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Banking stocks like JPMorgan (NYSE: JPM ) , Wells Fargo (NYSE: WFC ) , and Goldman Sachs (NYSE: GS ) led the market higher in 2009, soaring on profound relief that the government had bailed them out and stabilized the financial system.
This year, however, banking stocks have pushed lower, bringing the market down with them, as uncertainty once again swirls around financial regulatory reform. In January, President Obama proposed imposing new limits on the size and activities of the country’s largest banks, such as Bank of America (NYSE: BAC ) and Morgan Stanley (NYSE: MS ) .
Negotiations between Senate Banking Committee Chairman Chris Dodd (D-Conn.) and the committee’s ranking member, Sen. Richard Shelby (R-Ala.), recently reached an impasse regarding a financial consumer protection agency, leading many to believe banking reform would be stuck in gridlock indefinitely. Last week, however, Sen. Bob Corker (R-Tenn.) stepped up to the plate. Corker, a key member of the Senate Banking Committee, has agreed to work with Dodd to help craft a bipartisan financial-reform bill.
I spoke with Sen. Corker to get a sense of the status of financial regulatory reform in the Senate, along with his thoughts on banking reform. The senator says that he and Dodd have agreed to set aside the topic of consumer protection for now, but adds that he believes consumer protection should be part of any financial regulatory reform negotiations. Corker says he will work to find a way to enhance consumer protection without negatively impacting the safety and soundness of the financial system, but notes that if that is not possible, he cannot support the reform bill. He says he thinks we will see a markup on a bill toward the end of February or March.
Corker spoke about the pluses and minuses of the Volcker Rule and about promoting economic growth through limiting the amount of legislation proposed, which would work to lift uncertainty for businesses. He says this financial reform bill could be a step toward removing the impediments to restarting growth in our economy.
Here are some edited excerpts from our conversation:
Jennifer Schonberger: Is it too early to prognosticate what the bill might contain in terms of its contents?
Senator Bob Corker: It’s tough to say until it happens. I can say that the major focus so far has been on systemic risk -- resolution and how we deal with derivatives. It’s been on the issue of consumer protection, and how do we deal with it in a way that doesn’t undermine the safety and soundness of financial institutions across our country.
Chairman Dodd said that whatever agreements [Sen.] Mark Warner [D-Va.] and I come to on resolution and systemic risk, which we’re negotiating now, will be part of that legislation. Sen. Judd Gregg [R-N.H.] and Sen. Jack Reed [D-R.I.] are working together on derivatives, and [Dodd] says that whatever agreements they come to will be a part of that legislation as well.
Another topic Chairman Dodd outlined in December in this bipartisan effort was that [Sen.] Mike Crapo [R-Idaho] and [Sen.] Chuck Schumer [D-N.Y.] would work on governance. There may be more titles, but those are the specific areas of effort now. We’ll have to see when Chairman Dodd’s markup comes out, or hopefully a bipartisan bill comes out.
Schonberger: You mentioned you’ve been working with Sen. Warner on the problem of “too big to fail.” How do we solve the “too big to fail” problem in your view?
Corker: We solve it by creating a regime that allows an orderly unwinding of a company that fails. We ensure that if a systemically important company fails, it actually fails out of business. One of the problems that came up a year and a half ago was that we had failing institutions, but there really wasn’t an orderly way to unwind many of them. Instead, government chose to prop up companies artificially during that period of time.
We’re working on a mechanism that absolutely ensures that if a large, systemically important company fails, that it actually fails out of business and it’s over. To me, that is something very important to reintroduce into the way people view capitalism in this country. It’s also very important that we remove the notion of any company being too big to fail from the American vocabulary.
Schonberger: What are your thoughts on President Obama’s proposals to impose new limits on the size and activities of the country’s largest banks, otherwise termed the Volcker Rule?
