Category Archives: Financial Regulation

Dodd-Frank Is Five Years Old

On July 21, 2010, Congress passed the Dodd-Frank financial regulation bill. Today, that bill turns five. It is not a happy anniversary.

As CEI’s John Berlau points out in a new paper, Dodd-Frank has actually reduced competition in the financial sector. By codifying too-big-to-fail and adding in price controls and other regulatory hoops—27,669 total regulatory restrictions and counting—Dodd-Frank insulates incumbent banks from pesky upstart competitors. In fact, in the last five years, precisely one new bank has opened for business. This stagnation is not healthy for innovation or for competition—or for capital-hungry entrepreneurs throughout the economy.

A few other Dodd-Frank facts worth pondering:

  • The original bill text is 848 pages long. The edition of Herman Melville’s Moby Dick on my bookshelf is 602 pages long.
  • Dodd-Frank requires regulatory agencies to issue 398 regulations. Five years later, many of them have yet to be issued. Hopefully they stay that way.
  • Since each of those regulations contain multiple regulatory restrictions (some of the rules are hundreds of pages long and are extremely detailed), the actual number of regulatory restrictions Dodd-Frank enacts could eventually top 40,000, or even 50,000. Nobody knows yet.
  • Its price controls on debit card interchange fees have raised the cost of banking for small businesses and the poor (See Iain Murray’s new paper).
  • Dodd-Frank does not address the root causes of the 2008 financial crisis—banks took on too much risk, especially in the housing sector. Instead, by codifying government bailouts for major financial institutions, Dodd-Frank reduces incentives for financial institutions to keep their risk at manageable levels. Whatever its stated intentions, Dodd-Frank potentially sets the stage for another financial crisis and more bailouts.

For more, see John’s extensive Dodd-Frank research.

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Export-Import Bank Update

Things have been busy on the Export-Import (Ex-Im) Bank front. For those not in the know, the Ex-Im Bank makes loans and guarantees loans for U.S. exporters, as well as their foreign customers. For example, if a foreign airline wants to buy a new plane, Ex-Im will arrange favorable financing terms if it buys that plane from U.S.-based Boeing.

Ex-Im’s critics argue that the bank is a corporate welfare program, and is vulnerable to favoritism and corruption. I compiled several reasons to oppose Ex-Im in this paper. Ex-Im’s defenders counter that Ex-Im is necessary to increase U.S. exports and support American jobs, though buying that argument requires ignoring that 98 percent of U.S. exports happen without Ex-Im’s involvement, and that there are other, possibly better uses for the capital Ex-Im sits on.

Unlike most other agencies, Ex-Im has a built-in sunset, meaning it will automatically cease to exist unless Congress periodically votes to renew its charter. This led to a bitter political fight last fall, when Ex-Im’s charter was renewed until this June 30. Typical reauthorizations last for four or five years, so this nine-month reauthorization was a significant concession to reformers. As June 30 approaches, the Ex-Im battle is heating up once again. At this point, it appears Congress will hold a vote in May on Ex-Im’s fate.

This week, the House Financial Services Committee held a hearing, where Ex-Im head Fred Hochberg (see his written testimony here) defended his agency from Chairman Jeb Hensarling (R-TX), who wants to close the bank.

Also this week, the Justice Department charged former Ex-Im employee Johnny Gutierrez with bribery. Over the period 2006-2013, Gutierrez allegedly accepted $78,900 of cash and other improper gifts. Diane Katz recently unearthed 74 cases of alleged corruption among Ex-Im employees from 2009-14, an impressive achievement for an agency with only 400 employees.

As Ex-Im’s beneficiaries turn up the political heat, rumors are swirling that Republican House Majority Leader Kevin McCarthy (R-Calif.), who came out publicly against Ex-Im last year, is changing his mind and might favor reauthorization. Rep. Stephen Fincher (R-Tenn.), who is sponsoring an Ex-Im reauthorization bill, has been working on McCarthy for some time. Boeing, which alone accounts for nearly half of Ex-Im’s business, has spent $69 million on lobbying since 2012, much of it in support of Ex-Im, and is pressing very hard to keep Ex-Im’s doors open.

Delta Airlines has been the loudest corporate voice opposing Ex-Im, but it has only spent $10 million in lobbying since 2012, barely one seventh of Boeing’s total. Delta argues that Ex-Im subsidizes its foreign competitors when they buy Boeing jets, putting Delta, which pays full price for Boeing’s planes, at an artificial disadvantage.

Finally, the bank claims to be a champion of small business, but as a new Mercatus Center paper by Veronique de Rugy and Diane Katz shows, Ex-Im heavily favors big businesses over small businesses

At this point it’s hard to say how this fight will end. The economic case against Ex-Im is airtight, and many key members of Congress want to close the bank. Inertia is the strongest force in politics and the closest thing to an immortal being is a government agency, but this is one issue where reformers have a legitimate chance of victory.

The Case for Closing the Export-Import Bank

Over at American Banker’s BankThink blog, I have a piece making the case for closing the Export-Import Bank, mostly on corruption grounds:

 The Wall Street Journal reported on June 23 that four Ex-Im employees have been removed or suspended in recent months, “amid investigations into allegations of gifts and kickbacks.”

Former Ex-Im employee Johnny Gutierrez allegedly accepted cash payments from an executive of a Florida-based construction equipment manufacturer that has received Ex-Im financing on multiple occasions. In a July 28 congressional hearing, Gutierrez chose to plead the Fifth Amendment rather than deny the allegations. The other cases involve two “allegations of improperly awarding contracts to help run the agency” and another employee who accepted gifts from an Ex-Im suitor.

Read the whole thing here. There are, of course, many other reasons to close Ex-Im. I compiled some of them in a paper here.

Laughing All The Way to the Export-Import Bank

The Kronies are back with a video about the Export-Import Bank, one of the federal government’s largest corporate welfare programs. While the video is less than subtle, it makes the rent-seeking and deal-making surrounding the Bank very clear. Fortunately, the Bank’s charter expires on September 30 of this year. Ex-Im will cease to exist unless Congress votes to reauthorize it. CEI’s Iain Murray recently weighed in on the Ex-Im fight here.

Cronyism is far from the Export-Import Bank’s only problem. It also has enormous opportunity costs. There is only so much investment capital to go around. Every time Ex-Im secures favorable financing for a debacle such as Enron or Solyndra, or a sound company like Boeing or Caterpillar that doesn’t need taxpayer help, a deserving company elsewhere has to pay higher interest rates, or may even be denied financing altogether. The Ex-Im Bank’s portfolio is currently in the neighborhood of $140 billion. This is an enormous amount of capital being politically-directed, instead of market-tested. Here’s hoping Congress decides to end the Export-Import Bank this fall.