'Ill-conceived' Dodd-Frank a 'disaster' that costs the US billions: Sen. Pat Toomey

The Dodd-Frank Act, the broad-based financial reform established after the financial crisis, needs a drastic overhaul, Republican Sen. Pat Toomey told CNBC on Friday.

"Dodd-Frank is a disaster, a very ill-conceived response to a financial crisis that, frankly, the government did more to cause than anybody else," Toomey told "Squawk Box," echoing a theory that government pressure on lenders caused them to dole out loans to people who could not afford to pay them and later defaulted.

The Pennsylvania senator, who sits on the budget, finance and banking committees, said the two major hurdles facing any attempts at reform are the Democratic caucus and whether the proposed changes to Dodd-Frank would legally qualify.

Toomey's first proposal would be to end the orderly liquidation fund, which he called "one of the biggest, most egregious mistakes of Dodd-Frank."

Essentially a bailout fund, it provides a process for financial institutions that fail to quickly and efficiently liquidate, eliminating the potential for future government bailouts like those in 2008, on which the government spent nearly $2 trillion.

Toomey suggested that instead of redirecting taxpayer dollars to the fund, the government could save $20 billion over the next 10 years by closing the fund and redesigning the bankruptcy code so it could be used to resolve big financial failures.

The senator also suggested the removal of the Consumer Financial Protection Bureau and the Office of Financial Research, which he called "a completely redundant team of hundreds of economists doing research."

"Like we don't have any economists in America doing research on financial institutions. It's ridiculous," Toomey said.

The CFPB was established in 2010 to protect consumers from financial institutions' abusive and deceptive practices by empowering consumers with information and making consumer finance rules more clear. The bureau provides resources for servicemembers, students and the elderly, among others.

Most recently, the CFPB issued a $100 million fine to Wells Fargo for illegally opening secret accounts in the names of clients to boost sales numbers, which earned the bureau political support.

The Office of Financial Research was another reform established to make the financial system safer, "[shining] a light on financial markets long hidden from public view," wrote a key Dodd-Frank architect in a CNBC op-ed.

The inherent flaw of Dodd-Frank, according to the senator, was the federal government's notion that complete control and micromanagement of the financial industry would be an effective solution to prevent future mistakes.

"The real way to diminish the risk of bank failures, I think, is to have the market impose the discipline," Toomey contended.

"It's unsecured creditors who generally impose that discipline, and if they know that they're going to go through a bankruptcy and they're going to get wiped out if there's a failure, then guess what? They'll impose the discipline," he said.

But investors may be a bit too excited about these prospects, Guggenheim Securities senior equity analyst Eric Wasserstrom said in a separate interview with "Squawk Box."

"Generally speaking, I think we are starting to run out of value in [the financial] space, largely because so much has been discounted particularly around the regulatory environment, which I think is actually going to be very slow to change," he said.

Big banks may get some targeted regulatory relief over the next several years, Wasserstrom said, but institutions already in trouble shouldn't expect regulation that helps them bounce back.

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