Good Riddance to Finance Regulator Richard Cordray

John Berlau  Novermber 16, 2017 @ The Spectator
 

Rep. Ann Wagner (R-MO) may have had the best response to yesterday’s resignation announcement by Consumer Financial Protection Bureau Director Richard Cordray. The statement, sent to reporters and posted on her website consisted of just two words: “Good riddance.”
 

Wagner provided links to give some context, and no example shows Cordray’s general arrogance better than his answer to a basic question Wagner asked about CFPB spending and priorities. When she asked him in a hearing about the CFPB’s renovations of its new building that so far has cost $215 million, Cordray replied, “Why does that matter to you?”

The resignation of Cordray — appointed by President Obama to the CFPB first as a likely illegal “recess” appointment in 2012 and then confirmed for a five-year term in 2013, when then-Senate Majority Leader Harry Reid abolished the filibuster for nominees — is long overdue. The CFPB under Cordray’s tenure has failed consumers, as it has issued massively expensive regulations that have crushed Main Street banks and credit unions while ignoring the misdeeds at Wells Fargo even as state agencies were tackling it.

If Cordray had not resigned, or if for some reason he changes his mind, President Trump should not hesitate to fire him. I have argued repeatedly — including in an open letter to President Trump earlier this month — that there are many grounds to fire Cordray even under the strict conditions of Dodd-Frank. As I pointed out recently in The American Spectator, Cordray “has violated the due process right of the firms and individuals he regulates, approved excessive spending on renovations for the CFPB’s office building, and ignored Congressional subpoenas for information on the CFPB’s operations.”

Tellingly, even two staunch GOP critics of President Trump, Sens. Ben Sasse (R-NE) and Mike Lee (R-UT), still urged the president to fire Cordray.

And members of both parties have expressed concern about the harmful effects of the multitude of CFPB regulations on community banks and credit unions. A letter to Mr. Cordray from the Credit Union National Association and several state credit union associations called the CFPB’s regulatory approach “terribly troubling” and “baffling,” and noted that the cost of the regulatory burden on credit unions has increased from $4 billion in 2010 to $7 billion in 2014, due largely to CFPB red tape.

Cordray’s CFPB long escaped accountability because of the defective and unconstitutional structure of the CFPB. Congress and the courts must strengthen the CFPB’s accountability by making it subject to appropriations from Congress and giving the president the power to remove the director “at will,” as in the case of a Cabinet secretary.

President Trump must also immediately nominate and the Senate must swiftly confirm a new director who will begin the process of removing the red tape harming consumers and Main Street financial institutions and focusing the CFPB’s resources on combating genuine fraud and malfeasance. Consumers, entrepreneurs, small banks and credit unions need relief now from the CFPB’s stifling red tape.

The Volcker Winter Storm — Bad Rule, Worse Implementation

by John Berlau on December 11, 2013

This appeared here and I wish to thank John for allowing me to publish his work.  RK

On a snowy day in Washington, several federal agencies packed some mean regulatory snowballs that will most likely overshoot their supposed destination of Wall Street and crash-land with a thud on the businesses and investors of Main Street. Rather than postpone the planned vote on Tuesday, when the federal government was officially closed, agencies sheltered themselves from public view and pushed through the rules.

According to USA Today, “CFTC spokesman Steven Adamske said his agency will not hold a public meeting, but commissioners will approve the rules in writing.” This lack of transparency on voting on the rule was symptomatic of a series of last-minute changes from the rule the agencies had initially proposed two years ago. The agencies never submitted these changes for public comment, and thus according to a Reuters analysis, may be vulnerable to lawsuits for violation of the Administrative Procedure Act.

Beyond that, nothing good ever comes when the government utilizes an opaque process to force “transparency” on the private sector. For all the supposed “toughness” of the new rule, there is nothing specific that would prevent something like J.P. Morgan’s much-despised “London whale” trade.

In the meantime, the new rules could sharply reduce the stream of initial public offerings that have been propelling the stock-market upsurge. And just as regulatory impediments to smaller IPOs were relaxed modestly with the bipartisan Jumpstart Our Business Startups (JOBS) Act signed by President Obama last year, the Volcker rule will likely erect new barriers to market making by Main Street banks underwriting the offerings of these smaller firms.

