treasury Secretary Paulsen did before the crisis was
issue a report on how bad the State insurance system was.
And so Treasury has long had this viewpoint of, we need to
get rid of State regulation of insurance. I don't think they
have been shy about it and I think FSOC has largely followed
it.
Let me also say you have raised a very important point in
regard to Congressman Capuano's points, which is, of course, is
that what we should be doing is comparing this recovery to
previous recoveries.
The argument that if we had not done Dodd-Frank or the
stimulus of this, that we would have been stuck in a hole and
people would stop going to work and living in caves or
whatever, that is not the case; economies recover.
Mr. Pittenger. Thank you. Are you concerned that firm-
specific non-bank designations of insurance companies could
create competitive imbalances in the insurance market?
Mr. Calabria. Yes. As I mentioned in my earlier remarks
about, to me, I worry that the designation would encourage
insurance companies to look more like banks.
And in my opinion, the largest insurers are far more better
capitalized and in far better shape than the typical larger
bank. So, I don't want MetLife to look like Citi; I think that
would be a gross mistake.
Mr. Pittenger. Professor Zywicki, do you have a comment on
that?
Mr. Zywicki. I don't have anything more to add than what
Mark said.
Mr. Pittenger. Very good. Mr. Atkins?
Mr. Atkins. Yes. I agree with that, and I think you have to
look no further than the President's own appointed insurance
expert on FSOC, who completely slammed not only in really harsh
terms frankly, not only the designation of Pru, but also the
designation of MetLife as being--he said that was unfounded
basically.
Mr. Pittenger. Thank you. I yield back.
Mr. Huizenga. The gentleman yields back. Just to let our
Members know, there has been a motion to adjourn, a vote call.
It is a 15-minute vote. So with that, we are going to continue
with some questioning here, but if it is all right with our
panel, I believe we will shortly take a break to go vote and
then reconvene.
The Chair recognizes Mr. Ellison of Minnesota for 5
minutes.
Mr. Ellison. I want to thank the Chair and the ranking
member and also the panel. Mr. Silvers, one of the requirements
of Dodd-Frank was publicizing the ratio of CEO pay to median
worker for publicly traded firms.
I just want to point out that back in 1980 when I was a
sophomore in high school, the ratio was about 42:1. In 2014,
CEOs received about 373 times the average employee.
I guess my question to you is, why is this important
knowledge for investors, and how does this knowledge further
our discussion of addressing economic stability and even
equity?
Mr. Silvers. There is--what that information is about
obviously is internal equity within the firm, and there is a
substantial body of research most recently developed and
focusing on retail stores which suggests that there is a
correlation between essentially internal equity within the firm
and long-term firm performance.
Contrary to what my colleague on the panel, Mr. Atkins,
suggests, the securities laws from their very inception were
designed to ensure that the public had material information
about the management of public corporations. It is very clear,
the public would very much like to know this, what this ratio
is and know it accurately for all public companies. But the
more fundamental question is, it is the law of the land.
Congress passed that statute and the public is entitled to have
it enforced, which it hasn't been so far.
In terms of the larger issue of economic stability,
underneath the economic crisis that began in 2007 was a
generation of wage stagnation. It created the political and
economic circumstances in which a wide variety of people in
both parties were tempted to substitute credit for wages.
I think if you listen closely to my colleague Professor
Zywicki's testimony, he is in favor of that kind of
substitution; I am not. I think that substitution profoundly
destabilized our economy and threatened not just our long term
prosperity, but it threatens us with repeated and increasing
severity of financial crises.
The pay ratio rule is designed to put valuable information
in the hands of both investors and the public that is relevant
to that problem.
Mr. Ellison. Mr. Chairman, I also want to ask for unanimous
consent to introduce into the record an article from Forbes
dated June 16, 2014, which says, ``The Highest Paid CEOs are
the Worst Performers.''
Mr. Huizenga. Without objection, it is so ordered.
Mr. Ellison. Yes, so there you go.
I would also like to point out, just for the record too,
that the reality about mortgage loans made during the financial
crisis and prior to it, is that about 66 percent of the loans
are equity stripping refinances. And these were cash-out
refinancing of homeowners with substantial equity. Too often,
loans on predatory terms. I just want to point that out as
well.
And Mr. Zywicki, I wonder if I could ask you a question,
sir. In your testimony you complained, or you pointed out that
the CFPB is engaged in a massive data mining program. You said
it collects data from hundreds of millions of consumers and
credit records, which ``far exceed any reasonable regulatory
purpose.''
And then you cite Mr. Newt Gingrich in a footnote to
support your claim. Are you aware that Mr. Gingrich is on
retainer from the U.S. Consumer Coalition?
Mr. Zywicki. I cited that because--
Mr. Ellison. Are you aware?
Mr. Zywicki. No. I wasn't aware, but--
Mr. Ellison. Are you aware that is a 501(c)(4)
organization, which according to its founder Brian Wise is
dedicated to trying to undermine the CFPB? Did you know that?
Mr. Zywicki. I am not aware of that.
Mr. Ellison. So you cited a source and you don't know the
terms upon which that citation was made?
Mr. Zywicki. I do know the terms because I know those data
are accurate, because I have seen similar numbers elsewhere and
I just cited that as the most immediate data on hand.
Mr. Ellison. You cited Gingrich. You didn't mention that he
was paid by the U.S. Consumer Coalition. Did you?
Mr. Zywicki. No. I didn't know that.
Mr. Ellison. You didn't mention he was compensated for his
advocacy?
Mr. Zywicki. No.
Mr. Ellison. You didn't mention that?
Mr. Zywicki. No. But the data is out there and the data has
been reported elsewhere. That was just the most recent source.
Mr. Ellison. So a compensated source to advocate a
particular line of argument, you don't think it was worth the
public's time to know that? No, you don't.
Okay, my time is over.
Mr. Huizenga. The gentleman's time has expired.
Mr. Ellison. I have no further questions for this witness.
Mr. Huizenga. The gentleman's time has expired.
With that, we are going to go to our last questioner before
we take a brief recess.
And the Chair recognizes Mr. Rothfus of Pennsylvania for 5
minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
Mr. Huizenga. Sorry, we won't start the clock yet, but just
so that everybody is clear, the game plan will be that we will
recess briefly, go and vote, and return immediately and
continue with the hearing.
And with that, Mr. Rothfus?
Mr. Rothfus. Thank you, Mr. Chairman. And I thank our panel
for being here this afternoon.
It is always good to take stock on anniversaries. So we are
at 5 years now for Dodd-Frank. I would like to go back though 7
years before Dodd-Frank, just to set the record straight. We
have heard a lot about Fannie and Freddie. I want to remind
people what was going on in the early 2000s, an attempt to
reform what was going on at Fannie and Freddie.
