Lawmakers and financial market participants sparred Tuesday over the economic and other impacts of the Dodd-Frank law, as well as the resulting Volcker Rule and potential new money market fund rules.
During a hearing held Tuesday by the House Financial Services Committee’s capital markets panel, Rep. Scott Garrett, R-N.J., claimed Dodd-Frank is “one of the main reasons that there has been such a tepid economic growth over the last several years.” He and other Republicans criticized its costs, saying they outweigh the benefits.
But Democrats and Anne Simpson, portfolio manager for the California Public Employees’ Retirement System (CalPERS), defended the rule.
“We simply cannot afford another crisis,” Simpson said. “In the worst dark days of the most recent crisis, CalPERS was $70 billion down. Now, we’ve grown our way back to close to where we were. … It is simply not achievable to earn rates of return that would plug that gap. So these reforms for us are absolutely system critical to long-term sustainability.”
Dennis Kelleher, president and chief executive of Better Markets, a nonprofit group that promotes financial transparency, said the cause of the economic trouble was not Dodd-Frank, but rather Wall Street excess and financial deregulation.
“Unfortunately, Wall Street and its allies are engaged in a campaign that attempts to deflect the public debate away from that crisis, away from Wall Street’s role in that crisis,” he said.
Another issue at hand was the further regulation on the money market fund industry, which would create a disincentive for these firms to buy ABCP. These investors are now facing regulatory curbs that would reduce their buying power.
Thomas Lemke, testifying on behalf of the Investment Company Institute, said additional money market fund rules could leave businesses with fewer options for short-term investments and cause them to pull cash from funds.
“We continue to believe that the 2010 amendments have already addressed the concerns with money-market funds,” said Lemke, general counsel and executive vice president at Baltimore-based asset management firm Legg Mason & Co.
Lemke was particularly concerned about rules that would require money-market funds to convert from a stable net-asset value of $1 per share to a “floating” NAV.
Though a floating NAV is not required by Dodd-Frank, regulators, including Securities and Exchange Commission chairman Mary Schapiro, have said they are considering requiring a floating NAV to prevent future runs by investors on money market funds.
Schapiro has warned that despite 2010 regulations, money markets still pose systemic risk to the U.S. economy.
The SEC is also considering capital buffers and possible redemption restrictions.
Lemke said the Volcker Rule, which would limit proprietary trading at banks, has left banks confused as to which market-making activities are exempt and which are prohibited. The rule, which is being finalized by regulators, could hike underwriters and issuers’ costs, he said.
In terms of securitization, the sector's trade group has warned regulators about the negative effect of the Volcker rule on the industry, specifically on the ABCP and tender option bond markets.
In written testimony, Mike Nicholas, CEO of Bond Dealers of America, whose members are middle-market fixed-income firms, criticized the rule for encompassing financial institutions, including bank-affiliated fixed-income broker-dealers, that do not pose substantial economic risk or engage in billions of dollars of hedging.
“A Volcker Rule that makes no distinction on the basis of size and market type, principal trading versus proprietary trading, could disrupt these markets, resulting in less liquidity and higher transactional costs for investors,” he wrote.
The Securities Industry and Financial Markets Association wrote in testimony that the Volcker Rule’s definitions of permitted activities are artificial and too narrow, that the rule is “conceptually difficult” and that the costs will not justify the benefits.
Lemke, in written testimony, said the rule could hurt market liquidity and constrain credit funding for municipalities. It should be revised to exempt tender-option bond programs, he said, adding that Dodd-Frank did not intend for Congress to regulate such traditional banking activities.
Simpson said the recent multibillion-dollar trading loss at JPMorgan Chase illustrates the need for proprietary trading constraints on federally-insured banks. The loss subjected clients, customers and taxpayers to excessive risk, she said