February 10, 2015 7:31 AM
Literally since the day the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama, my Competitive Enterprise Institute colleagues and I have predicted its harshest effects would fall on community banks. “While the bill claims to crack down on excesses on Wall Street, its harshest impact will likely be on Main Street businesses that had nothing to do with the crisis,” I wrote on FoxNews.com on July 15, 2010, the day President Obama signed the bill.
Since then, numerous studies, as well as testimonials from community bank officials, have proven this prediction correct. Yet much of the media and politicians still peddle the myth that Dodd-Frank only hurts Wall Street, and thus, repealing or easing sections of Dodd-Frank would benefit “big banks” at the expense of Main Street.
But maybe a new confirmation of Dodd-Frank’s harm to community banks will get attention because of its unlikely source: the John F. Kennedy School of Government at Harvard University. Two researchers at the Kennedy School’s Mossavar-Rahmani Center for Business and Government have just produced a study concluding that Dodd-Frank accelerated the decline of America’s community banks.
While acknowledging that community banks’ share of financial assets has been falling since 1994, authors Marshall Lux and Robert Greene find that “since the second quarter of 2010—around the time of the passage of the Dodd-Frank Act—their share of U.S. commercial banking assets has declined at a rate almost double that between the second quarters of 2006 and 2010.”
February 3, 2015 2:26 PM
Ed Pinto had a depressing and revealing op-ed in The Wall Street Journal Friday about how the Obama administration is artificially creating markets for risky mortgages, using the Federal Housing Finance Agency and the government-controlled mortgage giants, Fannie Mae and Freddie Mac. Not only will this put taxpayers at risk, but it will burden prudent homebuyers through “cross-subsidies” for risky borrowers “subsidized by less-risky loans.”
Long ago, Pinto worked as an executive and credit manager at Fannie Mae before it began buying up massive amounts of risky mortgages to pursue short-run profits and meet federal affordable-housing mandates.
As Pinto notes in “Building Toward Another Mortgage Meltdown,” Federal Housing Finance Agency Director Mel Watt has pushed for a resurgence in risky mortgage loans, and hinted at more mischief to come in his January 27 testimony to the House Financial Services Committee, in which he “told the committee” that he expects to release by “March new guidance on the ‘guarantee fee’ charged by Fannie Mae and Freddie Mac to cover the credit risk” on the loans they acquire.
As Pinto points out,
In the Obama administration, new guidance on housing policy invariably means lowering standards to get mortgages into the hands of people who may not be able to afford them. Earlier this month, President Obama announced that the Federal Housing Administration (FHA) will begin lowering annual mortgage-insurance premiums ‘to make mortgages more affordable and accessible.’
Government programs to make mortgages more widely available to low- and moderate-income families have consistently offered overleveraged, high-risk loans that set up too many homeowners to fail. In the long run-up to the 2008 financial crisis, for example, federal mortgage agencies and their regulators cajoled and wheedled private lenders to loosen credit standards. They have been doing so again. When the next housing crash arrives . . . homeowners and taxpayers will once again pay dearly.
Even progressive media like the Village Voice have reported on how the Department of Housing & Urban Development—especially Clinton’s HUD Secretary Andrew Cuomo—spawned the mortgage crisis by pressuring lenders and the mortgage giants to promote affordable housing, helping “plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments.” A 2011 book by The New York Times’ Gretchen Morgenson also chronicles how “it was Fannie Mae and the government housing policies it supported, pursued, and exploited that brought the financial system to a halt in 2008.”
But the Obama administration learned nothing from this, and has expanded this risky, “affordable-housing” push. Pinto notes, lowering mortgage-insurance premiums for risky borrowers is the centerpiece of a “new affordable-lending effort by the Obama administration,” which led to the “the latest salvo in a price war between two government mortgage giants to meet government mandates”:
Fannie Mae fired the first shot in December when it relaunched the 30-year, 97% loan-to-value, or LTV, mortgage (a type of loan that was suspended in 2013). Fannie revived these 3% down-payment mortgages at the behest of its federal regulator, the Federal Housing Finance Agency (FHFA)—which has run Fannie Mae and Freddie Mac since 2008, when both government-sponsored enterprises (GSEs) went belly up and were put into conservatorship. . . .