Indeed, this committee held a hearing on September 25,
2003, on whether there needed to be some reforms with the way
things were being done at Fannie and Freddie. Regarding these
entities and its regulator, Barney Frank made a number of
really striking statements, including this one, ``I do think I
do not want the same kind of focus on safety and soundness that
we have in the Office of the Comptroller of the Currency or the
Office of Thrift Supervision for the Fannie and Freddie
regulator. I want to roll the dice a little bit more on this
situation toward subsidized housing.''
Dr. Calabria, any reaction to rolling the dice?
Mr. Calabria. I guess, first of all, I note that the OCC
was the primary regulator of Citibank, so even OCC level of
regulation apparently wasn't very good.
But that said--let me, if I can, and certainly not--
personal push back a little bit, lots of people across the
aisle were wrong on Fannie and Freddie, and so I do think that
is worth remembering.
I think if we could put aside--
Mr. Rothfus. But they are wrong on Fannie and Freddie.
Mr. Calabria. They are wrong on Fannie and Freddie. A
number of people were--
Mr. Rothfus. And it was a big contributing factor to what
we saw?
Mr. Calabria. Absolutely.
Mr. Rothfus. With Dodd-Frank. Now let's--I want to talk a
little bit about Dodd-Frank and how it was marketed as a way to
end too-big-to-fail.
Prior to its passage, then-Secretary Geithner claimed the
law would end too-big-to-fail. And yet at the signing ceremony
for the Dodd-Frank Act, President Obama proclaimed the
following, ``After taking office, I proposed a set of reforms
to empower consumers and investors to bring the shadowy deals
that caused this crisis into the light of day, and to put a
stop to taxpayer bailouts once and for all. Today, those
reforms will become the law of the land.''
Of course, we know that Secretary Geithner backtracked from
his suggestion that this would end too-big-to-fail. In 2014 the
question came up, and he said, ``Of course, it didn't end too-
big-to-fail.''
Dr. Calabria, I would like to go through the list that the
President talked about and get your thoughts on whether the
reforms that the President claimed have in fact been achieved.
Specifically, has Dodd-Frank empowered consumers and investors,
or has it resulted in fewer and more expensive choices for
consumers, and reduced upward mobility, particularly for those
economically disadvantaged groups who have historically had the
most difficulty accessing credit?
Mr. Calabria. I think the numbers are fairly obvious that
it has been a burden in that regard.
Mr. Rothfus. Has Dodd-Frank eliminated shadow lenders, or
has the avalanche of regulations that is imposed on our
financial institutions actually led consumers to less regulated
areas?
Mr. Calabria. That certainly seems to be the case.
Mr. Rothfus. And finally, did Dodd-Frank put an end to
taxpayer bailouts once and for all, or did it rather enshrine
too-big-to-fail into law, resulting in an expansion of the
Federal safety net and increasing the probability of future
crises and bailouts?
Mr. Calabria. So again, to clarify my earlier statements, I
do believe that Dodd-Frank offers a path to ending bailouts, I
just note that it is an optional path, and I think it is highly
unlikely that regulators will ever choose it--and one of the
reasons I believe so is because there are similar powers that
were put in place for Fannie and Freddie and they were not used
at that time.
So, as long as we have the Tim Geithners or the Hank
Paulsens at the seat, to me, I think you should bet your money
on that the creditors are going to get bailed out.
Mr. Rothfus. Professor Zywicki, earlier this week the IMF
released its annual review of the U.S. economy. The report
found that some key vulnerabilities in the U.S. financial
system have yet to be addressed, notably the housing finance
system.
The IMF also found that the Federal Reserve's extraordinary
loose monetary policy and low interest rates have encouraged
firms to take on additional risks in search of better returns.
Finally, the report expressed concern about consolidation
within the banking sector, particularly that large and
interconnected banks dominate the system even more than before.
I find this report to be particularly troubling given that
it was bad government housing policy and Fed monetary policy
that helped set off the last financial crisis. Furthermore,
there is much evidence out there that Dodd-Frank regulations
and the SIFI designation process is actually encouraging
additional consolidation rather than eliminating it.
What do you say to these concerns and those identified by
the IMF?
Mr. Zywicki. I agree with all of that, which is, big banks
are getting bigger, and smaller banks are getting crushed. We
have done nothing to deal with the incentives that consumers
have to walk away from homes that are underwater such as
requiring higher downpayments, doing the State anti-deficiency
laws. And we are seeing exactly the same phenomenon we saw
earlier.
And I don't want to overlook something that Dr. Calabria
mentioned early, which is, the fuel that drove this fire was
the Federal Reserve's crazy monetary policy from 2001 to 2004
and thereabouts. And we are doing exactly the same thing now
and we are inflating another bubble probably in the housing
market in a lot of areas.
Mr. Rothfus. Thank you, Mr. Chairman. I yield back.
Mr. Huizenga. The gentleman yields back.
And just so that everybody is aware, we have 2 minutes and
40 seconds left in this 15-minute vote, and so we will recess
at this time, and until immediately after votes, when we will
return. Thank you.
[recess]
Chairman Hensarling. The committee will come to order.
The Chair now recognizes the gentleman from Connecticut,
Mr. Himes, for 5 minutes.
Mr. Himes. Thank you, Mr. Chairman. And thank you to the
panel.
I really appreciate this opportunity to reflect after 5
years on the effectiveness of Dodd-Frank. I was here when it
was put together and I participated in the many discussions
around its creation. And I remember the extravagant, not to say
apocalyptic warnings about how this was going to be what
everything else, the Democrats proposed at that time, a job-
killing bill.
That it would represent--what has generated some echoes
here today, a lack of freedom for consumers, and all sorts of
other things. And of course--and this caught my attention, it
was to devastate, and again, the language was beyond
apocalyptic. It was to devastate a key American competitive
advantage, our capital markets.
A lot of that criticism has begun to fade such that we hear
echoes of it today. It is hard to call all that stuff job
killing when you have been through 12 million new jobs created
in on average 250,000 jobs added per month. It takes some sting
out of that accusation.
The question of the capital markets, though, caught my
attention. I have the privilege and sometimes challenge of
representing a district which is very, very dense with people
who work in the financial services industry. And I am the first
to recognize that there was both individual and institutional
crazy, if not to say criminal, behavior in the industry.
But it is also true that these capital markets are
essential to Main Street, to borrowing for mortgages and
student loans and consumer lending, and of course for our
businesses. So I thought I might just take a look at the facts
around what has occurred in the capital markets in these last 5
years and just together some facts which are displayed there.
And I would ask the Chair for unanimous consent to make
this a part of the record.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Himes. Businesses and people borrow and access capital.
On the upper left there, you see the commercial and industrial
loans since Dodd-Frank, a very strong rise up 60 percent.
Small businesses, its access venture capital--in the upper
right, you see venture capital investments up over 100 percent.
People and companies benefit from the stock market.
At the lower left, you see the behavior of the Standard &
Poor's 500, up almost 100 percent in the 5 years since Dodd-
Frank. That is a pretty darn nice return for some people who
got badly hurt in the crisis and of course represents, if
nothing else a real vote of confidence for those capital
markets that we were promised would be devastated by Dodd-
Frank.
