The Republican Strategy To Repeal Dodd-Frank

By Simon Johnson
On January 7, 2015, Day 2 of the new Congress, the House Republicans put their cards on the table
with regard to the 2010 Dodd-Frank financial reforms. The Republicans will chip away along all
possible dimensions, using a combination of legislation and pressure on regulators - with the
ultimate goal of relaxing the restrictions that have been placed on the activities of very large banks
(such as Citigroup and JP Morgan Chase).
The initial target is the Volcker Rule, which limits the ability of megabanks to place very large
proprietary bets - and their ability to incur massive losses, with big negative consequences for the
rest of us. But we should expect the House Republican strategy to be applied more broadly,
including all kinds of measures that will reduce capital requirements (i.e., make it easier for the
largest banks to fund themselves with relatively more debt and less equity, taking more risk while
remaining Too Big To Fail and thus benefiting from larger implicit government subsidies.)
The repeal of Dodd-Frank will not come in one fell swoop. Rather House Republicans are moving in
several stages to reduce the scope of the Volcker Rule and to gut its effectiveness.
The first step in this direction came on Wednesday, with a bill brought to the floor of the House
supposedly to "make technical corrections" to Dodd-Frank. This legislation was not considered in the
House Financial Services Committee, and was rushed to the House floor without allowing the usual
debate or potential for amendments (formally, there was a "suspension" of House rules).
Buried in this legislation is Title VIII, which will extend the deadline for one important aspect of
Volcker Rule compliance to 2019. (The specific topic is by when big banks should divest themselves
of some Collateralized Loan Obligations, CLOs - on how these investments function as internal hedge
funds at the largest three banks, see this primer from Better Markets, a pro-reform group.)
Some very large banks and House Republicans previously asked to extend this deadline for CLO
compliance through 2017, and a full extension was actually granted by the Federal Reserve in 2014.
(Specifically, in April 2014 the Fed extended the divestment deadline for CLOs to 2017and then, in
December 2014, extended the divestment for all covered funds under the Volcker Rule until 2017.)
Now that Citigroup, JP Morgan Chase and Wells Fargo already have the extension through 2017,
they immediately ask for... an extension through 2019.
The strategy here is clear: delay for as long as possible. Perhaps the regulators will cave in, again,
under pressure. Perhaps the White House will agree to another rollback of Dodd-Frank, for example
attached to a spending bill - which is what happened in December 2014. (Remember that
government spending is only authorized until September 2015, so there will be plenty of
opportunities).
And perhaps, after November 2016, a Republican president will work with a Republican Congress to
eliminate all parts of Dodd-Frank that crimp the style of very large leveraged financial firms.

On Wednesday, the Republican bill that would have weakened the Volcker Rule actually failed under the suspension of the rules, it needed two-thirds of all members present in order to pass, and
the vote was 276 in favor and 146 against. When enough Democrats hold together, they can make a
difference.
But all of this is just a warm-up. In coming months we should expect: the largest few banks (always
masquerading as representing the social interest) will pressure for a change in technical definitions,
e.g., what kind of hedge fund they are allowed to own and what it means to "own" something. They
will ask for more delays and "clarifications". And they will argue that lending to some category of
firms ("job creators") should be exempt from any kind of restriction.
Section 716, which would have forced big banks to keep their derivatives business somewhat
separated from their insured deposits, was repealed in December 2014. This measure primarily
benefited Citigroup and JP Morgan Chase. At the time, some Democrats - including people close to
the White House - said, not to worry, "we'll always have the Volcker Rule."
In fact, the signal from the repeal of Section 716 is that the store is open. The White House had
previously said "no" to any proposed repeal of Dodd-Frank, including when attached to a spending
bill. This moratorium has clearly been lifted, and the lobbyists are hard at work.
The House Republican rhetoric will be "technical fixes" and "job creation". But the reality is that
they are determined to strip away all meaningful restrictions imposed on Citigroup, JP Morgan
Chase, and other megabanks - and to roll-back Dodd-Frank as far as possible, until it becomes
meaningless or they are finally able to repeal it completely.
http://baselinescenario.com/2015/01/07/the-republican-strategy-to-repeal-dodd-frank/