Statement of John Berlau, director, Center for Investors and Entrepreneurs, Competitive Enterprise Institute:
President Obama’s twin goals of more bank loans and more heavy-handed regulation are in conflict with each other. Large financial institutions, such as the ones represented at the White House, as well as smaller regional banks and credit unions, may be holding back their lending due to uncertainty—both about the economy and about what Washington is going to do.
The House bill that passed Friday creates a new Consumer Financial Product Agency with largely undefined powers and broad jurisdiction. The bill contained a $150 billion bailout fund that would institutionalize “too big to fail,” and force prudent banks to pay hefty fees to subsidize the failure of reckless ones. This “prefunding” for the resolution bank failures are really taxes that will be passed on to consumers and investors. The bill also has arbitrary break-up authority—going beyond current antitrust law—for any institution a financial regulator deems as “systemically dangerous.” And both the House bill and pending Senate bills contain broad definitions of financial institutions that could include any business that offers credit—including auto dealers and retail stores with layaway plans.
The good news is that due to Republicans and the efforts of many freshmen and sophomore Democrats, some reasonable provisions were included and destructive provisions were eliminated. The best provision of the House bill is the exemption of smaller public companies from Sarbanes-Oxley internal control audits. This provision, introduced by freshman Rep. John Adler (D-N.J.) and which garnered the limited support of the Obama administration, will help smaller firms be less dependent on bank loans for growth by making it easier for them to go public without paying a costly price for extensive Sarbanes-Oxley audits that have produced little benefit for shareholders. The House also wisely defeated the “cram-down” that would allow bankruptcy judges to abrogate mortgage contracts. If collateral in mortgages is not secure, fewer loans will be made and mortgage interest rates will likely skyrocket. And the House fell just 15 votes short of passing an amendment by Rep. Walt Minnick (D-Idaho) that would have gutted the CFPA and would have instead created a council of bank regulators for a more deliberative regulatory process.
If President Obama wants responsible lending and vibrant entrepreneurship, he should listen to this bipartisan coalition in the House and others interested in balancing the costs and benefits of regulation.