Posts Tagged ‘Barney Frank’

Republicans May Underfund Dodd-Frank Implementation

Thursday, January 20th, 2011

Republicans May Underfund Dodd-Frank ImplementationPresident Barack Obama’s crackdown on Wall Street excesses could be hampered if the incoming Republican-controlled Congress refuses to fund two crucial regulatory agencies.  The Dodd-Frank financial reform law – passed with heavy Democratic support – promised a generous budget to regulate the $600 trillion over-the-counter derivatives market.  Now, the law’s implementation may be derailed by the incoming 112th Congress.  Randy Neugebauer (R-TX), who will chair the House Financial Services oversight subcommittee, wants to review the regulators’ expansion plans.  “Once you turn the money loose, it’s a little harder to stop that train,” he said.

The two regulatory agencies in question are the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).  The SEC, for example, had expected to receive an 18 percent increase to its 2011 budget, which would have allowed it to hire 800 new regulators to enforce Dodd-Frank.  Roadblocks are on the horizon, however, in the form of Representative Spencer Bachus (R-AL), who will chair the House Financial Services Committee, and Frank Lucas (R-OK), who will chair the agricultural committee that oversees the CFTC.  The two Congressmen wrote to regulators, saying “An overarching concern…is the need to get it done right, not necessarily get it done quickly.”  The Republicans’ attitude to enforcing Dodd-Frank could be a boon to Wall Street firms, whose lobbyists are advocating a go-slow approach.

Mary Schapiro, SEC Chairman, said “We will have to take some more steps to cut back.  At this stage, it will impact our work.”  The chronically underfunded and understaffed CFTC, which had expected a 50 percent budget increase, had planned to hire 240 new regulators this year to enforce its new oversight of the swaps market.  According to CFTC Chairman Gary Gensler, “I do think without sufficient funding next summer (2011) you’d see a significant number of registrants – swap dealers, swap execution facilities and so forth – whose legitimate applications would have to be slowed down.  Michael Greenberger, a University of Maryland law professor and previously the CTFC’s director of trading and markets, says.

House GOP Taking a Second Look at Dodd-Frank Financial Reform Law

Thursday, November 18th, 2010

Congressional Republicans may water down the financial reform law.  The newly empowered Republicans in the House of Representatives will attempt to rein in regulators who are in the process of implementing the comprehensive reform of financial rules and advocate for a smaller government role in the mortgage market.  By taking control of the House in the recent mid-term elections, the GOP will have more influence over the newly created Consumer Financial Protection Bureau and greater sway over any technical fixes that Congress makes to rules that govern derivatives trading.

“We don’t want them to regulate capriciously, arbitrarily, without engaging in a cost-benefit analysis,” said Representative Jeb Hensarling (R-TX), a member of the House Financial Services Committee.  President Barack Obama brought attention to the Republicans’ intent in a recent radio and Internet address, noting that House and Senate members “are now beating the drum to repeal all of these reforms and consumer protections.  I think it would be a terrible mistake,” he said.

With Democrats still in control of the Senate and in the White House, it’s highly unlikely that the Republicans will be able to carry out a fundamental revision or even repeal of the Dodd-Frank law.  There’s also the possibility of a presidential veto if repeal legislation makes it through both houses on Congress.  Because the Republicans now have a majority in the House, the diminished number of Senate Democrats will have to reach across party lines on financial issues for the simple reason that any changes will require support from both parties.  Bipartisan compromise will be used to arrive at consensus in the next Congress, said Senator Tim Johnson (D-SD), who is replacing the retiring Senator Christopher Dodd (D-CT), who headed the Senate Banking Committee.  According to Johnson, “We sometimes differ on how we achieve our goals, but we have to agree more often than not.”

Financial Reform Forces Transformation on Alternative Investments

Thursday, September 16th, 2010

Wall Street reform law places new restrictions on alternative investment companies.  The alternative investment management business will undergo major changes, thanks to passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Although no specific rules have yet been written, the Wall Street reform law could impact investment returns, leverage and risk-taking, innovation and transparency of private equity, real estate and hedge fund managers.

