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OpenMarket: Banking and Finance

  • CEI's Coalition Letter to Prevent New Bailouts of Fannie and Freddie

    August 28, 2015 8:01 AM

    As the Dodd-Frank “financial reform” celebrated its fifth anniversary this summer, just about every financial business—as well as many nonfinancial firms—have come under its thumb. This is true whether or not these companies had anything to do with the financial crisis.

    Community banks and credit unions that had nothing to do with the subprime mortgage meltdown suddenly found that they couldn’t issue mortgages to creditworthy borrowers, thanks to provisions such as “qualified mortgage” and “qualified residential mortgage” mandates enforced by the Consumer Financial Protection Bureau, the unaccountable new agency created by Dodd-Frank. Stable insurance companies such as MetLife that never faltered during the crisis and served policy holders for decades suddenly found themselves subject to bank-like capital requirements that even liberal Democrats like Sherrod Brown said was inappropriate.

    (MetLife is currently challenging the authority of Dodd-Frank’s Financial Stability Oversight Council (FSOC) in a lawsuit. The Competitive Enterprise Institute (CEI) has a separate lawsuit challenging the constitutionality of both FSOC and the CFPB that garnered a partial victory recently in the D.C. Circuit Court of Appeals.)

    Yet Fannie Mae and Freddie Mac, the two government-sponsored enterprises that many observers—from American Enterprise Institute scholar Peter Wallison to New York Times business columnist Gretchen Morgenson—say were the proximate cause of the crisis still face no requirement for any type of capital cushion.

  • Savers Oppose "Fiduciary Rule" Sold by Labor Department as "Protecting" Them

    August 21, 2015 3:12 PM

    “A fundamental shift in Wall Street culture” is what the Department of Labor is aiming for with the “fiduciary rule.” That’s what DOL Deputy Assistant Secretary Tim Hauser said in an interview with during recent hearings on the proposed regulation that has been called “Obamacare for Your IRA.”

    But the vast majority of comments submitted on the rule—most of which came far away from Wall Street—called on the DOL to change its own culture of paternalism, an analysis by the Competitive Enterprise Institute shows. Many of these comments took aim at the DOL’s explicit contention in the rule, which I have written about here and elsewhere, that individuals can’t “prudently manage retirement assets on their own,” and that they “generally cannot distinguish … good investment results from bad.”  

    Individual savers, however, begged to differ on their ability to manage their own retirement accounts and expressed outrage at the regulation’s limiting of their ability to seek guidance from brokers and pursue individualized investment strategies. A retiree named Don Schwartz pleaded with the DOL: “Leave my retirement alone. I need no help from the Federal government with my 401K.” After explaining that he was “doing just fine thanks to the company I retired from and my own personal decisions I made along the way,” Schwartz told the DOL loudly and clearly, “Quit helping me, I'm smarter than you think I am.”

  • Dodd-Frank Act Strangles Small Banks

    August 17, 2015 1:11 PM

    The 2010 Dodd-Frank Act was enacted partly to end “too-big-to-fail” banks, but it has done quite the opposite. It has curbed competition with big banks by eliminating competing small banks whose failure would not endanger the financial system. It used to be that 100 new banks were created every year; now, not one is created in a typical year.

    As the Cato Institute’s Walter Olson notes, the “Dodd-Frank law is strangling community banks. More on community banks here, from Scott Beyer, and in several past posts.” He “previously noted this Wall Street Journal account from March on one of the most dramatic aspects of the trend, the throttling of de novo bank formation: ‘Based in a rural village in the heart of Amish country, Bank of Bird-in-Hand is the only new bank to open in the U.S. since 2010, when the Dodd-Frank law was passed and enacted. An average of more than 100 new banks a year opened in the three decades before Dodd-Frank.’”

    This completely contradicts the law’s sponsors, whose “statute itself declared that it would ‘end too-big-to-fail.’” Consumers have suffered: “Before Dodd-Frank, 75% of banks offered free checking. Two years after it passed, only 39% did so.” As CEI’s Iain Murray has noted, “rules issued under Dodd-Frank have harmed some of the poorest Americans, who have seen their insurance made more expensive, their banking choices reduced, and their bank fees increased. Many have been forced out of the banking system altogether” potentially leading to the return of “loan sharks.”