Even as written in the Dodd-Frank financial “reform” statute, the Volcker rule was a solution in search of a problem, or in search of a factor that was not even a minor cause of the financial crisis. The provision, often referred to a “Glass-Steagall lite” – after the 1930s law that was repealed by President Clinton in 1999 – maintains Glass-Steagall’s false dichotomy of inherently “risky” trading and inherently “safe” lending.

And it doesn’t ban or restrict trading based on level of risk, but on whether the trading is ”proprietary.” Most discouragingly, in the statute and in today’s edict, the Volcker Rule contains explicit exemptions for trading in risky government-backed securities, such as municipal bonds and foreign sovereign debt.

There is no evidence that proprietary trading — a bank trading for its own portfolio — is more dangerous than executing trades for customers. In the leadup to the financial crisis, banks traded mortgage-backed securities for themselves and for their customers, but at bottom the instruments were dangerous due to the underlying mortgage loans — loans encouraged by governmental entities such as Fannie Mae and Freddie Mac and by mandates such as the Community Reinvestment Act.

Moreover, even the rule’s architect, former Federal Reserve Chairman Paul Volcker, concedes that banks must do some incidental trading for their own portfolios to carry out other functions. This type of trading includes buying shares to “make markets” for companies they take public and to hedge the risk of ordinary loans such as mortgages.

But in practice, it’s very difficult to tell which type of trading is “proprietary.” As former Sen. Ted Kaufman, D-Del., who (wrongly) advocates bringing back Glass-Steagall, wrote in Forbes Tuesday after the rules were released:

Who’s to know what’s a hedge, what’s market making (trading on behalf of clients), and what’s trading for the bank’s own account? The paper trails can be inconclusive. Like angels on pins, there is never going to be an answer.

And IPOs, particularly for smaller companies, are likely to take a hit. In order to underwrite a stock market offering, banks have to engage in “market making.” They “make” a liquid market for the stock by buying shares in the company to generate demand. But the new rule, according to various interpretations (that will be further revised as the new language is examined), puts many new burdens on this traditional practice.

According to The Wall Street Journal, “the rule … will require banks to provide ‘demonstrable analysis of historical customer demand’ for financial assets they buy and sell on behalf of clients.” But how does a bank show “historical customer demand” for a company that has never gone public before?!

This could have the biggest impact on smaller IPOs, in which banks can’t easily measure “historical demand” and would have to likely buy more shares to create more demand than they would for a larger firm. Some banks may look at the compliance costs, and simply not underwrite smaller IPOs, harming innovation by entrepreneurs and wealth-building by ordinary investors.

This could also slow the growth of IPOs underwritten by non-Wall Street banks. In recent years, and since the modest regulatory relief from some Dodd-Frank and Sarbanes-Oxley provisions from the JOBS Act, regional banks such as Atlanta-based SunTrust and Cleveland-based Key Bank, have increased their sponsorship of new companies going public.

And in further showing that the Volcker Rule and its implementation is not focused on preventing risk, the new rules contain explicit and blanket trading exemptions for municipal bonds and foreign-based sovereign debt. And exemptions for banks to buy and sell securities in Fannie and Freddie, the two proximate causes of the crisis, were already in the Dodd-Frank statute.

The Volcker Rule may create the “perfect storm” of lessened innovation in the private sector and more-of-the-same gambling by government.

On Dodd-Frank’s 3rd Anniversary, “North Star” is Further Out of Reach

By John Berlau on July 22, 2013 · 0 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Regulation

This appeared here and I would like to thank John for allowing me to publish his work. RK

Over the weekend, President Obama hailed the third anniversary of the enactment of the Dodd-Frank “financial reform.” In his weekly radio address, the president also hailed the confirmation of Consumer Financial Protection Bureau Director Richard Cordray, which occurred last week after Senate Republicans caved to Majority Leader Harry Reid’s “nuclear option” threat to end the filibuster.

The president began his address, “Three years ago this weekend, we put in place tough new rules of the road for the financial sector so that irresponsible behavior on the part of the few could never again cause a crisis that harms millions of middle-class families.” And he concluded, “If we keep moving forward with our eyes fixed on that North Star of a growing middle class, I’m confident we’ll get to where we need to go.”

Sorry, Mr. President, but just the opposite is true. Dodd-Frank has declared certain large financial institutions to be “Systemically Important Financial Institutions,” enshrining too-big-to-fail in law. And the volumes of regulations emanating from the law’s 2,500-plus pages have harmed community banks, credit unions, small businesses, farms and manufacturers that had nothing to do with the crisis.

Here are some articles my colleagues and I have written on Dodd-Frank’s devastating toll as well as some its just plain silly, but still destructive, provisions:

• I write in National Review and American Spectator on the new database the CFPB is building that rivals the National Security Agency in collecting personal financial data. The articles make the point the CFPB is even less accountable than the NSA, because at least the NSA gets it funding from Congress, rather than the Federal Reserve.
• My colleague Iain Murray explains in “The Corner” of National Review Online how the Treasury Department is extending the SIFI or too-big-too fail principle beyond banks to many types of businesses.
• Provisions in Dodd-Frank regulating trade and the energy sector?! Believe it or not, yes?! I point out in National Review the flaws and lack of justification for provisions jammed into Dodd-Frank that force energy companies to disclose every payment they make to foreign governments and manufacturers to disclose if any of the gold, tin, or tungsten they use may have come from the Democratic Republic of the Congo. These provisions were inspired by celebrity activists but are hurting the very regions of the world they were meant to help, as well as driving up energy prices in the U.S. economy.
• In a rare instance of bipartisanship on deregulation, lopsided and, in some cases, unanimous majorities of the House Agriculture and House Financial Services Committees bucked the Obama administration to provide relief from Dodd-Frank’s stringent derivatives regulations. I document here in OpenMarket how both sides pointed out that these provisions were hurting farms, airlines and factories that had nothing to do with the financial crisis.

If the president truly wants to focus on the “north star” of helping the middle class prosper, he should work to repeal Dodd-Frank, end bailouts and lift barriers to more competition in the banking system from credit unions or well-run companies such as Wal-Mart. More to come on these items.

 

In Free Speech Victory, SEC Lifts Gag Rule On Hedge Funds And Venture Capital

By John Berlau on August 29, 2012

This first appeared here.  I would like to thank John for allowing me to post his work. RK

Today’s proposed Securities and Exchange Commission (SEC) rule lifting the outdated ban on “general solicitation” by hedge funds and venture capitalists is a victory for entrepreneurs, small investors, and, most of all, the First Amendment. Pursuant to the bipartisan Jumpstart Our Business Startups (JOBS) Act signed by President Obama, the SEC voted 4-1 to scrap a rule that had turned into an effective ban on routine communication with the general public from hedge funds, private equity firms, and venture capitalists.

The Competitive Enterprise Institute had previously filed an amicus brief supporting the Bulldog Investors hedge fund’s challenge to this and its state variants of this ban as unconstitutional restrictions on free speech. We argued — as did Bulldog’s outspoken co-founder and chief Phillip Goldstein and his counsel, the famed liberal First Amendment attorney Laurence Tribe — that the general solicitation ban was keeping the “99 percent” of ordinary investors in the dark about the workings of financial markets.

Over the decades, the SEC rule had come to broadly define just about any type of communication with the general public as an illegal stock “offering” to investors not wealthy enough to qualify to invest in hedge funds and venture capital. Under the solicitation ban, venture capitalists had less freedom to communicate over the Internet than the pornography industry. Non-wealthy adults who couldn’t meet the threshold for investing in vehicles exempt from SEC rules were treated as children who couldn’t be trusted with any information about investments not available to the general public.

Worries that lifting this ban will cause an increase in fraud, such as those expressed by dissenting Democratic SEC Commissioner Luis Aguilar, are wholly misplaced. Nothing in the proposed rule restricts the SEC’s ability to punish falsehoods and deceptions in dealing with investors. Hedge fund managers and venture captialists still may only sign up investors meeting wealth criteria of more than $1 million in assets or $200,000 in income (though this should eventually be changed too for non-wealthy investors willing to take this risk). But they will now be able to communicate their strategies to everyone, and ordinary investors will be able weigh this new information in their investing decisions.

The general solicitation ban did nothing to prevent Bernie Madoff from peddling his fraudulent scam to “qualified” individual and institutional investors. With barriers to general communication lifted, there will be fewer shadows where fraudsters like Madoff can hide.

What’s ironic is that hedge funds and private equity firms are accused of not being transparent, but much of this is due to the government’s own rules that force them to keep mum. The SEC should move with all deliberate speed to get it right with the First Amendment  and investor transparency.

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Clinton Vs. Clinton (And Obama) On Deregulation

by John Berlau

This first appeared HERE on OpenMarket.org, the blog of the Competitive Enterprise Institute.  I want the thank John for allowing me to post his work.  John is the author of  Eco-Freaks: Environmentalism Is Hazardous to Your Health, which is highly critical of the environmentalist movement wherein he states; "America ... is still mighty prosperous, but environmentalism is putting us on the brink of danger as well. As technology after technology that our grandparents put in place is being banned, and new technologies never even come to market, we risk a public-health disaster. Environmentalists have promoted all sorts of doomsday scenarios about population explosions and massive cancer crises from pesticides that have been shown to be false……. Indeed, as we will see throughout this book, public health hazards caused by environmental policies are already on the scene." I read his book right after it came out in 2006 and recommend it to everyone.   His analysis here about banking regulations is just as clear. RK

With little success on the economic front, President Barack Obama in 2012 is embracing much of his message on the economy from 2008. And from that playbook, he has two basic strategies.

One is to blame the supposed deregulation policies of the Bush administration that Obama and his surrogates endlessly say “got us into this mess.” And the second is to hug former rivals Bill and Hillary Clinton as hard as he can and harken back to the prosperity and economic growth of the 1990s.

But there is just one problem with this theme. The Obama campaign’s twin messages of bashing deregulation and embracing the Clinton years are inherently contradictory. Despite yesterday’s much-hyped new pro-Obama ad in which Clinton warns that a Mitt Romney president would “go back to deregulation,” on financial regulation, Bill Clinton as president was actually more of a deregulator than Bush.

Clinton pushed for and signed the very deregulatory measures that have been blamed (wrongly) for causing the financial crisis of 2008. What’s more, Clinton administration officials have credited these policies for contributing to the ‘90s economic boom — the very “shared prosperity” that Obama says he wants to go back to.

Late in Clinton’s tenure, the White House put forth a document celebrating “Historic Economic Growth” during the administration and pointing to the policy accomplishments it deemed responsible for this growth. Among the achievements on Clinton’s list were “Modernizing for the New Economy through Technology and Consensus Deregulation.” That’s right, a Clinton White House document credited part of the administration’s success to that now dreaded d-word, deregulation.

“In 1993,” the document explained, “the laws that governed America’s financial service sector were antiquated and anti-competitive. The Clinton-Gore Administration fought to modernize those laws to increase competition in traditional banking, insurance, and securities industries to give consumers and small businesses more choices and lower costs.”

Everything in those passages is true. All that’s missing is credit to the GOP-controlled Congress elected in 1994 for passing most of the policies that led to the prosperity. But the Clinton administration, whatever its personal and policy flaws, should indeed be praised for signing and advocating this deregulation. These bipartisan financial policies, however, were the very same policies that Obama, Joe Biden, and other Democrats attacked during the campaign of 2008 and throughout the next four years. “Let’s, first of all, understand that the biggest problem in this whole process was the deregulation of the financial system,” Obama proclaimed in the second presidential debate of 2008.

But on financial policy, ironically, Clinton was a far more deregulatory president than George W. Bush. As James Gattuso of the Heritage Foundation points out, while there may have been flawed oversight, there really was no actual financial deregulation under Bush. Indeed, Bush’s signature achievement in the financial area was the signing and implementing of the costly and counterproductive Sarbanes-Oxley accounting mandates.

