GOP to whack Dems with Dodd-Frank
Just 12 months later, Republicans are convinced they can hang the law around the president's neck like an albatross and use it to beat him next fall.
Republicans at every level, from the presidential campaign to competitive House races, are already describing the law as a terminally flawed regulatory overreach second only to health care reform in its ability to destroy jobs, restrict credit and further delay an already tepid economic recovery.
The GOP effort is likely to be aided by the slow pace of Dodd-Frank implementation and widespread confusion in the banking industry regarding the potential impact of many of its provisions.
"President Obama likes to tout his 'unprecedented' efforts to cut down on federal regulations, but the truth is the Dodd-Frank regulatory bill is hurting the economy by piling burdensome regulations on businesses and job creators," Republican National Committee Chairman Reince Priebus told POLITICO in a preview of the party's messaging effort for the 2012 campaigns. "If the president truly wants to jump-start the economy, he'll drop the rhetoric, stop burdening job creators and start producing results."
GOP presidential hopefuls have also been sharply criticizing the law both in broad strokes and specific attacks, apparently unafraid they will be cast as siding with Wall Street over Main Street businesses and consumers.
In a recent speech at the University of Chicago, former Minnesota Gov. Tim Pawlenty slammed the length and complexity of the 848-page law. He has also called for it to be repealed.
"The Dodd-Frank financial regulation bill called for more than 200 new rules to be written by more than 10 federal agencies," he said, "none of them resolving the catastrophic scandal of Fannie Mae and Freddie Mac. Months after the law went on the books - no one yet knows exactly what the law is."
Last month in Colorado, GOP front-runner Mitt Romney, the former governor of Massachusetts, said the law restrains lending and impedes growth. "Banks are afraid to make loans right now because of the government hanging over them like gargoyles," he said.
Ripping Dodd-Frank - once thought to be politically dangerous for a candidate who made his fortune as a Wall Street private-equity executive - is now a standard part of Romney's stump speech as he casts himself as the free-market antidote to Obama.
Democrats say the GOP is making a serious miscalculation that will wind up costing it dearly.
They point to polling data that suggest ongoing intense anger at Wall Street, particularly as executive pay shoots back up near pre-crisis levels. And they say while any law as big as Dodd-Frank will have kinks that need fixing, it will ultimately make the banking system safer, protect consumers from predatory practices and reduce the risk of another catastrophic crisis.
Rep. Barney Frank (D-Mass.), one of the two main authors of the law along with former Sen. Chris Dodd (D-Conn.), said Republicans cannot attack the law directly, so instead rely on gauzy rhetoric suggesting government regulation is hurting economic growth.
"I think the slogan 'Let's deregulate derivatives' is not a popular one," Frank told POLITICO. "Reality has kicked their ideology's [behind]. They understand that."
Frank noted that Republicans on the House Agriculture and Financial Services committees approved bills to delay regulating derivatives, although they have yet to schedule a full vote.
"They get a bill through the committees to hold off any new regulation of derivatives, but they haven't brought it forward," he said. "So I think they are conflicted."
GOP strategists and financial industry officials privately concede part of Frank's point, saying Republican candidates need to tread carefully in going after the law so as not to be seen as siding with big banks. But they say there are plenty of specific provisions to portray as contributing to the weak economy.
"The industry has not sprung back in popularity at all," one banking lobbyist said. He asked not to be identified by name to preserve relations with regulators during the implementation process.
"If the economy had come roaring back, it would be hard to go after the bill at all," the lobbyist said. "But it is now much easier to make the case that this is another disjointed, wrong-headed policy response from the Obama administration and Democrats in Congress. But Republicans need to be very careful in how they talk about it. It's a balancing act."
Several banking industry executives said uncertainty over whether they will be required to hold even more capital than recently proposed by international regulators in Basel, Switzerland, was one of the biggest problems with the Dodd-Frank law.
They also cited higher compliance costs associated with multiple new layers of regulation, including the Dodd-Frank provision that created the Consumer Financial Protection Bureau, which is scheduled to receive broad new enforcement authority over banks on July 21 but does not yet have a director.
Republicans say they will not confirm Elizabeth Warren, who conceived of and is setting up the agency, or anyone else until the structure of the bureau is changed to a commission similar to that employed by the SEC, FDIC and other financial industry regulatory bodies. Warren and other prominent Democrats will not accept such changes, leading to a stalemate that threatens the agency's future.
Industry analysts said one main line of GOP attack is likely to be that Dodd-Frank does not actually do much to address what they say were the actual causes of the financial crisis.
"We had a crisis because a number of different cogs in the overall financial process failed to function," said Jaret Seiberg, a banking analyst and senior vice president at MF Global. "Regulators were not being tough enough with rules; political forces favored easy credit and the belief that everyone should be able to own their own home; investors became too complacent with risk and rating agencies were too timid with ratings."
Seiberg said he believes much of the current GOP rhetoric is aimed at setting the stage for a full Dodd-Frank repeal effort starting in 2013.
Republicans have also targeted provisions requiring that would-be homeowners put down 20 percent to get a mortgage that would qualify for a federal guarantee. In addition, mortgage lenders could be required to retain at least a 5 percent stake in any but the least risky loans they make. Typically, lenders sell many of their loans for packaging as mortgage-backed securities.
"You only need [the risk retention rule] if you have bad underwriting standards," Seiberg said. "And you already corrected that side of the ledger. And now you add this very onerous risk retention requirement on top of it. It's too much aimed at the same problem and as a result you restrain credit and damage the economic recovery."
Despite Frank's comment that the GOP is conflicted about rolling back Dodd-Frank, Republicans are not likely to stop at criticizing the derivatives reform portion. Derivatives are financial contracts between two parties tied to an underlying asset.
Republicans in the House and Senate have broadly criticized new margin requirement proposals on derivatives as possibly harmful to so-called end users, such as the farmers and ranchers who use the contracts to hedge against risk. Democrats say such users will not feel any adverse impact.
Steven Lofchie, an attorney at Cadwalader, Wickersham & Taft and a critic of the Dodd-Frank law, authored a widely read paper on why the derivatives rules could not be put in place by the initial July 16 deadline. That date was recently pushed back.
In a recent interview, Lofchie, who voted for President Obama and has historically supported Democrats, said very few things about the law make sense. He said that the derivatives trading requirements are likely to drive business away from U.S. banks to more unregulated markets in Asia that have been pitching themselves as alternatives.
"If we establish rules that are not intuitive and do not have a rational basis, there is no particular reason that trading has to happen here," Lofchie said. He added that he believes the opposite of Frank's point to be true. He said the more the GOP goes after specific provisions of Dodd-Frank, the stronger its case will be.
"At the level of generality, this law seems OK," he said. "At the level of specificity, it just doesn't work."
Josh Boak contributed to this report.
POLITICO and the New Hampshire Union Leader are sharing content for the 2012 presidential campaign.