GOP alternative to Dem reform bill

The collapse of the housing and mortgage markets, which led to the worst financial market meltdown in U.S. history, has shown that our 1930s-era regulatory system is not up to the task of monitoring the safety and soundness of the complex financial firms of the 21st century. We need comprehensive regulatory reform to restore market discipline, reduce incentives to take excessive, imprudent and systemically significant risks, and protect consumers from abusive lending practices.

House Republicans will introduce legislation this week that will bring a new era of responsibility to Wall Street and a new era of transparency and accountability to those whom we entrust with the responsibility for monitoring our financial institutions and markets. The Consumer Protection and Financial Regulatory Enhancement Act is premised on three key principles: ending the bailouts once and for all; getting the government out of picking winners and losers in the market; and restoring market discipline so that financial firms will no longer expect the government to rescue them from the consequences of imprudent business decisions.

Unfortunately, the Obama administration and House Democrats want to take us in a different direction that is becoming all too familiar. Like their “cap and tax” and healthcare legislation, their solution for financial regulation reform is to ration resources, limit consumer choice, and dictate prices as a substitute for market discipline. And they propose to do so at the worst possible time when the economy is struggling to recover and jobs continue to be lost.

In June 2009, the U.S. Treasury Department released the administration’s so-called “white paper” on financial regulatory reform. It calls for granting sweeping new powers to federal regulators — the same ones that did a poor job of identifying and addressing both systemic and safety and soundness risks before they turned into a full-blown financial crisis.

For example, the administration’s regulatory restructuring plan would make the Federal Reserve responsible for regulating any financial firm it deems “systemically significant” and for preventing systemic shocks. This is the same regulator that allowed CIT to convert into a bank holding company in late 2008 and placed the troubled lender under its supervision — only after declaring that the company was “adequately capitalized.” This inability to assess risk once again threatens to undermine a fragile economy and erase the $2.5 billion in taxpayer funds provided to the institution under the TARP.

The administration’s plan would expand the “too big to fail” approach to respond to problems at large, complex banking organizations by including non-bank financial firms in this category. The proposal then calls for the creation of a resolution authority that promotes continued bailouts and reorganizations of failed institutions, rather than actually unwinding and shutting down their operations. The result will be a permanent bailout agency that will place politics over sound regulation and give firms the incentive to grow even bigger.

On top of that, the reform proposals released by the administration, and legislation introduced by House Financial Services Committee Chairman Barney Frank (H.R. 3126), would establish a massive new government bureaucracy known as the Consumer Financial Protection Agency. Clearly, Congress needs to take strong actions to end the abusive lending practices of banks and other financial firms that have harmed consumers and undermined the economy. However, instead of enforcing consumer protection laws and providing consumers with the tools they need to make sound financial decisions on their own, the Democrats believe the government should be making the choices for consumers.

H.R. 3126 would add this new layer of bureaucracy, which consumers will ultimately pay for, on top of the regulatory patchwork that currently exists. This agency’s job is to define which financial products are suitable for consumers, and to determine who qualifies for them. Banks and other providers will be ordered to keep all but the most basic financial products out of the hands of Americans under the assumption that they are not smart enough to understand them. Washington bureaucrats will decide what mortgage you can get, and the type of credit card you can have. The result will be fewer loans for people to buy a car, purchase a home, go to college and start or maintain a small business. The burden of this credit rationing will fall heavily on lower- and middle- class families, the very people we should be trying help, as well as small businesses that create 80 percent of all new jobs.

Republicans are offering a clear alternative to this “more of the same” approach to reform. To promote effective consumer protection, our plan streamlines and consolidates the functions of four bank regulatory agencies, including consumer protection, into a single agency. This removes the largest obstacle currently faced by consumers seeking redress for unfair or deceptive practices but unsure of where to turn, and it creates clear lines of accountability and prevents regulatory authorities from passing the buck. We also provide regulators with more investigative and enforcement tools, increase civil penalties, and maximize restitution to victims of fraud.

To end the bailouts, all failed non-banks would be directed to an enhanced bankruptcy process under the Republican plan. Utilizing the bankruptcy system is essential to getting the government out of picking winners and losers.

The Fed would be relieved of its current supervisory duties so that it can refocus on conducting monetary policy. In addition, the Fed would be prohibited from using its authority to respond to “unusual and exigent” circumstances to bail out any specific financial institution, and all transactions carried out under this section would be brought onto Treasury’s balance sheet.

Republicans are working to ensure that our new regulatory structure provides robust investor, consumer, and taxpayer protection. This means creating smarter, not more, regulation and bureaucracy. It also means ending the misguided government policies that seek to allocate and ration credit, and intervene to prop up failed financial institutions that helped precipitate, and later exacerbate, the crisis. Financial institutions should never again rely on taxpayer handouts.

Bachus is ranking member of the House Financial Services Committee.