“This will change the way alternative investment businesses are run.  They will have to use more capital and less leverage and less risk-taking,” said Henry Kahn, partner in the law firm Hogan Lovells.  “This fundamentally changes what types of businesses financial services are in.”  The large financial services firms now must choose which lines of alternatives business they will keep and how they will be set up.  Smaller firms might have to deal with Securities and Exchange Commission (SEC) registration for the first time.  This will give the world – and regulators – an inside look at their investment strategies, which they do not welcome.

Investors are concerned that increased transparency and greater oversight by the SEC will make investment managers less willing to be innovative because their proprietary strategies will be open to review by regulators and their competitors.  According to Kahn, “Some large institutional clients are concerned that regulations will put additional costs on medium-size advisers and inhibit beneficial innovation in investing.”

Next Up on the Presidential Agenda? Reforming Fannie and Freddie

Thursday, August 5th, 2010

Reforming Fannie Mae and Freddie Mac is next on President Obama’s to do list.  The next item on President Barack Obama’s ambitious agenda is likely to be overhauling Fannie Mae and Freddie Mac, the government-backed mortgage firms that so far have cost American taxpayers $145 billion to keep afloat.  The two firms, which own more than half of the nation’s $11 trillion in home mortgages, collapsed along with the housing market and were taken over by the federal government in September of 2008.

Many Congressional Republicans believe that scrapping Fannie and Freddie is mandatory; Democrats disagree and President Obama is expected to support reforms backed by consumer, real estate and banking groups.  The core of the emerging consensus is to preserve the 30-year, fixed-rate mortgage.  Susan Woodward, former chief economist at the Department of Housing and Urban Development (HUD) and a founder of Sand Hill Econometrics, said “People regard it as a right as Americans to get a 30-year, fixed-rate loan.”

Banks and builders agree with consumer advocates representing homebuyers that it’s good for the government to promote residential lending by supporting what Fannie and Freddie have done for years – purchasing mortgages and bundle them into securities that they sell to investors.  When the system works as intended, the MBS market creates additional money that is funneled back into the market to make new affordable loans.  The task is to determine how to accomplish this without the lax practices that the taxpayers had to pay for when catastrophic losses occurred in 2008.

The Obama Administration and leading Democrats strongly believe that the federal government should have a role in promoting homeownership.  Shaun Donovan, HUD Secretary, said “We should not compromise any of our core policy goals in the decisions we make in structuring our house financing system.”

Senate, House Versions of Financial Reform Bill Headed to Reconciliation

Monday, June 7th, 2010

Senate passes financial reform legislation; the bill now must be reconciled with the House version.  Senator Christopher Dodd (D-CT) is enjoying a big victory in his last days in the Senate following passage of broad financial reform legislation designed to rein in the excesses that caused the financial meltdown.  First, the Senate and House versions of the bill must undergo reconciliation.  Under the new law, for example, homebuyers will have to provide proof of income when applying for a mortgage.  Additionally, a new consumer protection apparatus will monitor lenders who offer subprime loans and then raise interest rates to sky-high levels.

The legislation – which will bring openness to complex financial instruments such as derivatives – passed 59 – 31 and provides a way to liquidate financial institutions once viewed as too big to fail.  It also establishes a council of regulators who will monitor threats to the economy and specific restraints on the derivatives trading, which set off the toxic debts that froze the credit markets and prompted the Federal Reserve to make trillions of dollars of loans to banks on the brink of collapse.

The vote hands President Obama his second landmark legislative victory this year, following the March passage of his historic health-care bill. “Our goal is not to punish the banks,” he said hours before the final vote, “but to protect the larger economy and the American people from the kind of upheavals that we’ve seen in the past few years.”