Corker: We’ve had two hearings on the Volcker rule, one of which included Paul Volcker. I think he’s very respected for what he did to fight inflation in the late ‘70s and early ‘80s. So when he put forth the policy, people wanted to hear it out. I think the consensus is that there are better ways of trying to make sure that there’s not unnecessary risk in financial institutions than arbitrarily making decisions about size and types of activities.
There are already components in place. Regulators already have the ability now. The Federal Reserve has the ability to keep companies that are involved in risky activity from doing so. For instance, 23A and B under the Federal Reserve Act keeps money from a commercial bank from being utilized to support other parts of a bank holding company. There’s a whole issue that money can’t leave a commercial bank that’s part of a complex bank holding company. It really can’t leave that institution and support other facets of it without taking a reduction in capital in that commercial bank itself. So there are a number of regulations that exist now to keep the efforts that go into supporting a commercial bank from supporting other risky behavior.
But in addition to that, if we pass a bill -- which I hope we do -- my sense is that we require additional capital requirements for those firms who are engaged in riskier behavior. My sense is we all want to do what we can to stop institutions from engaging in risky behavior that jeopardizes our financial system.
We also want to keep the ability of these institutions to be innovative. We want our country to be the world leader in financial innovation. I think there are better ways of dealing with that. I think our legislation will do that, while at the same time not arbitrarily draw lines in the sand around certain activities, which were even difficult to define in the hearing. Look at proprietary trading. If you’re trading on behalf of clients, there’s a fine line that you might cross to move into actual “proprietary trading.” I think we want to stay away from arbitrary items like that.
Schonberger: Is it fair to say, then, that you would be against the proposed legislation that Sens. Cantwell, Feingold, and McCain have jointly proposed, which would be to reinstate portions of the Glass-Steagall Act?
Corker: As I understand it, their legislation does not allow commercial banks to be part of a bank holding company. Today, you’re absolutely right. I do not support that legislation. Again, I think there are other ways of getting at the problem than separating commercial banking from complex bank holding companies.
Schonberger: Will any of this regulation work if we don’t coordinate on an international level?
Corker: That’s a good point. I’m glad you brought that up. We need to coordinate on an international level at every level. ... I think it’s one of the reasons our country needs to do away with the notion that any company is too big to fail. If we indoctrinate that into our way of thinking in our country, certainly that will permeate to other countries, and all of a sudden capitalism as we know it will be viewed in a very different light.
So I think it is important that we take the lead here and establish new regulation. But at the same time, you’re right. Things like resolution, when you have a company that operates throughout the world, those are difficult to put in place without international agreements. We still need to take action. But after our action is taken, we certainly need to continue to work with other countries around the world as they put in place regulation, so that ... we can we sync it up in a way that makes sense.
Schonberger: Switching gears slightly: President Obama made a number of proposals during his State of the Union address to create jobs (i.e., $30 billion to be doled out to community banks to lend to small businesses, elimination of capital gains tax on small businesses, tax credits for small businesses, tax breaks for capital investment, creating a bigger export economy). Do you think these initiatives are a good idea -- a good way to create jobs in America?
Corker: I haven’t seen the final proposal. I know the negotiations are taking place on a bipartisan basis around a jobs bill like that. But because I haven’t seen it, I’d rather not comment.
In general, I will say that much of the insecurity that exists in companies around our country is because of the hyper-activity that is taking place here in Washington. We continue to come up with an idea a day about what needs to be done in various sectors of our economy. I think that actually creates even more uncertainty. I think if we would just calm down and only do those things that are necessary, it would cause people in the business world to believe that there’s going to be a degree of stability into the future. I think that, more than anything else we could do, would help promote economic growth.
When [businesses] see there might be a health-care bill that imposes taxes, or there might be a cap-and-trade bill that may affect energy prices -- those kinds of things make the economy very Washington-centric and make people very concerned about the future. Again I think we just need to settle down here and quit announcing new programs, new mortgage modification programs on a weekly basis.
I’m not saying I won’t support it. I want to see what it says. But I wish that we would settle down and let the economy stabilize and grow based on a security in knowing that the game is not going to change.
For more thoughts from members of Congress: