Republicans in the House of Representatives passed the Choice Act on Thursday, a sweeping deregulation of the financial sector. It passed 233-186, with no Democratic support. One Republican, Walter Jones of North Carolina, voted no. This bill rolls back or weakens most of the protections put in place since the 2008 financial crisis through President Barack Obama’s Dodd-Frank Act.
Though it is very unlikely to gain the 60 votes it needs to pass in the Senate, important parts of it could pass through the budget reconciliation process. But even if it goes nowhere, it reveals a Republican Party that is focused on destroying reform based on a false narrative of the crisis, largely to the benefit of the financial sector.
The Choice Act isn’t a matter of conservatives simply preferring less regulation than liberals, or Congress readjusting reform in light of new evidence. What passed today isn’t a result of liberals turning the financial reform dial up to 11 and conservatives want to turn the dial down. Instead, it’s a surgical strike, gutting specific parts of the reforms that have been effective in preventing another crisis.
Take the Consumer Financial Protection Bureau, one of the strongest pieces of Dodd-Frank, which has brought transparency to previously opaque financial markets. It has applied enforcement and accountability not just to consumer financial products but also to markets where consumers are the financial product, like mortgage servicing, debt collection and credit scoring.
Before the crisis, consumer protection was fragmented across 10 regulators, and because it was everyone’s job, it was nobody’s job. This meant no agency built the expertise or interest in standing up for consumers and, worse, there would be a race to the bottom in enforcement, with financial firms seeking out the most lax regulators. The C.F.P.B. solved these institutional problems by consolidating enforcement in a dedicated agency.
That feature is exactly what the Choice Act targets. The act would gut the C.F.P.B.’s supervisory authority, sending it back to regulators who missed the crisis and recreating the broken pre-crisis regulatory structure. With this authority, the C.F.P.B. has returned about $12 billion from bad bank behavior to 29 million citizens. The Choice Act would repeal the C.F.P.B.’s ability to stop unfair, deceptive and abusive acts and practices — an authority that was essential, for example, in going after Wells Fargo’s creation of fake accounts for its clients.
But Choice goes far beyond this. The Dodd-Frank rollback is shaped by a false diagnosis of the financial crisis, by which the crisis posed no problems to the American economy. As the influential conservative Peter Wallison of the American Enterprise Institute noted, the Choice Act is a natural result of believing, as he and most Republicans do, “that the Dodd-Frank Act was completely unnecessary.”
When Jeb Hensarling, Republican of Texas and the House Financial Services Committee chairman, introduced the Choice Act, he noted, “Although it was painful and somewhat chaotic,” the Lehman bankruptcy “to some extent worked as it should have worked.”
That explains why the bill entirely repeals the Orderly Liquidation Authority, which should be referred to as the Bank Bailout Prevention Authority. This power ensures that when a large bank collapses, the Federal Deposit Insurance Corporation can wind it down, i.e., enable the bank failure without a government bailout and in a way that minimizes any disorder for other banks and the economy. This is a power that regulators lacked to manage the collapse and failure of Bear Stearns and Lehman Brothers. The Choice Act repeals this critical authority, and since it has an emergency funding stream, it could be eligible for Senate reconciliation, which means it would need only 51 votes to pass.
It takes a radical and out-of-touch ideology to say that Lehman Brothers’ bankruptcy and the subsequent chaos in the financial system was just the market working as it normally does and that the near collapse of Wall Street did not expose any need for reform. But this way of thinking explains why Republicans go after such integral parts of the reform.
Republicans want to replace Dodd-Frank with a bank-friendly form of bankruptcy. Yet bankruptcy can’t be coordinated internationally among regulators, a vital part of preparing for failure in a global marketplace. Regulators who are familiar with the firms won’t be involved, having been replaced by a random bankruptcy judge who will wake up one morning to learn that the fate of financial markets rests in how they know a situation with the steepest learning curve.
That is what happened to the George W. Bush administration, which went on to bail out the financial sector. It will happen again without these protections. Bankruptcy was never intended to handle these fast-paced and complex financial problems; this is why we’ve created special failure processes for financial firms like banks and insurance companies, and why Dodd-Frank created a new one for large, global financial institutions.
The Republicans argue that the Choice Act makes Wall Street angry. It’s tough to imagine how, when the vast number of changes amount to an industry wish list of the biggest banks. It repeals the miniature Glass-Steagall reform known as the Volcker Rule, which separates out high-risk proprietary trading from commercial banks. It removes the F.D.I.C.’s role of reviewing banks’ living wills — new procedures that make banks and regulators plan for a potential bank failure, presumably because the F.D.I.C. demands that they be stronger. It takes out language requiring firms that got bailouts to continue to be subject to stronger regulations. It allows industry to choose to ignore a wide range of regulations if they decide to adopt a single, easy-to-manipulate, balance-sheet metric. It eliminates a consumer complaint database the C.F.P.B. maintains.
It isn’t just the largest players who win under this bill. The Choice Act would remove the requirement that private equity firms register with the Securities and Exchange Commission and be subject to reviews. These types of firms were previously opaque, even though they are a major source of investment funds and exert a large amount of influence over the corporate sector. Preliminary examinations by the S.E.C. into private equity’s fees and expenses found abuses, conflicts of interest and fraud in over half of the cases, things that make the capital markets not work for investors or for companies.
A lot of attention these days focuses on the Trump administration. But the Choice Act shows that President Trump has no monopoly on bad ideas, a poor understanding of what is going on in the economy or an instinctive deference to the rich and powerful at the expense of everyone when it comes to the Republican Party.
Mike Konczal is a fellow at the Roosevelt Institute.