Take Gramm-Leach-Bliley, the 1999 law Clinton signed repealing the Depression-era Glass-Steagall Act, which had strictly separated traditional commercial banking from investment banking. Obama’s supporters, claiming that getting rid of Glass-Steagall led to the credit blowup, have seized on the first name on the law, that of former Sen. Phil Gramm (R-Tex.), to bash it as a piece of Republican deregulation. Never mind that the Senate passed the legislation by a vote of 90-8, with many Democrats voting for the final bill, including now-Vice President Biden.

What’s more, Clinton himself defends Glass-Steagall’s repeal to this day. In a 2008 Business Week interview with CNBC personality Maria Bartiromo, Clinton said plainly, “I don’t see that signing that bill had anything to do with the current crisis.” He even added that its lifting of barriers to financial service mergers may have lessened the crisis’ impact, pointing out, “Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn’t signed that bill.”

Clinton was — and is — correct. The law benefited the economy by creating more choice and competition, and there is little evidence of Glass-Steagall’s repeal playing a role in the mortgage crisis. As the American Enterprise Institute’s Peter Wallison noted in The Wall Street Journal, “None of the investment banks that have gotten into trouble—Bear, Lehman, Merrill, Goldman or Morgan Stanley — were affiliated with commercial banks.” He also pointed out that “the banks that have succumbed to financial problems — Wachovia, Washington Mutual and IndyMac, among others got into trouble by investing in bad mortgages or mortgage-backed securities, not because of the securities activities of an affiliated securities firm.”

Clinton also championed the Riegle-Neal Interstate Banking and Branching Efficiency Act, which passed in 1994, before Republicans even took over Congress. As the previously mentioned Clinton White House “Historic Economic Growth” document put it, “in 1994, the Clinton-Gore Administration broke another decades-old logjam by allowing banks to branch across state lines.”

Riegle-Neal finally allowed the U.S. to have nationwide banking chains, as virtually every other developed country does. Anyone who remembers the inconvenience of not being able to access your own bank’s ATM when driving into another state can attest to the benefits this law brought. Federal Reserve GovernorRandall Kroszner has credited the law for a myriad of economic benefits including “higher economic and employment growth, spurred by more-efficient and more-diverse banks” and “more entrepreneurial activity, as the more bank-dependent sectors of the economy, such as small businesses and entrepreneurs, achieve greater access to credit.”

Yet when Republican rival John McCain in 2008 advocated letting individuals purchase insurance across state lines and wrote in a journal article that “opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products,” the Obama campaign hit the roof. “McCain just published an article praising Wall Street deregulation,” an Obama’s attack ad exclaimed. “Said he’d reduce oversight of the health insurance industry, too.”

At the time, FactCheck.org lambasted this ad for quoting McCain “out of context on health care.” But as I wrote for Reason in 2008, “the greater worry is that the attacks on the bipartisan deregulation that led to prosperity appeared to be quite in context for Obama, at least during the campaign. If President-elect Obama wants to pull the U.S. economy out of its rut, he must face up to the fact that ’90s deregulation was an essential ingredient in Clinton’s recipe for an economic boom. He also must recognize that substantially undoing the liberalizations that Clinton and the GOP Congress achieved would crimp recovery as well as create new problems.”

Alas, with the possible exception this year of his signing of the Jumpstart Our Business Startups Act, which provides modest relief to smaller firms from Bush’s Sarbanes-Oxley and Obama’s own mammoth Dodd-Frank mandates, Obama has yet recognize the role deregulation played in fostering the Clinton-era growth he says he wants to achieve.

The Clinton era should not be romanticized by free marketeers. Clinton did pursue statist policies that grew government and favored public sector unions, as author Mallory Factor reminds us in his blockbuster new book, Shadowbosses. The government-sponsored housing enterprises Fannie Mae and Freddie Mac that weakened market discipline grew substantially, as well as housing regulations that encouraged perverse incentives, such as Clinton’s expansion of the Community Reinvestment Act. These are areas where the Clinton administration was not deregulatory and can be blamed for encouraging bad loans to be made (as can the George W. Bush administration).

Nevertheless, the Clinton-GOP governance, despite the constant bickering and backbiting, ironically left a shining legacy of prosperity, which bipartisan deregulation was so much a part of. In terms of economic growth, there are few better examples of bipartisan success than this tenure. We can only hope this aspect of Clinton’s presidency will be emulated once again.


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