President Trump Moves Closer To His Stated Goal Of Repealing Dodd-Frank
DAVID GREENE, HOST:
Let's zoom in on one of President Trump's key priorities. He wants to repeal the Dodd-Frank Act and dismantle some of its regulations. This law is meant to rein in big banks, but many Republicans see it as burdensome and unnecessary. Earlier this month, the House committee approved something called the Financial Choice Act, and this brought the president one step closer to repealing Dodd-Frank.
And it brought us to a moment when we knew we had to talk to David Wessel. He is director of the Brookings Institution's Hutchins Center, a contributing correspondent to The Wall Street Journal and someone who can help us make sense of Dodd-Frank. David, good morning.
DAVID WESSEL: Good morning.
GREENE: So a little background - Dodd-Frank was supposed to really change how we cope with the collapse of a big bank or insurance company, things we saw during the financial crisis, right?
WESSEL: Absolutely. So for decades, the law gave the Federal Deposit Insurance Corporation - they're the ones that insure bank deposits - the job of dealing with a collapsing commercial bank. But during the crisis, Bear Stearns, Lehman Brothers and AIG weren't commercial banks. So when they ran into trouble, the Federal Reserve had to improvise. No one was very happy with the result.
There was lots of cries of taxpayer bailouts. So Dodd-Frank creates one set of rules that amends the bankruptcy laws to better handle the collapse of a command - complex financial institution. But at times when that just won't work, like when the whole system is melting down, there there's something called Title II of Dodd-Frank which creates orderly liquidation authority, it's called, under which the FDIC only if the Fed and the Treasury in consultation with the president say it's OK, can take over any significant financial institution, wipe out its shareholders and some of its creditors and keep it operating until it can wind down. And that has become controversial.
GREENE: OK. Why controversial? Why are Republicans, why is the Trump White House raising alarms and saying that they want to do away with this?
WESSEL: Well, basically there are two things. One is that the law gives the FDIC the authority to borrow a lot of money from the Treasury if it needs it. And even though the law says FDIC will tax the whole banking system to pay back that loan, Dodd-Frank critics say this is too close to the dreaded bailout. And they also say that by creating this last resort thing, big banks and investors will see the possibility of a government invention - intervention even one as unpleasant as this orderly liquidation authority as an incentive to take too much risk and that will put it right back where we were before the crisis.
So President Trump and his executive order said that this may - and I quote him - "encourage excessive risk taking." And he told the Treasury secretary don't use it until you can review the whole thing. And Jeb Hensarling, the chairman of the House Financial Services Committee, has been particularly strident. Here's what he said about that the other day at the American Enterprise Institute.
(SOUNDBITE OF ARCHIVED RECORDING)
JEB HENSARLING: I think the OLA helps precipitate the next financial crisis. It's far more important to prevent the crisis just like it's far more important to invest plans and resources in fire prevention than in firefighting. And so we believe that what's most important is to have market discipline.
WESSEL: So he wants to kill the whole thing, rewrite the law and let bankruptcy judges handle any collapsing financial institution.
GREENE: OK. So Republicans making the argument that this law has created something worse and not better that might actually put us back into a crisis. Are the people who crafted and have been defending Dodd-Frank, do they totally disagree with that notion?
WESSEL: They totally disagree. They say, look, we've done a lot to prevent another crisis, but we can't be sure we'll avoid one. Killing orderly liquidation authority is like saying because we have better building codes, we should do away with firehouses. It's crazy. Ben Bernanke, the former Fed chairman - and I should say a colleague of mine at Brookings - says doing away with OLA would be imprudently putting the economy and financial system at risk. Here's what he said at a Fed conference a few years ago.
(SOUNDBITE OF ARCHIVED RECORDING)
BEN BERNANKE: The orderly liquidation authority provides us for the first time with a set of rules and a framework for safely winding down a distressed systemically important firm which of course is the essence.
WESSEL: He says bankruptcy judges can't handle this stuff. It's way too complicated, and the big banks agree with him. And that's - they want to keep this provision and that's the point that Mr. Hensarling cites as a reason to repeal it.
GREENE: OK. So briefly, David, where do we go from here? Is this law ready? Is going to be repealed at some point?
WESSEL: It's passed the House committee. It's probably going to go to the House floor next week and will be passed on a party line vote, but it's unlikely to get through the Senate in its original form.
But there are proposals - one from Roger Cohen, for instance, a big banking lawyer, to add a new chapter to the bankruptcy code to deal with collapsing financial institutions, but leave this orderly liquidation authority in place just in case we need it in another financial crisis.
GREENE: I see. So there actually may be room for compromise somewhere here.
WESSEL: Maybe, but nothing soon. Don't hold your breath.
GREENE: (Laughter) I won't. David Wessel is director of the Brookings Institution Hutchins Center and a contributing correspond to the Wall Street Journal. Thanks as always, David.
WESSEL: You're welcome.
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.