Senate Majority Leader Harry Reid (D-NV) summed up the legislation: “When this bill becomes law, the joyride on Wall Street will come to a screeching halt.”  The reconciled bill is expected to hit President Obama’s desk for his promised signature this summer.

Volcker Rule Seeks to Regulate Financial Markets

Wednesday, March 31st, 2010

President Obama’s proposed Volcker Rule financial regulation bill faces an uncertain future on Capitol Hill.  A draft of President Barack Obama’s financial reform legislation has been sent to Congress.  Dubbed the Volcker Rule in honor of the former Federal Reserve chairman’s  aggressive pursuit of these regulations, the five-page proposal will ban proprietary trading and mergers that give banks more than a 10 percent market share as measured by liabilities that are not insured deposits.  Passage of the bill would bar banks from owning or investing in private equity firms and hedge funds.

The rule, designed to reduce the possibility of another financial crisis, exempts mergers that exceed the market-share limit in instances where a firm takes over a failing bank so long as regulators approve.  Also exempted are trading in Treasury and agency securities, including debt issued by Ginnie Mae, Fannie Mae and Freddie Mac.

The legislation, which has been criticized by both Republicans and Democrats, would reduce banks’ ability to take risks.  It is a reaction to the more than $1.7 trillion in writedowns and credit losses that followed the subprime mortgage meltdown in late 2007.  Congressman Barney Frank (D-MA), chairman of the House Financial Services Committee, prefers a five-year transition period rather than the two years suggested in the president’s proposal.

Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York says the exemptions may help avoid market disruptions that could impact small investors.  “The market is made up of many unseen hands with different objectives and investment horizons, and if you pull out the speculators making short-term bets, like prop trading banks, then” the individual investor is “going to be the one who suffers.”

Barney Frank: Scrap Fannie Mae and Freddie Mac

Tuesday, February 16th, 2010

Congressman Barney Frank (D-MA) wants to scrap Fannie Mae and Freddie Mac in favor of an entirely new mortgage-financing system. According to Frank, Chairman of the House Financial Services Committee and who previously supported the programs, “The committee will be recommending abolishing Fannie Mae and Freddie Mac in their current forms and coming up with a whole new system of housing finance.”Congressman Barney Frank wants to start an entirely new mortgage-financing system.

Fannie Mae and Freddie Mac, which back a majority of the nation’s home loans, buy mortgages from lenders, insure them against default and supply new money to create new loans. Thanks to growing losses on these loans that threatened the health of Fannie Mae and Freddie Mac, the federal government took control of the programs in September 2008.  Since their seizure, Fannie and Freddie have been run by regulators and kept alive by $110.6 billion in taxpayer money.  Frank says that Congress needs to decide what to do with Fannie’s and Freddie’s remaining shareholders, as well as investors in the companies’ $5.4 trillion in mortgage bonds and $1.7 trillion in unsecured corporate debt.

Fannie Mae and Freddie Mac profit by financing mortgage-asset purchases with low-cost debt and on guarantees of home-loan securities they create out of loans from lenders.  They currently own or guarantee more than $5 trillion in U.S. residential debt, and were responsible for as much as 75 percent of the new mortgages made in 2009.

“We’re going to look at the whole question of housing finance,” Frank said.  “Sorting out the function of promoting liquidity in the market, and also the secondary market in general but then also doing some kind of subsidy for affordability.”

Fannie/Freddie were caught in the eye of the subprime meltdown.  In February of 2007, the residential mortgage-backed securities market crashed with sales plummeting 90 percent.  While reform is needed, Fannie and Freddie operate like a public option – by making home ownership more affordable and creating competition to commercial banks.  A positive step is the Deed for Lease program.  After foreclosure – at 57,000 homes in the first half of 2009 – the new program allows owners to lease their homes and avoid foreclosure.

Artificially creating/guaranteeing a market for home loans has lost billions. Hopefully, whatever entity replaces Fannie and Freddie will be prohibited from contributing to congressional campaigns and PAC’s.