Just days after the Libor-rigging scandal took center stage at a hearing with Federal Reserve Chairman Ben Bernanke on Capitol Hill, the U.S. Chamber of Commerce is out with a new report arguing that one of Dodd-Frank’s cornerstone provisions will hurt the economy. It’s awkward timing.
The report, released on Thursday by the chamber’s Center for Capital Markets Competitiveness, makes the case that the Volcker Rule, which bans banks from trading with their own money to turn a profit, would hurt banks as well as their customers on Main Street.
Critics of Dodd-Frank often cite the potential costs of the 2010 financial-reform law. Now, they will have to do so as Democratic lawmakers point to a series of recent bank scandals as evidence that Wall Street does, indeed, need stricter regulation.
May, June, and July brought a one-two-three punch of headline-grabbing bad news on Wall Street. First, JPMorgan Chase announced it had lost $2 billion or more on bad bets. Then it was revealed that Barclays and potentially a dozen other banks had manipulated a global benchmark rate known as Libor during the height of the financial crisis. Finally, brokerage firm Peregrine Financial Group collapsed and customer funds were reported missing.
This week's back-to-back Bernanke hearings show how difficult it may be to keep lawmakers’ attention on the potential ill-effects for the financial industry of Dodd-Frank when there are many questions to be answered on recent bank flaps. On Tuesday, Bernanke faced just one question on the Volcker Rule when he appeared before the Senate Banking Committee. Ditto Wednesday, when he answered lawmakers’ questions before the House Financial Services Committee.
The rule is one of the most contentious of Dodd-Frank’s provisions, and the Fed one of the five regulators charged with writing it. What’s more, the deadline for a final rule is Saturday. Although regulators aren’t expected to have the final rule ready in time, this week’s hearings would have provided an apropos time to talk about it.
Compare that to the recent Libor scandal, on which Bernanke received roughly 30 questions between his two Hill appearances. And JPMorgan CEO Jamie Dimon was brought to the Hill twice in June to answer for his bank’s trading losses.
Democrats are seizing upon the bank missteps to bolster their argument that the financial sector needs more regulation. “My initial view [of the Barclays scandal] is that we had some serious misbehavior here that calls into question the whole notion of self-regulation and rebuts the argument about ‘don’t be too prescriptive,’ ” Rep. Barney Frank, D-Mass., one of the reform law’s architects, told National Journal.
Sen. Tim Johnson, D-S.D., echoed those views on Tuesday. “Recent events, such as CFTC ordering Barclays to pay a $200 million penalty for Libor manipulation, are reminders that we need tough, fair rules in place and strong, adequately funded financial regulators to enforce those rules,” he said at the hearing with Bernanke.
And even Republican Rep. Scott Garrett asked Bernanke whether regulations could have been added to Dodd-Frank that could have prevented Libor manipulation, because regulators were aware it may have been going on as early as 2007.
"Isn't there some recommendations that you could've made for Dodd-Frank over the last four years when that was coming forward? Isn't there something that you could've done as far as regulations, perhaps with regards to how banks report their information to Libor, perhaps with regard to the requirements here in our banks here — perhaps setting up firewalls with regard to the offices in there — couldn't you have done something?" he asked.
No Republicans even mentioned "regulation" at the Senate Banking Committee hearing.
Politically speaking, it may be tough to take a public stand against bank regulation amid these bank brouhahas. Public trust in banks is at an all-time low, according to Gallup polling. It’s probably tougher to suggest banks can police themselves than it may have been when people with a “great deal” or “quite a lot” of confidence in banks was close to 35 percent — as it was in 2008 — than 21 percent, as it is today.
But despite the awkward timing, recent advocates of Dodd-Frank reforms told NJ they weren’t worried the bank’s missteps would make lawmakers any less likely to listen to their concerns or proceed with hearings on the subject.
Alex Pollock, a resident fellow at the American Enterprise Institute, recently testified before a House Judiciary subcommittee on the law's impact on financial-services competition. Pollock said he didn’t think people would change their position on the provisions of Dodd-Frank as a result of the recent bank flaps.
“I really doubt that the current events change the schools of thought much,” he said.
“I think members are trying to take a long view on these,” said Kenneth Bentsen Jr., executive vice president of public policy and advocacy at the Securities Industry and Financial Markets Association. Bentsen testified earlier this month before the House Financial Services Committee on Dodd-Frank’s impact. He doesn’t feelthat lawmakers had changed their views as a result of the bank wrongdoings or would be likely to give consideration of the law short shrift.
Much work remains to be done on Dodd-Frank implementation. More than 60 percent of rulemaking deadlines have been missed, law firm Davis Polk reported in its two-year progress report for the law. Fewer than one-third of the 398 required rulemakings have been finalized. There’s plenty of room for discussion of how those rules will look — it’ll just be more difficult if Wall Street keeps getting itself bad publicity.
Stacy Kaper contributed