The Big Idea

The GOP v Dodd-Frank

Ever since Ronald Reagan beat George HW Bush to the nomination in 1980 primaries, Republican campaigns have run on the trusted platform of reduced government spending and lower taxes. So it comes as no surprise that most of the debate concerning financial reform during the current primary season has included wholesale calls to repeal the Democrat-sponsored Dodd–Frank Wall Street Reform and Consumer Protection Act.

But once the rhetoric is peeled away, it becomes much harder to pinpoint how exactly each candidate would affect the regulation of financial markets in the US if they were to beat Democratic incumbent Barack Obama in November. While a popular platform for stump speeches, repealing Dodd-Frank would be no easy task.

“The truth is that the Republicans are very unlikely to be able to repeal Dodd-Frank, since the Democrats will just filibuster it in the Senate,” said Douglas J. Elliott, a fellow at the Brookings Institution, a non-profit public policy organisation based in Washington, DC.

To Elliott, the GOP’s universal mantra of repealing Dodd-Frank is tantamount to trash talk.

“The real key will be what lesser steps a Republican president might push to trim back Dodd-Frank,” said Elliott. But at this point in the cycle, he said it was politically expedient for all Republican candidates to assert they will fully repeal the act. “This has the side-effect of giving us no clue about their ultimate actions.”

How would Mitt fit? 

Mitt RomneyWhile former Massachusetts Governor Mitt Romney has pledged to repeal Dodd-Frank, commentators admit pinning down the candidate’s true intentions for financial reform is difficult because of his background as both a moderate politician and a former private equity manager.

In the lead-up to January’s South Carolina primary, Romney – the co-founder of private equity house Bain Capital – was asked during a televised debate what he would do if another bank asked for a bailout. The then frontrunner said he would not give anyone a “blank check”. Instead, he would push failing firms into bankruptcy.

But for a candidate billing himself as the best man to take on Obama, Romney’s view of what to do if a bank fails sounded curiously similar to the basic idea behind the Obama-endorsed Dodd-Frank reforms, which aims to avoid ‘too big to fail’.

Mark A. Calabria, director of financial regulation studies at DC-based independent think tank the Cato Institute, said Romney’s support for the Emergency Economic Stabilisation Act 2008 that created the TARP bailout programme, could provide a firmer sense of how the former private equity manager feels about bailouts.

“This economic crisis has proven that government has an urgent obligation to address some awful abuses we’ve seen in the financial sector, particularly in housing finance,” Romney told a meeting of the Conservative Political Action Committee in February 2009. “I know we didn’t all agree on TARP. I believe that it was necessary to prevent a cascade of bank collapses.”

But Calabria warns against counting on Romney to be soft on banks because of his 15 years in private equity.

“Hedge fund and private equity-types have a lot of contempt for investment banks,” said Calabria. “It’s not clear to me what Romney thinks of the big banks but it probably isn’t favourable.”

Calabria points out that apart from former Utah Governor Jon Huntsman – who is now endorsing Romney after dropping out of the race just before the South Carolina primary – the major GOP candidates have been fairly silent on the particulars of bank reform.

Last October, Huntsman wrote an editorial for the Wall Street Journal, likening Romney to Obama and faulting the fellow Mormon as not proactive enough on America’s banking sector.

A new Newt? 

Former Speaker of the House Newt Gingrich is arguably the most conservative runner in the 2012 race, so it should be a little easier to track the views of the man who recently said Senator Chris Dodd and Representative Barney Frank should go to jail for drafting the act which bears their names.

Newt Gingrich“Once we repeal Dodd-Frank, we can begin to consider limited, responsible, pro-growth financial regulations passed in a series of steps, with each one understood and passed on its own merits,” says a policy statement on Gingrich’s campaign website. “We also must absolutely ensure that failing financial institutions are not bailed out by the federal government.”

Lately, Gingrich has espoused a number of reasons for repealing the law – from insisting it so far has done nothing to stop small banks going under, to a belief that junking Dodd-Frank would boost the housing market. But like his fierce rival Romney, Gingrich has avoided being pinned down on any details.

Gingrich is reportedly receiving economic policy advice from a group of ‘supply-side economics’ proponents who believe the best way for the US to grow is dramatic tax cuts, less regulation and a firm hold on monetary policy. The former Speaker of the House would reduce corporate tax to 12.5% – a third of its current rate. In contrast, Romney has surrounded himself with mainstream Republican economic advisers and would only reduce corporate tax to 25%.

“All the candidates are all over the map when it comes to banking that they go back and forth and flip-flop on every issue,” said professor Helmut Norpoth of the State University of New York (SUNY), Stony Brook. “With such erratic behaviour, I wouldn’t believe anything they say right now.”

