About the only thing on which Sen. Bernie Sanders and Rep. Ron Paul agree is that the FRB needs to be collared, and this unusual combo of liberal Socialist and conservative libertarian did just that despite tough odds in the Dodd-Frank Act. The results of this round-the-bend coalition are only now being felt, with the first blast coming from the Fed’s Wednesday disclosures of who got what from all its emergency facilities. Now, we see another portent of a potent, populist coalition. When the Wall Street Journal and liberals like Simon Johnson agree that Title II’s systemic-resolution rules need repeal, the new law is up for grabs.
Clients who, like us, survived the Dodd-Frank debate know that Title II as enacted wasn’t easy. Republicans like Rep. Ed Royce (a contender to chair House FinServ next year) argued forcefully that the resolution regime perpetuated too-big-to-fail banks. He and others pressed hard for pure bankruptcy for all financial companies, arguing that the chaos post-Lehman was caused not by a resolution regime that let pieces fall where they may, but rather by moral-hazard expectations that were dealt a rude surprise.
In the Senate, a bipartisan group pushed for Bankruptcy court proceedings and other provisions designed to make Title II systemic resolution a last-ditch option that would cost big counterparties dearly. Although the most liberal members of the Senate devoted most of their energy to the Sanders’ provisions noted above and the Levin-Merkley effort to implement the Volcker Rule, GOP advocates of striking Title II were joined on numerous occasions by Democratic colleagues with whom they rarely, if ever, join hands.
At the end, the final version of Title II was a lot tougher than initially proposed by the Administration, but still provides a broader safety net than opponents think warranted for the largest financial institutions. As a result, the push is on to rewrite this part of Dodd-Frank early in the new Congress. Rep. Royce and others will, we expect, introduce legislation to repeal Title II. Liberals will join in, but add proposals to break up the biggest companies.
Indeed, the push won’t just come from some of the more traditional liberals in the Congress. As an op-ed Thursday from the president of the Federal Reserve Bank of Kansas City noted, populists and small-town bankers think the big boys should be broken up so that none gets the putative advantages of size and too-big-to-fail protection. As a result, the campaign to repeal Title II could well be joined with others to impose still more stringent size and activity restrictions on the nation’s largest banks.
Will any of this pass? At this point, we doubt it, if only due to the problems of passing anything through the United States Congress. But the pressure for tough rules from senior members of Congress will have significant impact on pending regulations. When in doubt, regulators will err on the side of making Congress happy if only to keep it at bay. The combination of pending rules on both the new resolution regime and the “break-up” front (e.g., the Volcker Rule and new concentration standards) provides ample scope for far-reaching systemic reform without a touch of the Presidential pen.