As Pinto notes,
Mortgage price wars between government agencies are particularly dangerous, since access to low-cost capital and minimal capital requirements gives them the ability to continue for many years—all at great risk to the taxpayers. Government agencies also charge low-risk consumers more than necessary to cover the risk of default, using the overage to lower fees on loans to high-risk consumers. Starting in 2009 the FHFA released annual studies documenting the widespread nature of these cross-subsidies. The reports showed that low down payment, 30-year loans to individuals with low FICO scores were consistently subsidized by less-risky loans.“
In 1997, for example, HUD commissioned the Urban Institute to study Fannie and Freddie’s single-family underwriting standards. The Urban Institute’s 1999 report found that “the GSEs’ guidelines, designed to identify creditworthy applicants, are more likely to disqualify borrowers with low incomes, limited wealth, and poor credit histories; applicants with these characteristics are disproportionately minorities.” By 2000 Fannie and Freddie did away with down payments and raised debt-to-income ratios. HUD encouraged them to more aggressively enter the subprime market, and the GSEs decided to re-enter the “liar loan” (low doc or no doc) market, partly in a desire to meet higher HUD low- and moderate-income lending mandates.
January 30, 2015 3:31 PM
“Wall Street Chips Away at Dodd-Frank,” blared a recent front-page headline in The New York Times about bipartisan measures that have passed the U.S. House of Representatives and/or been signed into law that ever-so-slightly lighten the burden of the so-called financial reform rammed through Congress in 2010. “GOP Pushes More Perks For Wall Street...” reads the home page of The Huffington Post under the picture of establishment pillar, Jamie Dimon, CEO of JP Morgan Chase.
Yet, what these articles don’t say is that the firms putting their resources on the line to challenge Dodd-Frank in court are the furthest thing from Wall Street high rollers. They are decades-old firms selling stable, time-tested financial products to everyday consumers.
At first glance, the national insurance firm MetLife and the Texas community bank State National Bank of Big Spring might seem to have little in common. But they both are solid financial firms that never took a bailout and never had their hand in the toxic mortgages—spurred on by the government-sponsored enterprises Fannie Mae and Freddie Mac and mandates of the Community Reinvestment Act—that caused the financial crisis.
And now, the firms are both doing their customers and all Americans a favor by bringing suit against Dodd-Frank’s Financial Stability Oversight Council (FSOC), one of the many opaque entities in Dodd-Frank that lack accountability to Congress and the public.
In its lawsuit brought this month, MetLife raised many of the same constitutional issues as did State National Bank in its pending legal challenge brought in 2012 in collaboration with the Competitive Enterprise Institute, at which I work. CEI and the conservative seniors group 60 Plus Association are co-plaintiffs with the bank, and CEI attorneys are working with the esteemed C. Boyden Gray—the former White House Counsel—in providing representation to the parties.
In an open letter to its customers that ran in full-page ads in The New York Times, Washington Post, and Wall Street Journal, MetLife CEO Steven Kandarian explained his objections to the firm being designated as a “systemically important financial institution,” or SIFI, by FSOC. “We do not believe MetLife poses systemic risk, and we are concerned that our designation will harm competition among life insurers and lead to higher prices and less choice for consumers.” In that sense, a court victory for MetLife would greatly benefit the public as well.
To its credit, MetLife is rejecting not only the burdens of being designated a SIFI but also the benefits—benefits that seem to eagerly embraced by both MetLife’s competitors (such as the infamous AIG) as well as the biggest banks. Being designated a SIFI means the federal government considers MetLife to be “too big to fail,” making it subject to the same Dodd-Frank bailout regime set up for big Wall Street banks like Goldman Sachs and JPMorgan Chase.
As CEI, 60 Plus Association, and the State National Bank argue in our legal challenge to the Dodd-Frank Act, the SIFI designation confers on a firm a strong competitive advantage, as investors and creditors know the government won’t let it fail.
We argue that the tiny State National Bank “is injured by the FSOC’s official designation of systemically important nonbank financial companies, because each additional designation will require the Bank to compete with yet another financial company—i.e., a newly designated nonbank financial company—that is able to attract scarce, fungible investment capital at artificially low cost.”
January 28, 2015 3:34 PM
In a partial victory for all those campaigning against the abuse of power known as Operation Choke Point (see our comprehensive study here), the Federal Deposit Insurance Corporation (FDIC) has issued guidance to its supervisory staff that restricts some of the methods used to advance Choke Point.
Operation Choke Point is a Department of Justice initiative aimed at “choking off” the financial oxygen of businesses the administration disapproves of, with a special focus on payday lending. It threatens banks that do business with these industries with burdensome investigations and subpoenas, which has led to banks closing accounts with legal businesses that have had a perfect banking record.