  • CEI and Allies Submit Evidence to Australian Senate Inquiry on Credit Cards

    August 10, 2015 1:20 PM

    Today, CEI and other members of the International Alliance for Electronic Payments joined the Australian Taxpayers Alliance in submitting evidence to an Australian Senate inquiry into credit card interest rates and related matters. CEI has long been concerned about the effects of regulation on the payments card industry and helped found the International Alliance in order to help ward off these harmful effects all over the world.

  • Financial Regulation and Payments Update: July 31, 2015

    July 31, 2015 12:44 PM

    Last week saw the fifth anniversary of Dodd-Frank and there was a great deal of commentary from opponents of the act, not least from us here at the Competitive Enterprise Institute.

    To start off with, here’s the assessment of House Financial Services Committee Chairman Jeb Hensarling (R-Texas):

    Too-big-to-fail institutions have not disappeared. Big banks are bigger, small banks are fewer, and the financial system is less stable. Meanwhile, the economy remains in the doldrums.

    Before Dodd-Frank, 75% of banks offered free checking. Two years after it passed, only 39% did so—a trend various scholars have attributed to Dodd-Frank’s “Durbin amendment,” which imposed price controls on the fee paid by retailers when consumers use a debit card. Bank fees have also increased due to Dodd-Frank, leading to a rise of the unbanked and underbanked among low- and moderate-income Americans.

    Before Dodd-Frank’s passage, former Sen. Chris Dodd said that “no one will know until this is actually in place how it works.” Today we know. The law he co-wrote with former Rep. Barney Frank is gradually turning America’s largest financial institutions into functional utilities and taking the power to allocate capital—the lifeblood of the U.S. economy—away from the free market and delivering it to political actors in Washington.

    At CEI, we agree. In a paper issued last week I concentrated on Dodd-Frank’s harmful effect on Main Street:

    Many of the rules issued under Dodd-Frank have harmed some of the poorest Americans, who have seen their insurance made more expensive, their banking choices reduced, and their bank fees increased. Many have been forced out of the banking system altogether, only to face the alternatives, such as prepaid debit cards and payday loans, more difficult to access. When legal choices are restricted, people turn to illegal ones. Loan sharks and racketeers could soon make a comeback, thanks to Dodd-Frank’s “consumer protection” provisions.

    CEI’s board chairman, Prof. Todd Zywicki, also recently testified before the House Financial Services Committee on Dodd-Frank’s legacy. He also concentrated on the effects of Dodd-Frank on the consumer:

    Dodd-Frank imposed a regime that instead has led to higher prices, less innovation, and less choice in consumer credit products, while doing little to improve consumer protection. By taking away preferred choices for consumers, such as mortgages, bank accounts, and credit cards, Dodd-Frank and other laws have increased consumer dependence on less preferred products like payday loans, pawn shops, and check cashers. Most tragic of all, low-income and younger consumers—who already had the fewest choices—are those who have suffered the most from Dodd-Frank’s regulatory onslaught.

    At CEI, we suggest that part of the answer to these problems is greater competition in the banking sector, which will require substantial reform to Dodd-Frank. John Berlau outlines that here.

  • Democratic Judges Green-Light CEI’s Challenge to Dodd-Frank

    July 24, 2015 3:27 PM

    Just days after President Obama touted the supposed achievements of the Dodd-Frank financial reform law on its fifth birthday, a unanimous judicial panel—including an Obama appointee—dealt the administration a major defeat in its defense of the law. If the co-plaintiffs in the case—the Competitive Enterprise Institute, the 60 Plus Association, and a courageous Texas community bank––ultimately prevail, it will be a huge victory for American consumers and entrepreneurs being strangled by the red tape of Dodd-Frank and its Consumer Financial Protection Bureau (CFPB).

    Today, a three-judge panel of the D.C. Circuit Court ruled unanimously that State National Bank of Big Spring, Texas, had standing to challenge the constitutionality of the Consumer Financial Protection Bureau, the massive bureaucracy created by Dodd-Frank with virtually no accountability to Congress. The decision, written by Judge Brett Kavanaugh, a George W. Bush appointee, was joined by Clinton appointee Judith Rogers and Obama appointee Nina Pillard.

    The Democrat-leaning panel criticized the D.C. federal district court for its bizarre ruling that, despite the fact that State National Bank was directly subject to the CFPB’s edicts, it somehow didn’t suffer injuries serious enough to have standing to challenge the Bureau. (Bank president Jim Purcell testified before Congress that the bank even had to stop issuing new mortgages and wire transfers because of CFPB rules.)