Lower right, what about people, consumer credit. Again, we
have been hearing a lot today about a reduction in freedom in
terms of the products that are available to consumers. The
graph in the lower right would suggests that if even if there
is a reduction in freedom there and a reduced reduction in
choices there has certainly not been reduced consumption of
consumer credit.
So I think it is fair to say that the facts demonstrate
that Dodd-Frank, far from having a catastrophic effect on the
capital markets, actually contributed to the restoration of
those markets and something that we consider a key competitive
advantage.
We now hear the criticisms reduced to the abstract and
academic notion that those things could have been better. If
only others had been in charge we would have had a more robust
economy or perhaps those charts, which are pretty dramatically
in their north-easterly direction, would be somehow more
northerly in their direction.
But those facts are important. And they are important
because we see efforts to eliminate an awful lot of the
protections which I would argue would perhaps turn those graphs
around.
I did want to make that point, and that reflection at this
5-year anniversary, but I do have a question. Again,
representing as I do the district for whom the financial
markets are pretty important, I have always recognized that
while a very important and good step forward, Dodd-Frank is far
from perfect. And there are in fact changes that should be
made. So in the very limited time I have left, I would just
love to get from each of you, very quickly, if you could make
one change, the change that would draw agreement on the part of
peer-reviewed academics and others, if you could make one
change to Dodd-Frank, what would it be?
Let me just quickly go from left to right.
Mr. Atkins. It is hard to pick out of all 15 titles, but I
would start with Title I, for sure. And address the potential
of the FSOC and the Fed bringing in bank regulated.
Mr. Himes. Thank you.
Mr. Calabria?
Mr. Calabria. I reiterate that there is a lot to choose
from, but if you want to talk where there is most robust
agreement, I think most of the academic literature does suggest
that Title I of designating entities sends the wrong signal to
the marketplace.
Mr. Himes. Thank you.
Mr. Silvers?
Mr. Silvers. I would restore Glass-Steagall.
Mr. Himes. Restore Glass-Steagall, meaning force a
separation of commercial banking activity from brokerages?
Mr. Silvers. And obviously I wouldn't literally take the
words of Glass-Steagall. I would try to enforce that concept in
modern context.
Mr. Himes. Thank you.
Mr. Zywicki?
Mr. Zywicki. I would make the CFPB into a bipartisan
commission and put it on budget, and remove its role in safety
and soundness checks.
Mr. Himes. Okay. So two Title I's, one CFPB, and Glass-
Steagall. Thank you. I appreciate it.
Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Indiana, Mr.
Messer.
Mr. Messer. Thank you, Mr. Chairman.
I would like to start with Mr. Calabria, and talk a little
bit about some of the unintended consequences of Dodd-Frank. As
you heard from our colleagues on the other side of the aisle
today apologists for Dodd-Frank are fond of saying that the law
struck a direct blow against Wall Street, remade the financial
systems so that those firms no longer enjoy the privileges that
made them too-big-to-fail, and gave rise to the taxpayer
bailouts of 2008 and 2009.
In reality though, the biggest Wall Street firms are the
beneficiaries, not the victims, of Dodd-Frank, both because the
law cements them as too-big-to-fail, and because the massive
regulatory dragnet they cast over the financial system makes it
difficult for smaller firms to compete.
There is no mystery to this. Goldman Sachs CEO Lloyd
Blankfein and JPMorgan Chase CEO James Dimon have both said
that Dodd-Frank gives them some competitive advantages because
of the broad scope of regulatory cost associated with the law.
Harvard University released a study recently that confirms
this. And just anecdotally, we all know you can count on the
fingers of one hand, the number of new banks that have been
chartered since Dodd-Frank was enacted.
So, Mr. Calabria, whom should we believe? Our colleagues on
the other side of the aisle and the Obama Administration who
loudly proclaim Dodd-Frank administers harsh medicine to Wall
Street or the CEOs of those same firms who tell us they are
actually the competitive beneficiaries of this law?
Mr. Calabria. Certainly, I think the evidence is pretty
overwhelming that concentration has increased since both the
crisis and since Dodd-Frank. I would be the first to say lots
of causes go in there just as there are lots of causes with the
market going up, I would, for instance, suggest that maybe 6
years of negative real short-term rates might have actually
inflated the equity markets a little bit. And we will see what
happens when those things turn around.
But I think absolutely there is no doubt in my mind that
you have seen growing concentration both on the commercial
banker side and on the broker-dealer side.
Mr. Messer. Mr. Zywicki, you are nodding?
Mr. Zywicki. I agree completely which is we have known for
decades that regulatory structures fall harder as small
businesses. What we have done is created this monolith, this
huge regulatory structure then imposed at our community banks
who obviously didn't cause the problem here.
And just the regulatory compliance cost is killing these
businesses, not to mention, as I said, on products such as
mortgages. It has gotten rid of their competitive advantage,
which is relationship lending and sort of knowing about their
customers. And so it is absolutely, in my view, accelerated
consolidation of financial industry and further destabilized
the financial system.
Mr. Messer. Thanks.
Really quickly, Mr. Atkins, we would like to raise with you
an issue that is actually beyond the scope of Dodd-Frank and
deals with the liquidity coverage ratios under Basel III.
It came to my attention, and you are probably well aware,
that Federal banking regulators have excluded all American
municipal bonds from being treated as highly liquid assets
under the LCR rule, which creates a remarkable situation where
certain German bonds qualify as these sorts of assets when most
American municipal bonds don't--all American municipal bonds
don't--that it obviously disincentivizes banks from investing
in those assets and potentially raises borrowing costs.
We all know that aside from U.S. treasuries for America
municipal bonds, securities are some of the safest investments
available with State and local governments having about a zero
default rate.
To help ensure that we change that, I have authored, with
Congresswoman Maloney from New York, legislation that would
essentially direct the FDIC, the Federal Reserve, and the OCC
to classify investment-grade American municipal bonds as level
2A securities and highly liquid assets.
Everyone that I have talked to tells me that these
investments are some of the safest in the world. Can you help
me understand why it would make sense to allow German bonds to
qualify as that kind of asset and not allow American municipal
bonds?
Mr. Atkins. Yes. The problem with Basels I, II, and III
basically is that they categorize these various investments in
buckets. And there is always an incentive then to choose the
riskiest, therefore the highest yielding ones, in each of those
buckets and not to have a real market-based type of valuation
to it.
It is really the regulators choosing winners and losers, if
you will. So, I think there is a fundamental flaw in all of
that design.
Mr. Messer. Just a simple question: Do you think if a bank
needed to sell investment grade municipal bonds, they could do
that, and could they find buyers if we were at a time of
financial stress?
Mr. Atkins. For a bank to--
Mr. Messer. Yes.
Mr. Atkins. Yes, I would think so.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr. Green,
ranking member of our Oversight and Investigations
Subcommittee.