One of the ways Choke Point has proceeded has been via supervisors issuing veiled threats or direct but unwritten comments that suggest a banking institution should stop doing business with a client. As a result, there has been no paper trail within the administration directly linking the closure of bank accounts with Operation Choke Point.
This new memorandum purports to put a stop to that. It tells its staff that recommendations for closure of bank accounts should not be made through informal comments, and that banks should not be informally criticized for their relationships. All such recommendations now need to be put in writing.
Furthermore, “reputational risk” alone is no longer to be considered grounds for recommending the termination of a banking relationship. Previous FDIC guidance on “reputational risk” was the source of the much-talked about list of industries targeted by Operation Choke Point. The withdrawal of the list by FDIC several months ago may have led to an even broader interpretation of “reputational risk,” with suggestions that even coal mines have been the target in some areas.
That these two guidelines had to be put in writing is an implicit admission by FDIC that its staff has been guilty of these practices. The instruction to cease such arbitrary behavior is a victory for campaigners against executive abuse, and in particular for Rep. Blaine Luetkemeyer (R-Mo.), a former banking examiner who took his complaints directly to the head of the FDIC.
FDIC, however, is only half the battle. The investigating attorneys at the Department of Justice who began the Operation still retain the power to issue subpoenas that can cause havoc to any bank that receives one. That threat remains, and banks will still be wary of doing business with companies that might possibly attract one. Until the DOJ is brought in line, Operation Choke Point will likely continue.
January 20, 2015 5:16 PM
Today, the Supreme Court lifted a cloud of uncertainty that had been hanging over consumers, community banks, and credit unions by refusing to take a case that threatened to make the stifling Dodd-Frank pseudo-financial reform legislation even more draconian than it already is.
The Court let stand a unanimous ruling from a three-judge D.C. Circuit Court of Appeals panel that overturned district Judge Richard Leon’s 2013 ruling that the Federal Reserve had not made the price controls stemming from Dodd-Frank’s Durbin Amendment were not stringent enough. Today’s decision, authored by Clinton-appointed Judge David Tatel, found that the Federal Reserve “reasonably construct[ed]” the law in considering costs in setting the price caps.
In the wake of cybersecurity attacks on credit and debit cards, this ruling may have come in the nick of time. In a show of incredible chutzpah, the trade associations for some of the nation’s largest retailers argued in federal court—even after the Target breach—that retailers should pay even less for fraud prevention and cleanup after fraud losses than they currently are under a federally imposed limit.
That would mean that innovation would continue to lag behind and even more of the costs of payment processing would be shifted to consumers—as they have since the passage of this amendment, which was inserted into the 2010 Dodd-Frank financial overhaul by Senate Majority Whip Dick Durbin (D-Ill.).
January 14, 2015 9:29 AM
With the start of the 114th Congress comes a fresh opportunity to address the challenges created by a broken government. To kick off this new congressional session, the Competitive Enterprise Institute (CEI) recommends numerous reform proposals to strengthen the U.S. economy, increase transparency, and foster fair and open competition instead of favoring special interests.
CEI’s top policy proposals center on substantive regulatory reforms needed to improve America’s economic health. In 2014 alone, 3,541 new regulations hit the books, and the burden is constantly growing. If federal regulations were a country, their cost would amount to the world’s 10th largest economy.
In addition to reining in burdensome regulations, CEI recommends that Congress continue to conduct fundamental oversight to protect Americans from executive overreach. Over the last six years, federal agencies have sought to usurp power from the legislative branch. Congress has a responsibility to demand honesty and accountability from our leaders and defend the rule of law.
January 8, 2015 12:24 PM
“If it keeps moving, regulate it. And if it stops moving, subsidize it.” So said Ronald Reagan in 1986.
Reagan was describing the unintended effects of government policy. But for the Obama administration, this formula seems to be the modus operandi of its policy making.
Take mortgages, for instance. After the Dodd-Frank financial overhaul was rammed through the Democrat-controlled Congress in 2010, the Consumer Financial Protection Bureau—a bureaucracy created by the Dodd-Frank to be unaccountable almost by design—implemented the law’s “qualified mortgage” (QM) provisions.
The QM provisions were so costly and complex that community banks and credit unions—as far away as one could get from the causes of financial crises—sharply decreased or even abandoned altogether the creation of new mortgages. The U.S. House of Representative responded last year by passing overwhelmingly bipartisan legislation to scale back Dodd-Frank’s QM, but the bill became one of over 400 that never moved from then-Senate Majority Leader Harry Reid’s desk.
