|Tipping Point (August 2010)|
ABA’s CEO, Ed Yingling, explains how, despite all efforts at damage control, Congress changed a necessary regulatory-reform bill into a flawed vehicle for wide-ranging social policy that will push some banks to sell.
Dodd-Frank Act | Special Report
By Bill Streeter, editor-in-chief, with Steve Cocheo, executive editor
Thinking back on the recent legislative battle, was the outcome better or worse than you expected?
Yingling I would say that it was within the four corners of what we expected, but ended up toward the worse because of what happened at the end on the Senate floor.
In this atmosphere and with this Congress we thought all along we would be facing a highly negative bill, so our first goal was to limit the damage. There were things we wanted to add to the bill and we did add some. And there were core things that we agreed should be enacted, like resolution authority and the Systemic Risk Council. But they were pretty much going to be enacted anyway.
We expected a bill to pass the House, because House rules give the majority huge power, and our goal was to get as good a bill as we could and keep it clean. We had two huge problems. One was the bill itself. This wasn’t just a regulatory reform bill, it was regulatory reform plus a huge amount of social policy. It became the vehicle for literally everything consumer groups had sought for the last ten years—nothing to do with the financial crisis.
Beyond that, particularly on the Senate floor, because of the way amendments can be offered, we knew we would be attacked by others who wanted to add things. To use a military analogy, if you’re an army fighting on ten different fronts and another army comes on the field, your troops are spread so thin the other force can take advantage of that. The three areas we identified where that could happen were credit unions, which turned out not to happen, in part because they ended up opposing the bill; the bankruptcy “cram-down” amendment, which we beat on the House floor; and, finally, what became the Durbin amendment on interchange. With the latter, we knew going in we would face a very powerful coalition—the retailers—spending millions of dollars at a time when we were spread thin, and when committee chairmen might be looking for votes.
All in all, the bill came out a little better from the House than we had game-planned.
In the Senate, we initially thought we would do better, and for a time things were cooking along about as we expected. We thought we had the leverage to get a negotiated bill between Sen. Chris Dodd [D. Conn., chairman of the Banking Committee] and Sen. Richard Shelby [R. Ala., ranking minority member], and be able to send a clean bill to the Senate floor with an agreement not to take unnecessary amendments.
When Shelby and Dodd had a little trouble reaching agreement, Sen. Bob Corker (R. Tenn.) stepped in. They were really trying in very good faith—Dodd, Corker, and Shelby—to reach a bill where they would have 80 votes.
Then things got worse than what we had hoped for. After healthcare passed, some Democrats adopted the strategy that, “We can ram things through if we want to.” You also had the Goldman Sachs hearings, which were used politically to put momentum behind the bill. And, frankly, we had a split industry. Some said, “We ought to put the bill on the floor without a deal,” which was incredibly harmful.
And so at that point, while Senator Dodd was still in serious negotiations, he was called down to the White House. Everybody believes that the President said, “Don’t cut a deal with them—we can get cloture [ending debate] because we see weaknesses in the other side.” After three defeats they got cloture and the bill went on the floor with no deal.
That meant two things. First, instead of being able to work out a more reasonable consumer bureau (which never got worked out), and instead of knocking out provisions such as tying national bank lending limits to state-chartered banks as part of a deal, we had to fight and fight for them, using up chips.
Second, and even worse, we were open to any amendment on the floor. We beat some of them, but what did we get? The Collins and Durbin amendments.
[The Collins amendment, introduced by Sen. Susan Collins (R., Maine), phases out the use of trust preferred securities for Tier 1 capital. The Durbin amendment, introduced by Sen. Richard Durbin (D., Ill.), requires debit card interchange rates to be set by the Federal Reserve.]
Because the Democrats needed every vote, they cut a deal with Collins. In a negotiated bill, Dodd and Shelby would have said the Durbin amendment is not relevant to the bill, and left it out.
In the conference committee we were able to improve the Collins amendment, but the bottom line is that the bill got more negative on the Senate floor than we had hoped because we lost the leverage to get a negotiated deal.
How much did confusion over TARP and “bank bailouts” hamper things?
Yingling The misuse of the word “bank” and the failure of government officials to communicate correctly about what TARP was, which left the impression that many banks were bailed out, was a huge mistake. The government did not explain why banks were taking the money and the fact that they had been asked to take the money. To this day I still believe that it was very poorly handled, going back into the Bush administration and right through this administration. They did not understand—and they should have—what they were unleashing. We tried and tried to set the record straight on every TV program we could get on; we wrote letters, we testified. We said, “You are causing severe damage to the faith of the public in their banking industry.”
Given the size and complexity of this legislation, how did ABA cope with the demands on its resources?
Yingling From my perspective we were ready to deal with this hurricane for three reasons.
First, we have a very deep and broad staff. Of all the financial trade groups we were uniquely able to cope with the volume and complexity.
Second, several of us at ABA went through the S&L crisis of the late ’80s, so we were accustomed to the pace and to the problem of cascading amendments. And we also knew from the ’80s that this would become a feeding frenzy, and that’s what happened.
Third, we have for years worked closely with the state bankers associations. So that alliance was ready and was one of the most important factors over the last year and a half. We had all the state associations and the ABA really working as a team. We had upwards of 100 conference calls during that period.
