Garrett to Wall Street: No More Bailouts on My Watch

The Capital Markets Subcommittee was put on the map by Representative Paul Kanjorski (D-PA), the present chairman of the subcommittee who penned the "Too Big To Fail" legislation otherwise known as the "Kanjorski Amendment."


Kanjorski lost his re-election bid and now with the Republicans taking control in the House, ranking member Scott Garrett (R-NJ) will be taking the gavel and with it, try and enact his plans in overhauling the financial services sector. Garrett got right to the point on what he plans to do once he takes the chairmanship.

LL: What is first on your agenda in regards to potentially repealing certain provisions of Dodd-Frank?

SG: My initial priority will be focusing on oversight of the implementation and rulemaking process. In particular, I’ll be keeping a close eye on the pace of the rulemaking process. In other words, I want to make sure the process isn’t rushed by timelines and deadlines. Contrary to what was done during the legislative process, we need to make sure the rulemaking process is done right.

LL: As Chairman of Capital Markets- what will be you message to Wall Street?

SG: Be careful with what you do, because there will be no free handouts or bailouts at the expense of the American taxpayer on my watch.

LL: Have you spoken with Elizabeth Warren yet from the Consumer Financial Protection Bureau (CFPB)?

SG: I have not spoken with Ms. Warren. Something tells me I wouldn’t be the first person on her call sheet. I do look forward to speaking with the actual director of the CFPB whenever that person gets confirmed by the Senate.

LL: Do you wish to see Elizabeth Warren as a permanent director of the Consumer protection Financial Agency (CFPB) ?

SG: If the CFPB is to be fully implemented, I would hope someone else is selected to run it. Given her track record and political agenda, it’s safe to say her selection would lock up credit, limit consumer choice and lead to job losses at a time when we can least afford it. Whoever is ultimately chosen needs to go through the Senate confirmation process—it’s the only current check there is on this agency.

LL: What changes would you like to see made with the CFPB?

SG: I’d like to see the CFPB done away with. I didn’t support the creation of it when we were working on the financial reform law and I don’t support it now. However, if it is to remain in place, it needs to be reined in to ensure Congress has some oversight authority. As things stand today, that just isn’t the case since funding for the CFPB is completely outside the appropriations process.

Congress should always have the power to control the purse strings as the founding fathers intended. I also believe the current structure and setup of the CFPB may be unconstitutional. The legislative branch is supposed to have oversight over the executive branch, but the structure of this severely limits that power.

LL: The new rules governing financial derivatives will impact farmers to small businessmen. What do you want to do in this area?

SG: Perhaps one of the most damaging provisions of Dodd-Frank is the derivatives piece, which leaves it unclear as to whether regulators may set margin requirements on trades involving businesses that use derivatives to manage legitimate risk.

I believe this was a huge mistake and serves as a prime example of Democrat overreach on the legislation. If American businesses are not able to use derivatives to manage legitimate risk, or if a lot more precious capital is tied up to manage risk, the end result will be that fewer workers will be hired and businesses won’t grow. America’s farmers, manufacturers and energy companies had nothing to do with the economic collapse and they should not be punished as if they did.

LL: Is there anything you want to change in regards to the FDIC resolution authority that allows the agency to wind down failing financial institutions?

SG: This is one of the most dangerous provisions of the Dodd-Frank bill. Setting up a separate resolution authority as an alternative to bankruptcy places serious uncertainty in the markets because counterparties won’t know how they stand legally if a firm were to fail.

Furthermore, it would put them at the whim of politically-motivated regulators and Washington bureaucrats. One need only look at what happened to secured creditors versus unsecured creditors in the auto bankruptcies when the rule of law was usurped. All of that would now be institutionalized through the new bailout authority.

At the same time, with large politically-connected firms getting resolved through the bailout authority mechanism, creditors of these firms know they will get a better deal than they would under bankruptcy, thus giving big companies an unfair advantage over smaller competitors. Of course, this also introduces moral hazard because counterparties will continue to invest in these large companies even when it doesn’t make sense because they know they will get bailed out no matter what happens.

LL: Are you concerned a Democratic-controlled White House and Senate will hamper your ability to pass any sweeping changes?

SG: The president has said he plans to work constructively with Republicans in Congress. While I don’t think his rhetoric has matched his behavior over the last two years, I’m an optimistic person, and I hope we’ll see some changes in the president.

LL: One of your biggest tools will be the power of the purse strings, preventing Dodd-Frank’s implementation by withholding of federal appropriations to certain agencies. Which agencies would be the first on your list to withhold?

SG: If we had the power to control the funding of the newly created CFPB as the Constitution intended, that would be my starting point.

LL: There is a very fine line in these sweeping changes. How do you revamp Dodd-Frank without looking like a proponent of Wall Street deregulation?

SG: This isn’t a Democrat or Republican issue. We all agree that reform was needed. In fact, Republicans offered comprehensive solutions during the financial regulatory reform debate. Unfortunately, like in so many other areas, the Democrats seriously over-reached for political and ideological purposes, putting our already fragile economy at even greater long-term risk. There is plenty of room to re-work parts of Dodd-Frank in a responsible manner.

LL: How would you like the reform of Fannie and Freddie look like?

SG: The first thing we need to do is move Fannie and Freddie on budget, and I have already introduced legislation to do just that. There should be an honest accounting of how much the American taxpayer is on the hook for Fannie and Freddie. Second , we need to remove the federal government guarantee so taxpayers aren’t on the hook for even greater losses in the future.

LL: One of the most prominent figures in financial reform, Paul Kanjorski (D-PA) chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises lost his re-election. Now, Gary Ackerman (D-NY) is next in line to assume Kanjorski's ranking member position for 2011, are you looking forward to working with Ackerman?

SG: I always had a positive working relationship with Paul. If I’m fortunate enough to be tapped as the Chairman of the subcommittee, I look forward to having a constructive relationship with whoever is selected to be the Democrat leader on the subcommittee.

LL: Many of my contacts that are CEOs say it’s not more regulation we need but better enforcement. You can have the best rules in the world, but without enforcement, it means nothing. What will you do to make sure the enforcement part of the equation is upheld?

SG: As part of our oversight of the SEC, we want to look into getting the best, most effective workforce possible for that agency. I also intend to look into protections some current SEC employees enjoy that may be keeping some poorly performing employees from being replaced.


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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."