As a financial regulator during the time, I worked with members of the House and Senate on some of the Dodd-Frank provisions and helped craft (and vote for) over 60 regulations. They weren't perfect but they were a good start for protecting consumers and our economy.
As we drive into the future, we have a responsibility to try to anticipate what is around the corner and to be nimble and quick to adapt (something regulators are notoriously no good at doing). The CHOICE Act, however, rips us into reverse and seeks not to tweak but to tear up key and critical components of Dodd-Frank. It could place us exactly back in a precarious position similar to the pre-recession circumstances. Many of us understand that some in Congress have a short memory, but amnesia about what caused the calamity of 2008 is unacceptable and could get eerily ugly.
Here are a few targets in the CHOICE Act that are cause for concern:
Too big to fail
The CHOICE Act would roll back requirements related to what are called SIFIs, systemically important financial institutions. These are institutions that if they failed could deal a devastating if not debilitating blow to our economy. The SIFIs, once designed by government, are given annual macroeconomic stress tests to ensure they can withstand various scenarios. The CHOICE Act not only cuts in half the number of stress tests, but requires that the test itself be published in advance, thus giving the SIFIs a test cheat sheet!
The CHOICE Act would also roll back SIFI criteria for what are termed "living wills"---essentially these are liquidation resolution plans under bankruptcy laws to be implemented if things go to heck in a hand basket. If this wasn't such a problem back in 2008, it wouldn't be such a huge deal now, but it was (think Bear Sterns and Lehman Brothers). U.S. taxpayers ended up bailing out big banks and others to the tune of over $700 billion. How about we not be in that position again, huh?
(Oh, and the CHOICE Act takes away the ability for government to designate non-financial entities as SIFIs. Recall AIG —American International Group — insurance company. We bailed them out with over $180 billion, but if the CHOICE Act were to become law, they could not be designated as a SIFI. Really?)
The Volcker Rule
On another key policy provision, the Volcker Rule, the CHOICE Act would repeal it. Volcker bans the use of proprietary trading by the large investment banks. We have seen in recent years where some of the investment banks placed their own bottom lines before their actual customers. In two specific cases, the banks urged their customers to take positions in new financial products. Once the products were populated (funded) with their own customers' money, the banks bet against them! Hundreds of millions of dollars in sanctions were levied. The Volcker Rule took care of that. The investment banks should put their customers' interests first, and always. The CHOICE Act would change that. (Similarly, the CHOICE Act ensures the continuation of what is called the Fiduciary Rule which currently allows financial advisors to place their own interest ahead of their customers.)
The Consumer Financial Protection Agency
Another CHOICE Act abomination is the deauthorizing and neutering of the Dodd-Frank created agency, the Consumer Financial Protection Bureau. The CFPB currently has authority to root our devious and deceptive practices by fly-by-night operations (and others) preying upon average consumers. Since its creation just a few years ago, the CFPB has returned $11.8 billion to more than 29 million consumers!
The CHOICE Act also takes away the independence of the CFPB by subjecting the director to being fired by the president for no reason. Financial regulatory agencies should not be political pawns nor subject to doing any president's bidding.
The Wells Fargo loophole
The CHOICE Act also allows the continuation of what is known as the Wells Fargo loophole. Right now, no private right of action can be taken against a bank if they do something like Wells Fargo did — open checking or credit card accounts without customer permission. There's a good change that could be implemented.
Is there any saving grace to the CHOICE Act? Sure, but only because of what it does not do. The legislation leaves in place (by and large) regulatory purview of previously dark markets (called over-the-counter, or OTC markets) that were at the real root of problematic trading leading up to 2008. Both the U.S. Commodity Futures Trading Commission (my former agency) and the Securities and Exchange Commission (SEC) would retain such authority under the CHOICE Act.
And finally, most market participants, even those who initially screamed bloody murder at what they thought might be required of them under Dodd-Frank have come to accept it. The rules we regulators developed accommodated, to the greatest extent possible, their comments. Market participants have now put their compliance and enforcement structures in place. New financial technology tools have been developed and are being used to create more efficient and effective back office operations.
At a White House meeting of business leaders earlier this year, President Trump said that JP Morgan CEO Jamie Dimon, was going to explain why Dodd-Frank should be repealed and replaced. We never heard a word from Mr. Dimon on that. To the contrary, he has spoken thoughtfully and only about recalibration of financial regulations and efforting to adjust to changing circumstances. That's a view held by the very vast majority of those I speak with in the financial sector.
Dodd-Frank wasn't perfect, and writing and implementation wasn't particularly pretty, but it has placed our markets and our economy in a much better and more secure place than we have been in decades. The CHOICE Act would take a flamethrower to the law, the ashes of which could wreak havoc going forward. The Senate and president should take a little trip down memory lane and recall what occurred leading up to 2008 before making a monumental mistake by adopting the CHOICE Act.
Commentary by Bart Chilton, a political and policy commentator. He is the former U.S. Trading Commissioner and author of "Ponzimonium: How Scam Artists Are Ripping Off American." He served on the Obama transition team in 2007-2008.
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