Mr. Green. Thank you, Mr. Chairman. And I thank you for
your service on this committee as well.
It is my understanding that some of the Members today have
opened the door to talking about invidious discrimination, and
while we are talking about Dodd-Frank, I think that it is
appropriate that we mention some aspects of invidious
discrimination, because there are some things that Dodd-Frank
does not do to the extent that I think that it should. So, I
agree with those who contend that Dodd-Frank is an imperfect
piece of legislation.
Let's just talk about some of the things that I would like
to see us impact by way of the work of the committee.
I have a statement here indicating that minority business
owners paid interest rates that were 32 percent higher than
what whites paid for loans in 2012. This is by way of the
Federal Reserve, by the way. This is what the Fed says. Dodd-
Frank doesn't do enough to address this kind of invidious
discrimination. I am pleased that someone brought it up today.
Otherwise, I might not have put this on the record.
According to The Wall Street Journal, in 2013 only 4.8
percent of loans made to buy homes were made to blacks.
However, blacks comprised 13.2 percent of the total population
in 2013. Now I know that we can rationalize that and say,
blacks don't make as much, they probably don't have the credit
history, there are all kinds of ways to rationalize it. But one
of the best things that we can do is investigate and find out
why blacks are at this number.
In 2013, only 7.3 percent of loans made to buy homes were
made to Latinos. However, Latinos comprised 17.15 percent of
total population in 2013. Dodd-Frank doesn't do enough to help
us, and I hope that the committee will.
According to CNN, 2013 HMDA data, the conventional mortgage
load denial rate was 10.4 percent for whites; by comparison,
however, the denial rate stood at 27.6 percent of blacks, 21.9
percent for Hispanics, and 13.3 percent for Asians.
The information goes on and on and on but I will move now
to the Washington Post. Between 2004 and 2008, black borrowers
were 54 percent more likely to have a high interest rate
mortgage, black borrowers. Latino borrowers, 45 percent more
likely to have a high interest rate than similar white
Borrowers, I might add, and Asian-American borrowers were 7
percent more likely.
Now, these are things that we can investigate, things that
I think the committee should investigate. I think that on the
heels of what we have just seen in South Carolina, where we are
eliminating symbolism, it seems to me that we have an
opportunity to actually get into the invidious discrimination
that still takes place. And my hope is that we will look after
these things at the committee level. We are currently examining
the CFPB, and of course until 1968, we were known as the
Banking Committee.
These lenders bear a look being taken at them. My hope is
that we will do it because we tell people to pull themselves up
by their bootstraps.
These loans, these mortgages are bootstraps. In my last 9
seconds, I appeal to the committee to please, it is an appeal,
let's look into this. I thank you, Mr. Chairman. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Colorado, Mr.
Tipton.
Mr. Tipton. Thank you, Mr. Chairman. I appreciate the
panel's time for being able to be here as we listen to our
colleagues' comments from the other side of the aisle. They
want to be able to interpret that Dodd-Frank has helped bring
the economy back.
I think it is worthy to note that we have the lowest labor
participation rate in 4 decades. For the first time, I think
you have mentioned this, the Brookings Institution report
coming out saying we have more small businesses shutting down
than there are new business startups in this country. We are
suffering under two trillion dollars worth of regulatory costs
which is driving up cost, if you care about people who are on
fixed incomes, young families who are trying to be able to get
a start, increasing their cost by inhibiting their ability to
have access to capital.
We have talked about Dodd-Frank today and too-big-to-fail.
Unfortunately, it has become apparent both anecdotally and
empirically that the legislation has failed to be able to live
up to its goals. Banks in my district and across the country
have told me time and again that the compliance costs brought
on by one-size-fits-all regulatory schemes made it impossible
for them to be able to lend to creditworthy Main Street
businesses.
Instead of working with the community, small banks and
credit unions are working to comply with rules and regulations
that were intended to curb Wall Street banks. Delta Bank in
Delta, Colorado, told me that they don't know how much longer
they are going to do it because they feel that they are no
longer working as a bank, they are working for the Federal
Government and for regulators.
Large banks do have the economy of scale to be able to deal
with additional compliance costs but smaller banks simply
cannot compete. Instead of promoting healthy growth in the
financial system, the rate of decline in community banks'
market share has doubled since Dodd-Frank was enacted. For this
reason, I introduced the Taylor Act of 2015, legislation that
directs Federal regulators to consider the risk profile and
business model of an institution promulgating regulations.
Regulations will be tailored in order to be able to limit
compliance costs when the regulation is considered not
necessary or appropriate for the institution. This piece of
legislation which has the support of over 55 State banking and
credit union associations is a crucial step toward limiting the
regulatory burden for those banks and credit unions that are
struggling to be able to operate in our Main Street communities
because of the burdens placed on them by Dodd-Frank.
Mr. Zywicki, you had commented several times during your
testimony about the destruction of the relationship between
community banks and the customers that they were designed to
serve. Can community banks survive in this new regulatory
framework if they can no longer rely on that traditional
banking relationship?
Mr. Zywicki. It is hard to see how and it isn't just that
they are exiting the mortgage market, as I said, 64 percent of
community banks said they have changed their mortgages because
of Dodd-Frank, 15 percent said they completely exited or are
considering exiting the market, and 70-plus percent have said
that the cost and everything has changed the way that they do
business.
I don't see how in the current regime they can possibly
survive under that sort of regime, and I think it was perfectly
summarized by the bank you reference which is that their
customer now is the Federal Government, not their customers.
They are looking over their shoulder constantly rather than
looking at the person across the desk from them and I think
that is terrible. I will add one other thing, it is not just
mortgages, it is also, according to the Kennedy study,
agriculture loans.
These big banks aren't going out to rural communities and
making agricultural loans and that sort of thing. These
community banks serve an important function in the American
banking ecosystem, a lot of consumers prefer it, and I think it
is a shame that they are being competed out of the market not
because they can't--because they just aren't allowed to compete
on a fair footing because of the regulatory cost.
Mr. Tipton. You just spoke to two things that are near and
dear to my heart. I represent a rural district in Colorado,
agricultural interests and small businesses. Are we inherently
seeing, because of Dodd-Frank, small businesses, small banks
literally now being almost forced into a position where they
are going to have to be able to merge, be bought up by a larger
institution and that the impacts that is obviously going to
have in terms of that relationship?
Mr. Zywicki. That is obviously what we are seeing, that
they are being forced to--they are either disappearing or being
forced to merge and it is an unbelievably ironic consequence of
Dodd-Frank that the big banks are getting bigger. That we are
getting more consolidation of the banking system when the whole
idea was to get rid of too-big-to-fail. The big banks are
getting bigger.
Mr. Tipton. And so we are just codifying too-big-to-fail as
we continue to pursue an overzealous regulatory regime that is
impacting us at the local level.
