Shortly after you were sworn in to fill the Senate seat previously held by Ted Kennedy, you famously declared, “I’ll be the 41st vote, not the 60th vote.” Your meaning with respect to health care was clear: I will stand between the voters and the federal takeover of health care that they oppose. But there are other areas of policy to consider as well. We understand that you will not always vote with the Republicans, but neither were you elected to be a reflexive 60th vote for the Obama-Reid-Pelosi agenda, as your opponent Martha Coakley would have been.
We harbored no illusions that every vote you cast would please conservatives. But we noted at the time that on issues such as uncontrolled deficits, constitutional rights for terrorists, and a proposed bank tax, you successfully campaigned against the Democrats’ position and won. We figured you would be with us more often than not, but that representing the Bay State would lead you to take a few votes per year on which we would have to agree to disagree.
Senator Brown, there is no need for the upcoming vote on financial regulation to be one of those. It’s a bad bill. The voters of Massachusetts can be persuaded to side with you against it, or at least to understand why you opposed it and to weight it lightly when considering whether to send you back to Washington. Moreover, having staked out a firm position against either increasing taxes on banks or adding to this year’s mammoth deficit, you are obliged to oppose the bill in its current form.
The Democrats have removed the $19 billion bank tax, which prompted your initial opposition, but they have replaced it with other bank taxes and with deficit spending. As long as the Democrats refuse to cut government spending to fund the reforms they want, this will be an insoluble problem. This bill should be tabled and taken back up in 2011, when Republicans will presumably hold a stronger negotiating position and can push for further improvements.
Your opposition can pave the way for this outcome. On this issue, you can be the 41st vote. Of the Democrats who voted against the bill, Maria Cantwell has now decided to support it, but Russ Feingold is holding firm in his opposition. From the Republican side, Susan Collins and Olympia Snowe seem likely to vote yes, but Chuck Grassley is probably a no: He voted against cloture last time, even though he eventually voted for the bill. Depending on when and with whom West Virginia governor Joe Manchin fills the late Robert Byrd’s Senate seat, you are the deciding vote.
There are many reasons to vote against this bill. Here are just a few:
THE COST: The Congressional Budget Office has put the ten-year cost of the bill at around $19 billion. The Democrats initially tried to fund this obligation via a tax imposed on large financial institutions. You opposed them. They went back to the drawing board and emerged with a funding mechanism that, were a corporation to try it, would get its accountants sent to prison for fraud. The bill would now “cancel” the Troubled Asset Relief Program a few months early, thus “saving” the government around $11 billion.
But the government wasn’t actually going to spend that $11 billion. As far as we know, the administration wasn’t planning on making any additional TARP loans. (The $11 billion over three months represents estimated losses on future TARP loans.) As House Financial Services Committee ranking member Spencer Bachus put it, the only way the math works is if the administration had made secret plans “to purposefully make loans in the next two months that would lose billions of taxpayer dollars.” We concur with Bachus: The Democrats are “rewriting the law to use TARP as their own personal slush fund to pay for new government programs.” You should oppose this move — it opens to the door to future, similar chicanery involving “unspent” TARP funds.
You should also oppose the other funding mechanism the Democrats concocted: an increase in FDIC assessments that would fall on small and large banks alike, even though the FDIC’s new resolution authority only applies to large financial institutions. If you opposed the previous bank tax, which only applied to large banks, there is no reason why you should now support a bank tax that underwrites large financial firms at the expense of smaller depository institutions.
VOLCKER UNDEFINED: You have expressed concern about the so-called Volcker rule, which would curb “proprietary trading” by federally insured depository institutions. Democrats have watered down this provision in order to win your vote. But the compromise version would still leave banks and bank holding companies at the mercy of federal regulators, who would have wide discretion over what constitutes prop trading. If Congress wants to ban specific investment practices, it should pass specific laws to address them, rather than rely on government bureaucrats to do the heavy lifting. Giving financial regulators more arbitrary power is a recipe for more uncertainty — and more lobbyists.
THE MORAL HAZARD COUNCIL: The bill would establish a new Financial Stability Oversight Council tasked with seeing the next crisis coming. The folly of this council is that it creates the impression that the government has its eye on the ball, which breeds laziness and incaution in the banking sector and gives the bankers someone else to blame when things go wrong.
BAILOUT AUTHORITY: Senate Republicans dug in and won some good changes to the new resolution authority that the bill would create, limiting the FDIC’s authority to bail out the creditors of large failed financial institutions as they are unwound. But too many loopholes remain. The FDIC retains the ability to structure GM- and Chrysler-like transfers of company assets that favor the politically connected at the expense of secured creditors. This legislation would also enhance the Federal Reserve’s authority to make broad extensions of credit to struggling financial entities. The Fed is only supposed to use this authority to help firms that are illiquid, not insolvent. But the line between the two is blurry, and regulators tasked with preserving “financial stability” have every incentive to blur it further during a crisis, as witnessed when former Treasury secretary Hank Paulson forced TARP money on healthy and weak banks alike.
