Democrats on the House Financial Services Committee hammered Republicans Tuesday for cutting the budgets of Wall Street regulators.
Rep. Barney Frank (D-Mass.) and other Democrats lodged the complaints during a committee hearing intended to explore the impact of new derivatives rules enacted by the Dodd-Frank financial reform law.
Frank and other Democrats said the proposed cuts would hurt financial watchdogs like the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).
"We are about to debate the budget from my Republican colleagues that will provide such inadequate funding for the SEC and the CFTC as to make all this academic," said Frank, the ranking minority member of the panel. "Agencies that are not well-funded are not going to do a good job."
The debate came as the House was preparing to consider a spending bill that would cut $61 billion in government spending, including cuts to both agencies.
Frank added that he planned to introduce an amendment on the House floor boosting the SEC's budget. His amendment would free up $131 million more for the SEC by pulling funds from various other sources, including the Internal Revenue Service.
"Cutting them even more...will make it impossible for them to implement Dodd-Frank and be responsible regulators," warned Rep. Carolyn Maloney (D-N.Y.).
"From the other side on the aisle, the solution of all problems is simply spending money on it," he said. "We want to get it right."
The budget fight surrounding federal regulators has been going on for months, ever since a budget standoff in the lame duck session of the last Congress left those agencies funded at levels enacted before Dodd-Frank was enacted.
Republicans almost universally opposed the financial reform law, and with the focus being on cutting federal spending, the GOP has shown little to no willingness to expand the budget of those regulators.
That puts them at odds with Congressional Democrats and the Obama administration. On Monday, the president's budget proposal for fiscal 2012 included big hikes to the budgets of the SEC and CFTC.
The SEC would receive a 28 percent boost to its budget under the president's proposal, as it would climb to $1.428 billion from its current $1.118 billion budget.
The CFTC would receive an 82 percent boost, climbing to $308 million from the current level of $168.8 million.
That stands in stark contrast to a continuing resolution (CR) offered last week by House Republicans on the Appropriations Committee, that is due to be considered on the House floor Tuesday. In their proposal, the budgets of both agencies would continue to shrink. The SEC would receive $1.069 billion, and the CFTC would get $112 million.
Regulators agreed that smaller budgets would make their work more difficult.
At the level of funding proposed by Republicans, CFTC Chairman Gary Gensler said he had no doubt he would have to cut staff, at the detriment of the agency's oversight.
"We'd have to have significant curtailment of our staff and resources," he said. "We would not be able to police or ensure transparent markets."
"The CFTC, I would contend, is a good investment for the American public," he added.
SEC Chairman Mary Schapiro agreed, saying budget tightening would "have a very real effect" on the SEC's work.
Republicans had their own dire warnings at Tuesday's hearing, as they cautioned that the rulemaking being undertaken by the agencies could drive financial activity abroad, or even bring about the obliteration of the U.S. derivatives market.
“If transaction costs of end users for derivatives increase because of duplicative rules," warned Rep. Ed Royce (R-Calif.). “Then end users simply will send their business to European dealers."
"When you look at this freight train of rulemaking…I think not enough alarm has been raised about the potential devastating impact this rulemaking could have on the U.S. derivatives marketplace," said Garrett. "It could literally spell the end of U.S. derivatives-based markets."
Regulators tried to assuage concerns from Republicans, saying that businesses of all shapes and sizes would not be impacted by new derivatives rules, promising that the new requirements would be targeted at financial institutions.
Under Dodd-Frank, institutions identified as major swap participants would be subject to additional capital and other requirements when entering into swap transactions. Republicans and businesses have warned that the rules could require commercial companies to limit their investment in the company and employees if subjected to the requirements.
But Gensler told lawmakers that those requirements are focused mainly at financial institutions, since non-financial companies do not pose the same risk to the financial system, he said.
"Proposed rules on margin requirements should focus only on transactions between financial entities rather than those transactions that involve non-financial end users," he said in his testimony. "We'll get this margin thing right."