I think it is important. Oftentimes, we talk about the
rules, regulations, the laws that are passed, but what you are
speaking to is something that I believe we need to be focusing
on. These are the people at home. The Hopscotch Bakery in
Pueblo, Colorado, is a very small bakery. The owner came to me
and she said that the big issue for her was access to capital
with a local community bank who wanted to be able to make the
loan, but regulatorily was not going to be able to make that
loan. Do we need to focus more on the outcome of the law and
how it is impacting Americans?
Mr. Zywicki. Absolutely. And we hear those stories from all
over the country.
Mr. Tipton. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Williams.
Mr. Williams. Thank you, Mr. Chairman, for holding this
hearing today, and I want to thank all of you for being here.
I wanted to switch gears a little bit and discuss how the
CFPB under Dodd-Frank has continued to expand its influence
into areas where it has no authority. That is something even
Director Cordray told me himself that the law doesn't address.
Of course, I am talking about the auto industry. I am a car
dealer. I am one of them. Okay.
So Mr. Zywicki, I would like to ask you about the CFPB
settlement with Allied Financial in which CFPB got Allied to
pay $98 million by accusing the company of discrimination
against car buyers based on disparate impact statistics.
I have said this in previous hearings but I think it is
worth repeating today, as a car dealer myself, the idea that I
would charge different prices to my customers based on race,
religion or the color of one's skin is offensive not only to me
but to my industry. In fact, if I was doing that, I don't think
I would be very successful.
So, it has been a year-and-a-half since the Allied
settlement. Do you know if the CFPB has paid any of the $98
million to consumers whom the CFPB said were discriminated
against?
Mr. Zywicki. Thank you, Congressman Williams, because I
think this example of what they are doing with the auto dealers
is one of the most egregious examples of regulatory empire
building I have ever seen.
Dodd-Frank makes it very clear that they can't regulate
auto dealers, and so instead what they have done is essentially
strong-armed indirect auto lenders and they essentially forced
them to become arms of the Federal Government to enforce this
agenda. What is this agenda? It is an agenda that has been
written about extensively which is sort of disparate impact on
steroids.
There is an amazing study that the American Financial
Services Association published by Marsha Courchane which uses
as Bayesian Improved Surname Geocoding and whatever the term is
to try to identify the so called plaintiffs and it is a joke.
It has no verifiability in doing it. They finally entered into
this settlement for Allied under who knows what conditions and
they don't have any real--they don't actually have any victims.
They have statistical victims. They have created this claim
form that seems to be completely on the honor system where
people don't have to prove they were overcharged, they don't
have to prove anything, they can just write in and get some
money.
And so maybe the CFPB is going to distribute money to
people, but there is no indication that they are distributing
to actual victims of discriminatory practices.
Mr. Williams. With that being said, in fact I had my staff
pull up the form. This is it right here, that they would have
discriminated buyers fill out. In my opinion, it is ripe for
fraud, and you have agreed with me.
If you look at this form, it basically says if you took out
a loan that Allied later financed in a certain period of time,
the CFPB will assume you were discriminated against. I am in
the business but I have bought two cars and financed them
through Allied, so I wonder if I should fill this form out and
send it in.
Now, Mr. Zywicki, in the interest of time, just a quick
yes-or-no answer to the following question if you don't mind.
Do you think the process the CFPB set up that we are talking
about is designed to determine--
Chairman Hensarling. Wait, I'm sorry, would the gentleman
suspend and hold the clock? Apparently, we have one vote on the
Floor, and might I suggest that the gentleman from South
Carolina--have you voted on this?
Mr. Mulvaney. I have not.
Chairman Hensarling. Perhaps we can avoid a recess if the
gentleman from South Carolina and the gentleman from Maine
would quickly go vote and return back to the committee room.
Perhaps we can avoid a recess here.
I thank the gentleman for yielding, and we yield back to
the gentleman from Texas.
Mr. Williams. Thank you, Mr. Chairman. Do you think the
process we talked about is designed to determine whether
borrowers were actually discriminated against?
Mr. Zywicki. No. I don't see that.
Mr. Williams. And what about the CFPB restitution form we
just mentioned? Do you think it prevents fraud?
Mr. Zywicki. No. I don't see any indication it does.
Mr. Williams. And do you see anything that would indicate
that the CFPB is even asking whether borrowers paid a higher
interest rate than other loans?
Mr. Zywicki. I don't see that either.
Mr. Williams. Not on there. Mr. Calabria, for you. Under
Section 1022 of Dodd-Frank, the CFPB was given a broad
authority to exempt financial services providers from its rules
based on asset size, volume, et cetera.
As you know, the CFPB has used this authority sparingly,
often creating an exemption so small that it doesn't actually
help those credit unions or community banks that are hurting
because of over-regulation. I am saying this really quick
because I am working on a proposal that would exempt community
banks and credit unions under $10 billion in assets from CFPB
rules, going forward.
Effectively, it turns the exemption on its head and forces
the CFPB to consider the impact on smaller financial
institutions and make an affirmative finding that community
banks and credit unions are indeed the intended targets of
these rules. So, my question to you is this, do you think
Section 1022 B of the law is clear?
Mr. Calabria. Absolutely. Yes.
Mr. Williams. Thank you. And shouldn't the CFPB be doing
analysis and affirm that smaller financial institutions
actually need or don't need to be included in the rules they
are writing?
Mr. Calabria. Yes. I think they would be better allocating
their resources on larger entities.
Mr. Williams. Mr. Chairman, I yield back. Thank you very
much.
Chairman Hensarling. Sorry, the gentleman yields back,
since we are trying to kill a little time here before the other
gentlemen return from the House Floor. At this time, we yield
to the gentleman from Kentucky, Mr. Barr, whom I trust will
take his full 5 minutes.
Mr. Barr. Yes, Mr. Chairman, I would like to take even more
with this great panel. But I appreciate the recognition, and I
thank the panel for your testimony.
This has been a fascinating hearing as we examine the
impact of the Dodd-Frank law 5 years since its enactment. And
let me start with Professor Zywicki. I am particularly
concerned about the impact that the Consumer Financial
Protection Bureau is having on access to consumer credit. For
many of my constituents in central and eastern Kentucky, and I
too have heard that, the unfortunate stories of creditworthy
borrowers who are no longer able to access a mortgage or get a
credit card or an auto loan or maybe short term credit.
The example that you gave about the gentleman who needs a
$500 transmission change just to get to work but no longer has
access to short-term credit or a payday loan really does have a
negative impact not just on the broader economy but on these
families. And it is really sad.
But let me ask you a follow-up to Chairman Neugebauer's
proposal, which was a proposal to reform the Bureau to a
commission structure, a bipartisan commission structure. I also
have a reform bill called the Taking Account of Bureaucrats'
Spending Act (TABS).
This would place the Bureau under the appropriations
process like many other regulators in the Federal Government.
What impact would that have in terms of effectuating the
Congress' power of the purse in holding the Bureau accountable?