While at the front of the nation’s mind, economic issues and a desire for regulating the banking industry are extremely complex issues to grasp for average voters who may be out of work and struggling with mortgage payments.

“All that the candidates can say right now is that they will cut taxes, kick-start the housing market, create jobs and stop bailouts,” said Norpoth. “This is very simple-minded and designed to attract voters without putting any substance to policy. The winning candidate will work out the finer points after they get the nomination.”

The GOP outsider 

The dark horse of this current cycle has once again been Texas Representative Ron Paul, who ran in 2008 and has billed himself as a Republican outsider, threatening to run as an independent if he does not receive the GOP ticket.

Ex-gynaecologist Paul claims to be a visionary who predicted the financial crisis and the man with the plan to solve it. The Paul Plan features conservative favourites such as cutting taxes and the deficit and eliminating federal bureaucracy. Where Dr No differentiates himself is his promise to reign in the Federal Reserve, which he claims was the “culprit behind the economic crisis”.

“Its unchecked power to create endless amounts of money out of thin air brought us the boom and bust cycle and causes one financial bubble after another,” Paul said in a statement, vowing to audit America’s central bank.

Paul not only wants to repeal Dodd-Frank but also Sarbanes-Oxley, which since 2002 has set standards for public company boards, management and accounting firms.

Earmarked for reform 

Of Rick Santorum, the Cato Institute’s Calabria said the former Pennsylvanian Senator is not necessarily a small government fan. “Santorum is a Bush-style social conservative. While he sees a role for intervention in the financial markets, he is far less likely to take a strong position,” he said of the Senator who has been heavily criticised for his support of legislative earmarks which direct funds to specific projects.

Rick SantorumLike Paul, Santorum would repeal the “burdensome” Sarbanes-Oxley as well as Dodd-Frank.

“Not only did [Sarbanes-Oxley] not prevent the financial crisis, but it chased capital overseas,” Santorum said last year. “At the same time, we must repeal Dodd-Frank before it can be fully-implemented and start from scratch to enact real reform that ensures the 2008 financial crisis does not happen again but at the same time does not place impediments in the way of capital formation and credit availability for average Americans.”

Santorum believes together, the two laws “enshrine ‘too big to fail’”.

It’s the majority, stupid 

For Calabria, the fact that Dodd-Frank is even on GOP candidates’ radars is a “pleasant surprise”. That all candidates are incensed by the so-called Volcker rule – which bans prop trading by deposit-taking institutions and is named after ex Fed chairman Paul Volcker – is just as encouraging.

Mark Calabria“That they’re all on board with repealing Dodd-Frank is impressive,” said Calabria, nevertheless agreeing that any repeal by Congress would be difficult, even for a Republican White House and majority-controlled House of Representatives.

In November, when 33 of the 100 seats in the Democratic-held Senate will be contested, Calabria sees a 75% chance the Senate will flip to a 52 or 53 Republican majority from its present 53 to 47 Democrat majority. He is also “90% certain” Republicans will keep the House, currently held with a 51-seat majority. “But the numbers are close,” Calabria said, asserting neither result would provide the Republicans with enough seats to repeal Dodd-Frank, given some GOP senators would likely cross the floor and vote against any repeal.

“You would expect a repeal to pass the House but not the Senate,” Calabria said.

The question then becomes, how would each candidate’s administration work with the Hill to reform banking regulation?

Calabria sees some hints of how each administration would operate. “Romney would be working with a House arguably more conservative than himself,” said Calabria, characterising the former Massachusetts governor as a potentially reasonable caretaker but questioning his ability to manage during times of crisis. “Romney, like Obama, would likely let Congress write the details.”

While Gingrich also is not one to dwell on the fine print, his time as Speaker of the House from 1995 to 1999, six years as minority whip and two decades as the Representative for Georgia’s 6th district, may give him the greatest advantage in dealing with Congress.

November reckoning 

Whoever wins the Republican ticket will be facing an incumbent with a low but climbing approval rating who staunchly believes in his present economic reforms. According to Gallup, the president’s approval rating is up to 44% after an all-time low of 38% in October. At last week’s State of the Union address, Obama confirmed his commitment to banking reform as a core strategy for improving the American economy and showed more signs of campaigning in earnest for the presidential elections in November.

“I will not go back to the days when Wall Street was allowed to play by its own set of rules,” said Obama. “So if you’re a big bank or financial institution, you are no longer allowed to make risky bets with your customers’ deposits.”

Bruce Love +44 (0)20 7397 3818 bruce.love@thetrade.ltd.uk