What’s the worst part of the law?
Yingling The consumer agency. Wayne Abernathy (EVP Financial Institution Policy and Regulatory Affairs) and I have about 65 years of experience in these things, and we agree that this is the most powerful agency ever created. It’s powers are very broad and vague. The agency gets to decide first and foremost what is “abusive,” which has been added to the “unfair and deceptive acts and practices” authority that will govern its actions, and its view will be given deference by the courts. Second, it has one person running it—there is no board, no checks and balances. Third, there is no appropriations process. The Federal Reserve writes it a check.
This agency literally will be able to do almost anything it wants.
There is a plus to the BCFP. In the past where nonbanks have engaged in practices that made it very hard for banks to compete, or that messed up markets, there was nobody at the federal level to really go after them. Now there is.
Will there be technical corrections?
Yingling There will be opportunities next year to address mistakes and unintended consequences. The degree to which we can do that will be affected by the election. I would expect us to try to roll back the Durbin amendment, and maybe make changes to the authority of the consumer bureau or its structure. But it will be very hard to do. Even if such a bill were to pass Congress, it would likely be vetoed, unless we could attach it to some legislation that can’t be vetoed.
One of the approaches we took to this bill was that we were going to state our positions and argue for them in those areas where we believe this bill is wrong. I would suggest we keep that same position. In this atmosphere you’ve got to stand up for what you think is right.
Are the parts of the bill that address systemic risk adequate?
Yingling We supported the core parts of the bill even before there was a bill. The most important part is the resolution mechanism and it is pretty close to what we advocated. It may or may not be perfect and I respect those that argue that it is not the right approach, but it is intended to be a controlled bankruptcy. And so that part of the bill we are pretty pleased with.
There is one exception: the fact that the resolution mechanism is in the FDIC under the FDIC’s name. FDIC has done a very good job and the public has faith in it. But now the agency has been politicized in terms of what we use the premiums for. And the FDIC now is the resolver for a future AIG. What would the view of the public be of the headline: “FDIC To Set AIG’s Bonuses”?
We had argued, if you feel you need FDIC’s expertise, create a new agency and let the FDIC people run it. But in the end it was blocked.
It’s a real problem.
How do you see this massive new law impacting the industry?
Yingling It’s fairly clear at this point that the largest banks are going to have a very, very significant increase in costs and decreases in revenue in some areas. Some of these changes should have happened—increased capital and liquidity requirements, more transparency on derivatives, for example. A big danger, however, is that when the smoke clears there will be a significant disadvantage for U.S. banks internationally, especially with regard to Asian banks, which have basically said, “We didn’t have a problem, so we aren’t doing reg reform.”
The mid-size banks in some ways were the most unfairly treated because they did nothing wrong and yet they got hit with almost everything in the bill because they didn’t get any of the carve-outs.
Having said that, the ultimate impact is greatest on the small banks because even with their carve-outs they don’t have the scale to deal with the tsunami of new regulations that’s coming, particularly when they are being hit on the revenue side by the Durbin amendment and changes in overdraft protection. In addition, the biggest banks are going to adjust their business models. They’re going to be tougher competitors for consumer deposits particularly because of the changes in FDIC insurance premiums. And so we think that unfortunately this bill may be a tipping point for many community banks.
We are hearing two things from bankers. Either they are talking about selling, or they are getting phone calls from bankers that want to sell. It is a real shame to think that government policy is going to force out community banks. Some of this would have happened anyway in this economy, but our guesstimate is that in a few years you will have 1,000 community banks that will disappear.
What is the future for thrifts?
Yingling The administration and certain members of Congress wanted to eliminate the thrift industry, but they weren’t able to. That’s something we worked very hard on and successfully. A key there was Barney Frank [D. Mass., chairman of the House Financial Services Committee], who was very strong on supporting mutuals and very strong on the thrift industry.
Thrifts came through the political storm in good shape. They can have a good future. However, there continues to be a lack of understanding in Washington of thrifts and particularly mutuals. We’re going to make a very aggressive effort to make sure people really understand these charters and not typecast them all as junior WaMus.
How do you see Fannie Mae and Freddie Mac playing out?
Yingling It will be another donnybrook. And it’s hard to see how it will work out, particularly if you project after the election a very evenly split Congress. Whatever you do with Fannie and Freddie means you are going to basically redesign the entire housing finance system.
In addition, you’ve got a huge issue of billions and billions of dollars that the taxpayers have lost in this black hole. Who’s going to pay for it? To some degree you want these two entities to make it up, but in all probability they will need to raise capital. They can’t raise capital if they can’t make money because they are basically taxed to death.
I have no doubt that they will move to the issue early next year but what happens after that is anybody’s guess. It could have a negative impact on the Home Loan Banks, so we will be alert for that.
Will anything change at the ABA as a result of recent events?
Yingling We are going to sit down with the state associations in early fall and walk through it. Not in the sense of throwing anything out and starting over, but lessons learned. One thing we will talk about is how to have bankers all the way down the line—not just the CEO—understand that just as there is a risk to their institution from credit mistakes, there is also tremendous political risk. And it must be part of their jobs to address political risk. •
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj0810/index.php?startid=42
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