Mr. Zywicki. I think that would definitely increase the
responsiveness and the ability of the CFPB to do its job. Which
is, too much independence, just bureaucrats left to their own
devices, do their thing, right? What we have learned over time
is that checks and balances actually work, that Congress' role
in being able to control the power of the purse and actually
supervise with some strength over executive agencies, makes the
agencies better for the consumers.
Mr. Barr. Now, let me ask you an out-of-the-box question
because we have these reform ideas that are actually consistent
with the original design of the Bureau. But I was interested in
your testimony and your former service at the Federal Trade
Commission and its focus on the mission of promoting
competition and choice as a core of consumer protection.
My question to you is, would it be something that you would
entertain as a positive idea to actually fold into the mission
of the Federal Trade Commission the functions of the Bureau, if
the Bureau continues to fail the American people?
Mr. Zywicki. I agree completely, which is I actually agree
with the idea of having one agency that would regulate consumer
credit.
I don't think the old system did work. I thought we could
have just given it to the FTC, if we don't, we should model it
after the FTC, and I have written a long law review article
where I urge exactly what you are suggesting, Congressman Barr,
which is combining a mission of competition and consumer
protection and understand the consumer's benefits not just from
consumer protection narrowly defined but also from innovation,
competition, choice, lower prices and all those sort of things.
Mr. Barr. I want to read your law review article because I
totally agree that competition, choice, and innovation is the
best consumer protection.
Let me turn to Mr. Atkins, and I appreciate your service
and your expertise. Secretary Lew testified in front of this
committee a few weeks ago and we talked about changes in the
capital markets after Dodd-Frank. Some of the illiquidity that
we are seeing in the fixed-income markets as a result of the
Volcker Rule in particular--and I appreciate your testimony
about the concerns you have with the Volcker Rule, especially
since proprietary trading really wasn't the cause of the
financial crisis.
My question to you is, when Secretary Lew was asked about
illiquidity, he disclaimed responsibility from regulations in
Volcker, and his answer was that he thought changes in market
structure were to blame for the liquidity problems. And Dr.
Calabria, I think you mentioned that there could be some
changes in fixed-income market structure.
And he also mentioned high frequency trading. My question
to you is, could you comment on Secretary Lew's refusal to
assign any blame whatsoever to Volcker and other regulatory
pressures?
Mr. Atkins. I don't know exactly what he said then, but to
ascribe everything to market structure changes, or you know,
some people have said to increased transparency in the market
has led to that, I think that is not accurate. I think you have
to lay blame at the Volcker Rule because basically, you have to
have people trading in the markets to set price.
Mr. Barr. As I mentioned, the Volcker Rule is forcing banks
to divest of AAA paper that hasn't defaulted in 20 years, and
there was really not much response from the Secretary on that.
Finally, let me conclude with Dr. Calabria, we talked about
consolidation and SIFI designation in OLA, and this new safety
net as contributing as opposed to detracting from too-big-to-
fail. Can you comment on what--those factors, is Dodd-Frank,
the cause of these large six megabanks, Wall Street banks
getting bigger? And I understand economies of scale and the
need for large institutions to service complex customers, but
could you briefly comment on that?
Mr. Calabria. Let me say, rather than cause, I think it is
best to think of that as a contributor.
Mr. Barr. Yes, thank you. I yield back.
Chairman Hensarling. The Chair wishes to inform Members
that the Chair did not know there were two votes on the Floor
as opposed to one. I am going to yield to the gentleman from
New Hampshire, Mr. Guinta for 5 minutes, at which point he will
recess the hearing until after the completion of the second
vote.
Again, we appreciate the indulgence and patience of the
panel. The Chair recognizes the gentleman from New Hampshire.
Mr. Guinta [presiding]. Thank you, Mr. Chairman, and thank
you for your indulgence relative to our voting schedule this
afternoon.
I first want to thank the panel for being here. It is clear
to me and there has certainly been debate about this, but I
have clearly seen the harmful effects of Dodd-Frank and the
effects that it has had on community financial institutions,
and most importantly, those consumers and users of those
products.
The Mercatus Center of George Mason University recently
released a paper, actually back in February 2014, which showed
that small bank have eliminated or are planning to discontinue
certain products or services as a result of Dodd-Frank, that is
indisputable fact.
Nearly 64 percent of the banks surveyed anticipate making
changes to the nature or assortment and volume of mortgage
products and services as a result of this new regulatory
action. The study also showed that roughly 10 percent
anticipate discontinuing residential mortgages due to Dodd-
Frank. And approximately 5 percent have already done so.
Residential mortgages or mortgage servicing, home equity lines,
credit, and overdraft protection are among the most likely
products and services to be cut.
In New Hampshire, where I represent, we have about 30
community banks that offer a wide array of products and
services to Granite Staters. However, due to severe
regulations, I continue to hear from my community banks that
they have had to limit products. They have had to limit loans
and services to my constituents, to their customers and
consumers. I personally do not see that as a favorable response
to Dodd-Frank; maybe others disagree.
But I wanted to ask Professor Zywicki, would you agree that
consumer choice in products and services is important for
overall well-being for consumers? Or do you think that more
choice in products and services harms those very consumers?
Mr. Zywicki. I think--
Mr. Guinta. It's a very simple and straightforward
question.
Mr. Zywicki. I think American families are a much better
judge of what financial products are appropriate for their
lives than Washington bureaucrats. And I think that consumers
unquestionably benefit when they get to choose the institution
or the products that they think will make them better off.
Mr. Guinta. Do you think that Dodd-Frank regulatory changes
negatively affected community financial institutions' ability
to offer products and services to consumers more than it
affected larger institutions?
Mr. Zywicki. Absolutely. Yes, as we have mentioned, we do
see community banks shrinking, we see community banks
retrenching in the products that they are offering. Some
leaving very important--completely leaving very important
market such as mortgages, simply because they can't deal with
the regulatory costs associated with Dodd-Frank.
Mr. Guinta. And since Dodd-Frank has been implemented, has
consumer choice increased or decreased in products or services?
Mr. Zywicki. Consumer choices unquestionably decreased, and
I must disagree with the Congressman from Massachusetts,
Congressman Capuano, who started to ridicule the idea that
consumers are now paying--the consumers who have lost access to
free checking are paying higher bank fees.
We are talking about a million people who lost bank
accounts because now they have to pay for bank accounts that
used to be free. Those are the poorest, the most vulnerable
Americans who were thrown out of the banking system because
they couldn't afford to pay the higher accounts.
And whether it is higher rates on credit, less access to
credit cards, less access to mortgages, or less access to home
equity loans, across-the-board, we have seen consumer choice
restricted and prices have gone up and consumers have been made
worse off as a result.
Mr. Guinta. The gentleman from Massachusetts and I have
similar districts in terms of some of the characterizations and
categories of people we represent. I am from Manchester, New
Hampshire, the State's largest City. I used to be mayor--
110,000, 115,000 people, average median income, family income
about $54,000.
You go to the south end of Manchester, and you ask
somebody, are they happy by paying $5 to $10 per month for the
privilege of banking with their institution that they had
banked with for the last 15 years, they would say arguably, no.
