Lame Duck Quacks Needed Dodd-Frank Relief

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.

What’s fascinating is the stand-alone bill granting relief to insurers that is the overregulation rescue dog that didn’t bark. On Wednesday, the House passed the Insurance Capital Standards Clarification Act, relaxing provisions of Dodd-Frank that, under the Federal Reserve’s interpretation, would have applied bank capital rules to many insurance firms.

Since the Senate had passed the exact same measure in June, the bill now goes directly to the President. And since the Senate passed the bill by unanimous consent, President Obama must either sign the bill or face a humiliating override.

Either way, the law goes into effect and policy holders are at least temporarily saved from the massive rate hikes on life, home, and auto insurance that would have occurred immediately next year had this relief measure not been passed.  Under the provision the new measure provides relief from, life-insurance rates alone could have soared by $5 billion to $8 billion a year, according to economic consulting firm Oliver Wyman.  

Under the Federal Reserve’s interpretation of Dodd-Frank’s Collins amendment, sponsored by liberal Republican senator Susan Collins (Maine), insurance companies with a small thrift operation—or even those without any banking component but deemed “systemically important” by Dodd-Frank’s Financial Stability Oversight Council (as was the case recently with MetLife)—would have faced the same capital standards that banks do. But the bill now awaiting Obama’s signature will explicitly give the Fed authority to exempt insurance firms from these rules

As I have written previously, virtually no one defended applying bank-centric capital rules to insurance firms as rational regulation. While both banks and insurers face risks, they use very different business models. Typically, banks make short-term payouts on deposits for millions of customers. Insurers, by contrast, either pay claims for just a fraction of policyholders or, in the case of life insurance, pay out after years or even decades.

When the Senate bill was brought to the floor this summer, even Warren didn’t utter a peep. And Brown was a co-sponsor and active supporter of the bill. “I want strong capital standards, but they have to make sense,” Brown said. “Applying bank standards to insurers could make the financial system riskier, not safer.”

May this lame duck progress in modest rollbacks of Dodd-Frank get the new duck quacking up a storm when Congress reconvenes in January.