Yet today, in a much-heralded speech on housing in Phoenix, President Obama is expected not to join the bipartisan effort to take on the Dodd-Frank regulations keeping mortgages from moving, but to create new subsidies that not only may be ineffective at moving the housing market but would be harmful to the nation’s fiscal health, as they bulk up the government-backed housing agencies that fueled the housing crisis.
According to press reports, the administration’s plan consists of cutting premiums borrowers pay for mortgage insurance for mortgages backed by the Federal Housing Administration (FHA) by 50 basis points. This move comes despite the FHA’s insurance reserves being already below required levels.
Not only did the FHA have to get a direct $1.7 billion public bailout from the Treasury last year, it has received—according to a new Politico investigation—an estimated $73 billion in hidden bailouts through budget “reestimates” that don’t require official action. In the Politico expose of the FHA and other government credit program, reporter Michael Grunwald explains that “reestimates don’t require a public announcement or a congressional appropriation; agencies just use what’s known as their ‘permanent indefinite authority’ to stick the shortfalls on the government’s tab.”
December 12, 2014 10:29 AM
Waaaah! That’s the sound of former House Financial Services Committee Chairman Barney Frank (D-Mass.) crying about stinging, bipartisan rebukes to his legacy of the Dodd-Frank financial regulatory monstrosity rammed through the Democrat-controlled Congress in 2010.
And it must be all the more painful to Frank that enough members of his own party had turned against provisions of the legislation that a couple much-needed rollback are on the verge of being signed into law in this month’s “lame duck” session.
According to the Boston Globe, Frank called some of these rollbacks “the road map for stealthily undoing all this in the future.” We can only hope this is the case! Because even liberal Democrats are now discovering that Dodd-Frank did nothing to lessen the problem of too-big-to-fail banks and instead punishes “Main Street” business, investors, and consumers who had nothing to do with the crisis.
As this is being written, it looks like three modest but significant measures of relief from Dodd-Frank are on the verge of passing; one by itself in a separate bill and two will be the proverbial “ponies” in the manure of subsidized terrorism insurance and “crominbus” spending bills.
There is a fight brewing with measure of derivatives relief in the cromnibus, with progressive Sens. Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio), leading the charge against it. This is a good modestly deregulatory measure and will be discussed in a follow-up blog.
December 10, 2014 3:38 PM
The release this week of a new House Oversight and Government Reform Committee staff report into Operation Choke Point provides another opportunity to underline just how egregious the behavior of executive agencies has been in this matter. As I outline in my in-depth report from earlier this year, Operation Choke Point has been a freelance operation by rogue members of staff at the Justice Department and the Federal Deposit Insurance Corporation (FDIC) in particular aimed at killing off industries they suspect might have high levels of fraud, on the grounds that they present “reputational risk” to financial institutions they do business with. It represents an end-run around all established legislative and judicial processes required by the constitution. As such it should be terminated immediately.
The new report focuses particularly on the actions of FDIC officials, as revealed in their own words through e-mails obtained by the committee. For instance, the report found that, “Personal animus towards payday lending is apparent throughout the documents produced to the Committee. Emails reveal that FDIC’s senior-most bank examiners “literally cannot stand payday,” and effectively ordered banks to terminate all relationships with the industry.”
The actions of FDIC officials also violated basic ethical standards. As the report found, “In a particularly egregious example, a senior official in the Division of Depositor and Consumer Protection insisted that FDIC Chairman Martin Gruenberg’s letters to Congress and talking points always mention pornography when discussing payday lenders and other industries, in an effort to convey a ‘good picture regarding the unsavory nature of the businesses at issue.’”
December 1, 2014 2:59 PM
Is it possible for opposite policies to both be wrong? Over at the Washington Examiner, I argue that it is. The U.S. is ending its quantitative easing program just as Japan is ramping its up. Those seemingly opposite policy paths are rooted in the same mistaken philosophy. I argue instead for a humbler monetary policy:
Both Yellen and Kuroda should move their focus away from stimulus, exchange rates and constant tinkering, and toward stability, honesty and predictability in their price systems. Easing of $1.66 trillion has had almost no effect on the U.S. economy. How reality will stack up against the Bank of Japan’s predictions, no one knows.
Along the way there are discussions of Keynesian liquidity traps, the Taylor rule, NGDP targeting, and Bitcoin. The larger point is that central bankers are barking up the wrong tree. Instead of manipulating various economic indicators with activist policies, they should concentrate on creating a stable, predictable, and honest price system that enables more investment, better investment decisions, and more innovation. That, not interest rate tinkering, is what causes economic growth and mass prosperity.