But it is not just that issue, and this is where I think we
have differences of opinion amongst the panel and the members
of this committee.
I look at cost of living, I look at the cost of groceries,
I look at the cost of home heating oil. I look at the cost to
do banking. I add those up, and I look to the people I
represent who are struggling in this economy. It was mentioned
that there is a 5.3 percent unemployment rate, that is true.
But the average weekly wage in this country has not increased
dramatically from 2008 to today--and I see my time has expired.
I would like to recognize Mr. Mulvaney for 5 minutes.
Mr. Mulvaney. Do you want to go vote?
Mr. Guinta. Yes.
Mr. Mulvaney. Okay. Do you want me to sit over there or are
you going to do that?
Mr. Guinta. I would invite you to take over as the Chair.
Mr. Mulvaney [presiding]. Okay. Gentlemen, thank you very
much, and I recognize myself for 5 minutes.
Thank you for doing this, I know it has been a long day,
and I know at least some of you been here enough to know how
this works. But for those of you who have not done--I consider
how often you have been here before. We mean no disrespect by
our coming and going, I can promise you that. And the questions
that you get at the end, I hope are just as important as the
questions you get at the beginning, since Mr. Emmer and I are
the ones asking them at the end.
I wish Mr. Meeks was here because he said something earlier
today that caught my attention about stability and about how he
was pleased with stability in the financial services markets
since Dodd-Frank went into place.
That sort of got my attention, because stability can be a
really good thing, and then too much stability can be a
problem. The banks in Greece today are really, really stable
because they are closed. And my guess is they won't be nearly
as stable next week if they open again, but stability for the
sake of stability is not necessarily a good thing but it is
certainly something to pursue.
And with that in mind, Dr. Calabria, you and I have talked
in the past about other ways to get to stability, that if the
goal of Dodd-Frank was to bring stability to the market to make
sure banks could not fail or weren't too-big-to-fail, or all
the rhetoric we have heard, there are other ways to do that,
which might be much, much simpler. And that would be to simply
require banks to hold a higher level of capital. Would you like
to talk to about that for a few minutes, sir?
Mr. Calabria. Absolutely. I think we can have at the same
time stronger regulation that is simpler regulation. And
capital certainly is very much the regard--earlier, some
comments were made about the Basel system of capital, and I
would actually suggest that the United States just pull out. I
think Basel has been a disaster, and the complexity does not
work very well.
I will note for the committee that for instance, probably
Citibank, the most troubled bank during the crisis, its tier
one risk-weighted capital never fell below 8 percent during the
crisis. So that tells you that either something is wrong with
our system of capital or maybe we didn't need the TARP and all
these things anyhow, or both rather.
So I do think we need a simpler system and I think simpler
does not mean weaker. I think that simpler could be stronger.
And I do think we can get rid of a lot of the unnecessary
costly regulations while actually having regulations that make
us stronger.
Mr. Mulvaney. There were things that discussed with one of
your predecessors of Cato was this concept of the simpler
system that will require a much higher level of capital. You
can opt in or out. If you wanted to operate as a traditional
bank, you wanted to have proprietary training, you wanted to do
all the things that the Goldman Sachs of the world do. And if
you want to maintain your 6 or 10 percent capital, that is
fine. And that option might be available to you.
But if you wanted to be a community bank, and you didn't
want to deal with derivatives and interconnectivity, all you
wanted to do was lend money so people in your neighborhood
could buy cars and houses, maybe there could be a different
system that would be set up for you at a higher level of
capital. Do you have any thoughts as to what that level might
be?
Mr. Calabria. So, and again, I would emphasize the need--I
think that first of all it cannot be something that is risk-
weighted, because I think that minimizes the transparency, it
has to be a pure simple leverage ratio. I think something in
the neighborhood at 15, 17 percent is something that will get
you a tremendous amount of stability.
I will emphasize in my opinion the tradeoff should not
simply be--you hold 15, 17 and you get out of Dodd-Frank, it
needs to be broader than that. I think there is a tremendous
amount of costly regulations that predate Dodd-Frank--
Mr. Mulvaney. But there are certain things that immediately
will become surplusage if I had 15 percent capital, right? Such
as what?
Mr. Calabria. Absolutely. Some of the examination process,
certainly, you want to make sure the capital is real, but I do
think you can give some differences for institutions in terms
of safety and soundness prudential regulations because
ultimately what we want to have is that the bank's owners have
their money at risk. And I think that is what we want to
substitute for.
Mr. Mulvaney. Fair enough. Mr. Silvers, I am going to take
advantage of the fact that I am here and nobody else is, which
is a lot of fun. What do you think of that? It is probably the
first you have heard of it. What are your thoughts? And again,
I am committing a cardinal sin here, I am asking a question
that I don't know the answer to. But I would be curious to know
what the Democrat witness thinks of, basically that kind of
idea. I'm not asking you to support it or oppose it, I'm just
curious as to your thoughts.
Mr. Silvers. Congressman Mulvaney, I have heard similar
ideas, but I haven't heard Dr. Calabria's version. I think that
in general, the basic notion that a straight capital test, that
is not risk-weighted, it is a very important and good idea. It
is a real problem in the Basel system that they keep going--
that they keep going back to risk-weighted capital tests that
allow for game playing in various ways. And that when you look
at the straight capital test, it is very low.
Mr. Mulvaney. And for lay people, which includes me, the
risk weighting bias might for example encourage banks to hold
sovereign debt versus corporate, is that right?
Mr. Silvers. It could encourage any number of things you
might not want to encourage.
Mr. Mulvaney. Okay.
Mr. Silvers. And it presumes something that--it has turned
out not to be true over and over again which is that those
particular regulators are good at picking what is risky and
what isn't.
The question of whether or not you could do that with
community--it is a kind of--you have heard me before talk about
Glass-Steagall--you are proposing a kind of Glass-Steagall.
Meaning that you are proposing a different set of regulations
and a different set of capital requirements depending on
whether banks are active in the securities markets, derivatives
markets, and various other exotic things.
So I am inherently sympathetic to that. The caveat I would
offer to you is this, during the subprime bubble, a lot of the
loans that were made were actually not made by the banks that
were financing them. They were made by smaller institutions,
generally non-banks that were conduits.
The main issue with a different regime for small banks is
that question, are they going to be conduits for big things,
that are going to move through without reference to capital.
And thereby be vehicles for--what I would be concerned about is
vehicles for exploiting consumers in various ways as turned out
during the subprime crisis. That is the kind of thing you have
to watch out for in these types of ideas.
The notion that we should have banks to do the business of
providing credit to businesses and consumers, and banks that
play in secondary markets and they should have different rules
perhaps different capital requirements, and that it should
matter what the size is, I agree with all of that.
Mr. Mulvaney. That is interesting. I wish you were here
yesterday. We just had a hearing on the SIFI designation of
bright-line rule of $50 billion, and it would have been
interesting to have that insight.
