WASHINGTON — Republicans and Democrats escalated the rhetorical war over regulatory reform on Wednesday, with each side accusing the other of playing politics.
It is a debate that has become increasingly confusing as lawmakers spar over what the legislation would — or would not — accomplish. With that in mind, American Banker offers a compilation of frequently asked questions that try to sift the substantive wheat from the political chaff.
Would the bill perpetuate bailouts?
No. This is the chief charge of the GOP leadership, and it is, at least in the opinions of most experts, a weak argument. Senate Minority Leader Mitch McConnell continued to make this claim Wednesday, arguing that the bill would cause "endless taxpayer-funded bailouts for big Wall Street banks."
But at a minimum, the legislation would make it much more difficult — maybe impossible — to bail out an individual institution. Indeed, it specifically bans help to any specific company.
Regulators could take other actions but only to help the system as a whole. For example, they could provide liquidity support and debt guarantees to healthy institutions if there were a systemwide emergency. They could not, however, supply capital injections similar to those provided by the Troubled Asset Relief Program.
The Federal Deposit Insurance Corp. could seize an institution and put it in receivership, but this is very different from a bailout. It might keep a company running temporarily, but the FDIC would be forced to fire its board and management, impose haircuts on its shareholders and creditors and eventually sell off its pieces.
What about the so-called $50 billion slush fund?
Republicans are objecting to a provision that would require large banks to pay into a resolution fund that could be used by the FDIC to unwind a systemically important firm. Sen. Richard Shelby, R-Ala., has said he worries that such a fund could be used as a kind of Tarp to prop up dying companies. But the bill would prohibit the money from being used in such a way and is designed only to let the FDIC keep a company afloat to preserve its value for the sale of its assets.
Paradoxically, Republicans say they are worried about taxpayers funding a bailout, but the money for this fund would come from the industry, not the Treasury. (The FDIC does have a line of credit to the Treasury but has never tapped it.)
Then why is the GOP leading with this argument?
Politically, both sides are trying to position themselves for the mid-term elections in November. The White House wants to force Republicans either to support the bill as is or to vote against it and risk appearing to defend politically unpopular banks. The GOP wants a counter to that, and is arguing that the bill would allow new bailouts — which is also politically unpopular.
Senate Banking Committee Chairman Chris Dodd took to the Senate floor Wednesday and heatedly denounced McConnell's talking points as coming straight from political pollster Frank Luntz, who advised Republicans last fall to oppose reform by painting it as a bailout-assistance bill, regardless of the argument's merit.
So are Republicans the only ones overreaching?
No. Treasury Secretary Tim Geithner has been arguing that the bill would enact tough new capital and liquidity requirements, which is a stretch. In truth, it would require regulators to write new capital and liquidity rules but leave them entirely up to the agencies' discretion. There is no way to know how tough those requirements will actually be.
What about other claims? Would the bill really end too big to fail?
Not directly. It would allow regulators to seize and unwind systemically important companies and give them the power to break them up if necessary. But by itself, the bill would not stop a bank from becoming so large and interconnected that its failure could damage the economy.
How about claims that this will prevent small banks from lending? Or create a huge new government bureaucracy?
House Minority Leader John Boehner made both accusations Wednesday. And though it was not clear what he was referring to, it appeared to be about the creation of a consumer protection division. It is hard to see why this would be a "huge" new bureaucracy, however, because it is likely to consist mostly of employees from the existing banking agencies. Some have also claimed that a consumer division could curb legitimate lending, but the Senate bill would give a proposed systemic risk council the power to override any consumer rule that jeopardizes banks' safety and soundness.
So will the bill pass its next test, approval by the Senate?
Probably. Though the debate has become more dramatic and partisan, many observers chalk it up to political theater and little else. Both sides have major incentives to strike a deal. It is a big political risk for Republicans to vote against it, and Democrats would like a legislative victory they can tout back home.
At least one member from each party made the case Wednesday that the political fighting should simmer down. Sen. Bob Corker, R-Tenn., said a few tweaks could gain Republican support, and Sen. Mark Warner, D-Va., said Democrats are open to constructive changes.