“CONSUMER PROTECTION”: The proposed Consumer Financial Protection Bureau (CFPB) would have broad powers to impose job-killing regulations. Though housed in (and funded by) the Fed, the CFPB would operate as an independent agency, with rule-writing ability and enforcement authority. We all favor prudent consumer safeguards, but those safeguards can be strengthened without creating yet another onerous bureaucracy. The CFPB could significantly reduce credit access for small businesses, and thereby jeopardize America’s wobbly economic recovery.
DEATH BY PROXY: The corporate-governance language (“proxy access”) in Dodd-Frank would greatly expand the influence of Big Labor and harm the interests of mom-and-pop investors. Even if you favor the idea of “shareholder democracy,” this is the wrong way to promote it. The chief beneficiaries of proxy access would be politically connected activist groups (such as the AFL-CIO and the SEIU), not ordinary shareholders. You’re quite familiar with the union agenda. Do you think it would help or hurt shareholder value?
WHO WILL RATE THE RATERS? Even though deeply flawed risk assessments by the top credit-rating agencies (CRAs) helped cause the financial crisis, the Dodd-Frank bill fails to break up the corrupt CRA oligopoly. By stripping certain CRAs of their unduly powerful status, we would create a genuinely competitive marketplace in credit ratings. That should be our goal. Dodd-Frank falls woefully short.
LEVERAGE LIMITS: The last crisis was made many times worse by the use of large amounts of leverage (debt) to magnify returns on real-estate investments. In the wake of the collapse, policymakers and intellectuals have put forward a number of interesting approaches to changing the way we regulate the use of leverage, but none of these made it into the Democrats’ bill. The only restrictions in the bill were put in place via an amendment sponsored by Sen. Susan Collins, but this amendment leaves the enforcement of these limits to the discretion of federal regulators. This is more or less the state of play that existed in the run-up to the crisis, and it is a recipe for regulatory capture and a return to the dangerously overleveraged financial system that existed before.
DERIVATIVES SPINOFF: “No one will know until this is actually in place how it works,” announced Senator Dodd the morning after House and Senate negotiators adjourned for the first time. Nowhere is this more true than in the area of derivatives regulation, which this bill attempts by putting all derivatives (such as the credit-default swaps that brought down AIG) on exchanges and requiring that they be traded through clearinghouses (third parties that would assume some of the risk of each trade). The bill originally would have forced banks to “spin off” their derivatives-trading operations as well. But so many loopholes were added to this title of the bill that it’s not even clear whether the swaps that brought down AIG would be regulated, or that the clearinghouses that are established wouldn’t become “too big to fail” themselves. It’s fair to say this sweeping provision could stand a little more scrutiny before we decide to roll the dice with Dodd.
FANNIE AND FREDDIE: It is laughable that the two companies most responsible for inflating the housing bubble are not addressed in a 2,300-page financial-reform bill. The government-sponsored enterprises (GSEs), now in federal conservatorship, have accumulated trillions’ worth of debt obligations, and the cost of bailing them out will far exceed the cost of TARP. Indeed, Fannie and Freddie currently enjoy a blank check from the Treasury Department. You have supported efforts to tighten restrictions on the GSEs, to cap their credit line, to bring them on budget for the duration of their conservatorship, and eventually to abolish their government charters — all of which have been blocked by your Democratic colleagues. Americans realize that financial reform is not complete without GSE reform. We’re confident that you do, too.
There are other reasons to oppose this bill, but these ten should suffice to give you pause. Senator Brown, consider whether Congress could produce a better set of reforms if it spent more time on this bill. The Democrats rushed through conference committee in 14 calendar days in an attempt to have the bill on President Obama’s desk before July 4. By contrast, conference committees on the last two major financial-reform bills — the Financial Institutions Reform, Recovery and Enforcement Act of 1989, and the Gramm-Leach-Bliley Act of 1999 — took 42 and 97 calendar days respectively. The Financial Crisis Inquiry Commission, appointed to investigate the causes of the last crisis, has not yet finished its report.
There is no reason to rush this process, other than that the Democrats want to pass this legislation while they have favorable numbers, leaving themselves plenty of time to pass other bad pieces of legislation before the public has its say in November. We’ve seen a preview of what the voters’ message is likely to be, courtesy of your historic election in Massachusetts: They’re looking to put obstacles between themselves and the Democrats’ legislative overreach. On financial regulation, you should be the 41st vote, not the 60th.