Mr. Silvers. If you don't mind, I would be happy to say
something about that. A lot of the discussion about SIFIs it
seems to me, you really don't want--you want the ability to
look at what--what firms are actually doing. So that for
example, the discussion that all mutual funds are not
systemically significant doesn't match what happened in 2008.
It is very clear that money market mutual funds are
systemically significant. The same thing is true with insurance
companies. If you have a pure life insurance company, the odds
that it is going to be systemically significant may not be very
great, but on the other hand, if you have an entity on the side
here that is dealing in derivatives very extensively, that is a
subsidiary of an insurance holding company which was AIG, that
can be a very, very dangerous thing, as we learned.
The $50 billion--in my view, the $50 billion test is--it is
certainly the case that institutions that have more than 50--
that have $50 billion in assets can, depending on what they are
doing could be systemically significant.
Mr. Mulvaney. But the simple fact they are $50 billion
doesn't make them so.
Mr. Silvers. I am not convinced that is the right number,
but I will tell you this, I am definitely convinced that saying
that by definition mutual funds are or insurance companies are
not systemically significant, that is a mistake.
Mr. Mulvaney. Gentlemen, just to show you who actually runs
the place, I am the only Member of Congress here and I am being
told by staff on both sides that I have to stop now.
And I will respect it because it comes from the Democrat
staff--if it was coming from these folks I would ignore them.
But I will close by saying this. Dr. Calabria and Mr. Silvers,
the other gentleman, I am sorry I didn't get a chance to ask
you gentlemen the same question because I would be curious to
know what your thoughts are.
But Mr. Hill, Mr. Schweikert, and I have a bill that at
least starts to try and begin a conversation about an
alternative banking system, something that would operate
outside of Dodd-Frank and be different for different types of
banks, smaller, simpler banks.
And don't be surprised if you get something from our
offices in the next couple of days to ask you to weigh in on
that because I am very curious to know what a lot of folks
think about it. So I appreciate your time.
With that, we are going to recess for a few minutes. The
second vote has not started yet. So my guess is as soon as the
second vote starts, you will see people starting to trickle
back in. I cannot imagine we will be in recess longer than 10
minutes.
So if you gentlemen would like to take a break, this is a
really good time, and we will stay in recess for
approximately--until, let's call it 2:00. Thanks, gentlemen.
[recess]
Chairman Hensarling. The hearing will come to order.
I recognize the gentleman from Minnesota, Mr. Emmer.
Mr. Emmer. Thank you, Mr. Chairman, and thanks to the panel
for your patience in being here. In the short time, there are
just a couple of areas I want to cover which have been covered
in some respects today.
But I just want to make it clear because I have some things
from my district that I want to share with you. Why don't we
do--Mr. Zywicki if you would, I think others have already given
this testimony but could you just confirm? Do you believe that
Dodd-Frank is actually harming the ability of financial
institutions to make loans and offer credit to people in
businesses?
Mr. Zywicki. Absolutely, yes.
Mr. Emmer. And does this include minority-owned businesses?
Mr. Zywicki. Yes.
Mr. Emmer. In fact, would you agree that Dodd-Frank is
having a disproportionately negative impact on Americans of
modest means in minority communities?
Mr. Zywicki. Absolutely. And we see that especially with
the disappearance of free checking. Upper-middle-class people,
for instance, haven't really noticed that. But it is low-income
people who are the ones who can't afford these fees, who can't
afford the higher minimum monthly balances to be able to get
free checking.
They are the ones who are losing it. It is also these same
people who have lost access to credit cards over the past
years. It is the same people who can't get access to mortgages.
Disproportionately, it is lower income people who are bearing
the brunt of Dodd-Frank.
Mr. Emmer. I am going to quote, there are a couple of
CEOs--the Goldman Sachs CEO has said, ``More intense regulatory
and technology requirements have raised the barriers to entry
higher than at any other time in modern history. This is an
expensive business to be in if you don't have the market share
in scale. Consider the numbers of business exits that have been
announced by our peers as they reassessed their competitive
position and relative returns.''
And then JPMorgan Chase's CEO has referred to the post-
crisis regulatory regime as creating a ``bigger moat that
protects his bank and other too-big-to-fail firms from
competition by new entrance in small firms that cannot
internalize the cost of the Dodd-Frank regulatory
requirement.''
Dr. Calabria, we have met, I apologize for butchering your
name.
Do you agree with these CEOs?
Mr. Calabria. First of all, I think the evidence is pretty
clear that concentration has increased and I think this always
has to be a concern, so on one hand, regulation always bears a
little heavier on smaller institutions.
But I think it is also important to keep in mind that a lot
of these regulations are essentially intended to be barriers to
entry. And so, I do think we have to ask the question, are the
institutions that are essentially kept out of the market--the
good or the bad players. So I do think that--I guess, I should
emphasize too, you will know coming from Econ 101, you reduce
competition, you have to end up having higher prices for
consumers.
Mr. Emmer. Right. And basically, what they are telling us
is that the bigger guys are able to survive; it is the smaller
ones who are taking on these increased costs created by this
extreme regulatory environment are suffering.
And I am going to give you a couple for the record. In my
district, this is from a banker who will remain anonymous, ``We
are a small community bank with three locations, compliance has
always been a cost. This is just a part of our business.
``However, since Dodd-Frank this cost has expanded greatly.
For example, within the last year, we had to hire a full-time
compliance director at a cost of $60,000 plus benefits, and
this is in addition to training two outside compliance firms,
one assists our staff with deposit compliance and one with the
loan compliance at an annual cost of about $40,000 per year.
``In addition to this, we have several members of our staff
whose jobs have changed, so that instead spending time on
revenue-generating activities, they are spending time on
compliance. Unfortunately, since there is no offsetting revenue
for this expanding cost, we are forced to consider passing the
cost on to our customers with additional fees.''
It is also changing the way they do business. And the
credit that they can offer to start-up businesses and consumers
who are trying to buy their first home or buy an automobile.
In my last couple of seconds, Dr. Calabria, again, the
Office of Financial Research and the Financial Stability
Oversight Council are funded through assessments on bank
holding companies. Effectively, this means that Congress has no
appropriation mechanism to perform necessary oversight over
these agencies. Do you think it would be wise for Congress to
have more oversight of OFR and FSOC?
Mr. Calabria. Absolutely. I am of the opinion that every
single Federal agency out there should be part of the
appropriations process.
Mr. Emmer. Anybody disagree? Mr. Atkins?
Mr. Atkins. Not at all. I agree with you 100 percent.
Mr. Emmer. All right. I see my time has expired. I yield
back, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
Currently, there are no other Members remaining in the queue,
thus, I would like to thank our witnesses for your testimony
today. And again, I thank you for your patience with the
schedule of Floor votes 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.
This hearing stands adjourned.
[Whereupon, at 2:15 p.m., the hearing was adjourned.]
A P P E N D I X
July 9, 2015
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