    “The Supreme Court has stated that ‘there is ordinarily little question” that a regulated individual or entity has standing to challenge an allegedly illegal statute or rule under which it is regulated,” states the D.C. Circuit’s opinion. “So it is in this case”

  • Not Dodd-Frank, Not Glass-Steagall, But Real Competition to End TBTF

    July 20, 2015 9:46 AM

    Progressives cheered Hillary Clinton last week when she said policy makers need to “go beyond Dodd-Frank.” She didn’t rule out repeal of some sections, but most took it to mean preserve virtually all of the law—which turns five on July 21—plus expand government intervention further into banking.

    But that praise was short-lived when Clinton’s economic adviser Alan Blinder told Reuters, “You’re not going to see Glass-Steagall” reinstated in her administration. The New Deal-era Glass-Steagall Act separated commercial and investment banking until it was partially repealed by the Gramm-Leach Bliley Act, which passed Congress overwhelmingly in 1999 and was signed into law by Clinton’s husband, President Bill Clinton.

    There seems to be a bipartisan chorus for Glass-Steagall restoration, from Clinton’s self-proclaimed socialist rival Bernie Sanders to conservative GOP candidate Ben Carson. These politicians tap into a frustration on the left and right that on the fifth anniversary of the so-called Dodd-Frank “financial reform,” too-big-too-fail banks are more entrenched than ever.

    In my new paper for the Competitive Enterprise Institute, I note that this frustration is well-grounded. “Today the banking industry is more concentrated than ever,” I write. But I and plenty of others have noted that much of the reason is Dodd-Frank itself, plus the effects of regulation put into place and signed into law by GOP Presidents George W. Bush, Richard M. Nixon, and Dwight D. Eisenhower. To really tackle too-big-to-fail and end bank bailouts for good, I argue, we need to lift these barriers to real competition in banking.

    “In the financial industry, as in any other industry, greater competition can help bring stability, innovation, and choice,” I write. It’s easy to forget that when it comes to bailouts, the financial industry is largely unique. There was virtually no call in recent years to bail out Blockbuster Video, Borders, Eastman Kodak, and, most recently, Radio Shack, even though their bankruptcies cost thousands of jobs and wiped out shareholders

    Why? The short answer is that unlike with bank failures, no consumers were threatened with shortages in supply in these other industries, thanks in large part to new entrants. Blockbuster’s customers could stream Netflix or rent their movies from Redbox. Borders customer could order their books from Amazon.

    Yet both before the financial crisis and after, there has been a dearth of new entrants in banking. In fact, since 2010, only one new bank has received federal regulators’ permission to open—the Bird-in-Hand Bank in the Amish country of Pennsylvania.

  • The SEC Sinks Its Claws Deeper into Executive Pay Packages

    July 14, 2015 11:11 AM

    Once upon a time critics of corporate America complained that executive salaries were too high, and too often disconnected from the performance of the firm. Senior managers are making millions while the company loses money—where’s the logic in that? So today many firms, including large banks and other financial services companies, have performance-based compensation packages—at least some of the money executives make is tied to the firm’s annual profits. Now incentives are aligned smartly, right?

    A potential complication creeps in, however, when a firm needs to restate its earnings. If a major deal goes south and restated earnings are lower than they were initially reported, perhaps we should restate an executive’s compensation as well, the thinking goes. This is the idea behind a provision of the Dodd-Frank Wall Street “Reform” Act. As Andrew Ross Sorkin reports in The New York Times, the Securities and Exchange Commission is currently working on a new rule which would expand this “clawback” concept from where it is already in force among Wall Street firms to all publicly traded companies. If restated profits were lower than they were in the year in which performance-related compensation was paid out, the company can demand that some of that bonus be repaid—as long as three years later.

  • Federal Financial Aid Drives Up Tuition and College Costs, Study Finds

    July 9, 2015 11:49 AM

    The federal government is now admitting that its own financial aid is partly to blame for rising tuitionreports Blake Neff in The Daily Caller:

    new report by the Federal Reserve Bank of New York has found that the massive investment in grants and student loans by the federal government is a major contributor to the unbridled growth in the cost of attending college.

    College tuition rates have consistently risen faster than inflation for some 25 years. One theory for the rise, dubbed the “Bennett hypothesis,” was put forward by Ronald Reagan secretary of education William Bennett, who argued that hikes in government student aid simply gave colleges a free pass to hike tuition.

    Now, the New York Fed’s research suggests there’s some merit to the idea, and that it means the government could be spending billions on education to no effect.

    “While one would expect a student aid expansion to benefit recipients, the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect,” the paper concludes.

    On average, the report finds, each additional dollar in government financial aid translated to a tuition hike of about 65 cents. That indicates that the biggest direct beneficiaries of federal aid are schools, rather than the students hoping to attend them.

    As Neff notes, this finding is consistent with some earlier studies on the subject, such as a 2012 paper by Harvard and George Washington University economists, and a 2007 paper that found that higher Pell Grants drove up tuition at private schools as well as out-of-state tuition for public schools.

    Earlier, Andrew Gillen, research director of the Center for College Affordability and Productivity, also reached the conclusion that federal financial aid fuels college tuition increases. In a colloquy on Gillen’s research, I concurred in this conclusion, while also noting that increased federal regulation has also fueled tuition increases—as have rules and red tape imposed by states and accreditation agencies. (A recent report by college presidents notes that under the Obama administration, the Education Department has flooded the nation’s schools with new rules that have never been properly vetted or codified, in violation of the Administrative Procedure Act.)

    Education analyst Neal McCluskey of the Cato Institute cited four additional studies showing that increased government spending on student aid results in large tuition increases.

    In 2011, Virginia Postrel wrote at Bloomberg News about how federal subsidies intended to make college more affordable have instead encouraged rapidly rising tuitions.

  • Dodd-Frank Conflict Minerals Rules Cause Smuggling, Starvation, and Harm to U.S. Businesses

    June 19, 2015 12:36 PM

    The 2010 Dodd-Frank Act effectively restricted U.S. business’s ability to obtain minerals from the war-torn nation of the Congo and surrounding countries. That caused massive unemployment and hunger in the Congo, and huge job losses in mining communities. By driving out Western buyers, it gave Chinese firms a virtual monopoly on some Congolese minerals. 

    Dodd-Frank imposed costly auditing and reporting requirements on companies that use minerals such as tin, tungsten and gold, requiring them to report on their use of minerals not just from the Congo, but also peaceful neighboring countries like Tanzania, which are effectively punished merely for being next to the Congo. At least 6,000 companies are affected, including Apple, Ford, and Boeing, costing them billions of dollars.

    African smugglers have benefited from Dodd-Frank, notes a recent article in Politico, as “clean miners” in the Congo, the world’s poorest country, simply can’t afford to comply with Dodd-Frank’s certification requirements.

    As Politico reported,

    the boycott prompted by the Dodd-Frank Act put thousands of eastern Congolese miners out of work. The World Bank has estimated that 16 percent of Congo’s population is directly or indirectly engaged in informal mining; in North Kivu in 2006, mining revenue provided an estimated two-thirds of state income. But revenues to the provincial government’s coffers fell by three-quarters in the four years before 2012, in part because of what officials called the “global criminalization of the mining sector” of eastern Congo, as encapsulated in laws like Dodd-Frank. The state’s loss is the smugglers’ gain: When the official routes are closed, the clandestine trade picks up the slack.. . .

    Despite Dodd-Frank and the spate of efforts to curb conflict mineral violence in the early 2000s, it appears unlikely that the certification schemes will ever reliably cover the whole of eastern Congo’s mining trade. Clean miners have been squeezed, as the retreat of Western buyers has let Chinese comptoirs gain a near-monopoly on Congolese coltan, allowing them to dictate prices.  

    The efforts to impose some control on the mineral trade . . . .does so at the cost of weakening the already precarious livelihoods of eastern Congo’s diggers and porters and their dependents.

    This harm was completely predictable. As Walter Olson noted earlier,

    Economic sanctions, when they have an effect at all, tend to inflict misery on a targeted region’s civilian populace and often drive it further into dependence on violent overlords. That truism will surprise few libertarians, but apparently it still comes as news to many in Washington, to judge from the reaction to this morning’s front-page Washington Post account of the humanitarian fiasco brought about by the 2010 Dodd-Frank law’s “conflict minerals” provisions. According to reporter Sudarsan Raghavan, these provisions “set off a chain of events that has propelled millions of [African] miners and their families deeper into poverty.” As they have lost access to their regular incomes, some of these miners have even enlisted with the warlord militias that were the law’s targets.


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