Here's a pop quiz: what financial services laws did Congress pass in 2011?
Drawing a blank? Don't feel bad. We're hearing crickets, too.
The year opened with promises of legislation to establish national standards for mortgage servicing and clean up technical problems with the Dodd-Frank Act, but both ultimately fizzled out. Even the pledge of progress on ways to reform the housing finance system was largely unfulfilled.
Instead, much of what happened on Capitol Hill was about Republicans and Democrats jockeying to influence how the federal banking agencies implemented Dodd-Frank.
That is likely to be the pattern for 2012, which will feature the same partisan gridlock as 2011 along with a large dose of election-year politics.
“In some ways, 2012 in Washington will look a lot like 2011,” said Brian Gardner, senior vice president at Keefe, Bruyette & Woods.
On the House side of the Capitol, Republicans who took control of the Financial Services Committee last January remain focused on curtailing what they see as regulatory excesses, especially in Dodd-Frank.
“Where Dodd-Frank went wrong is that it did not do anything to streamline regulations,” Rep. Ed Royce, a California Republican, said in an interview. “It instead piled new regulations on top of old ones.”
Senate Democrats, who hold a slim majority on the Banking Committee, say House Republicans want to gut Dodd-Frank, not improve it. “They're not looking to make this law work,” a Senate Democratic aide said.
Still, there are a few areas where Congress seems poised to take action in 2012. For other bills, the year will provide an opportunity for supporters to lay the groundwork for action following the election.
A measure to restrict stock trading by members of Congress is one bill that seems to be on a fast track. In the House the STOCK Act has 241 co-sponsors, more than half of the chamber's members.
Sen. Joseph Lieberman, who chairs the committee that passed the Senate version of the legislation, said in an interview that the bill's prospects also look good in the upper chamber.
“It may be controversial to some people, but it shouldn't be,” he said. “And frankly if we don't get floor time, we'll try to put it on as an amendment to something.”
But it is far from clear what the final version of the bill will actually do. In the House, a Financial Services Committee vote on the legislation was recently postponed because of a dispute over the bill's language.
In the Senate, Lieberman stripped out a provision that would require so-called political intelligence firms—which sell information gathered on Capitol Hill to hedge funds and other financial industry participants—to register as lobbyists.
Lieberman said he was concerned that the bill as previously written might have affected more people than its authors intended.
“We've got to be very careful about the drafting of this,” he said. “There's a problem out there, but this is a case of trying to draft something that doesn't take in other people that we don't really want to take in—like a constituent will call up and ask for information, not being paid.”
Another bill that has bipartisan support, as well as the strong endorsement of banking trade associations, would raise the threshold at which community banks are required to register with the Securities and Exchange Commission from 500 shareholders to 2,000. The House easily passed a version of the bill in November.
The Senate measure, co-sponsored by Republican Kay Bailey Hutchison and Democrat Mark Pryor, is under consideration by the Banking Committee.
Other pieces of legislation face more of an uphill fight in 2012.
A House measure that would allow banks to appeal examination findings to an outside party is popular with bankers, but not with their regulators. Although the bill has some Democratic support in the House, it seems likely to encounter resistance in the Senate unless its sponsors can find a way to resolve the concerns of regulators.
Republican Rep. Shelley Moore Capito, the bill's co-sponsor, said in a recent interview that her office was listening to the regulators to get a better understanding of their objections. A House hearing on the bill is likely to be held early in 2012.
In the Senate, Democrat Sherrod Brown is looking to revive and build additional support for a measure aimed at breaking up the largest U.S. banks—even though such a bill has no real chance of passing Congress in 2012.
In 2010, Brown co-sponsored legislation known as the SAFE Banking Act, which would have put size and leverage caps on financial institutions. The measure was not included in Dodd-Frank, and it has since faded from the public debate.
But in December, Brown held a subcommittee hearing on regulating large, complex financial institutions. In a brief interview, he said that he will take seriously the idea of introducing new legislation in 2012 to address the dangers posed by the nation's six largest banks. The bill would require those banks to begin to divest until they slimmed down to about $500 billion-$700 billion in assets, he said.
“I think there's increased interest from Republicans and fears of what these six largest banks represent, in terms of the subsidies they get and attracting capital, and the advantages they get with the regulators,” Brown said. “Because no regulator can understand a bank that's $2.2 trillion or $2.3 trillion like Bank of America and JPMorgan Chase are.”
Investors, too, have a hard time wrapping their brains around these types of banks, he added. “So it gives them a distinct advantage in the marketplace, because the investors clearly believe the government will protect those six banks,” he said.
Housing is another area where ideological differences in Congress are almost certain to prevent the passage of any broad reforms in 2012.
In the House, there are several bills to overhaul the nation's housing finance system. But those measures have not even received a vote in the Financial Services Committee, much less in the entire House.
And beyond vague descriptions of what a reform plan would look like, there is no consensus on how to proceed even within the GOP caucus.
“What we're looking at is bringing the private sector in to compete,” said Republican Rep. Judy Biggert.
Meanwhile, Senate Democrats and the White House appear in no hurry to act. So uncertainty over the future of Fannie Mae and Freddie Mac will almost certainly last another year.
In a recent interview, Republican Rep. Randy Neugebauer made comments that reflect the lack of urgency on the issue among members of both parties.
“I think Freddie and Fannie still continue to be some issue that we're going to have to resolve, at some point in time,” he said.
The biggest issue of 2012 will likely be Dodd-Frank, as it was during each of the past two years. Congressional Republicans are using various tactics to shape the law's eventual impact. In the Senate, Richard Shelby of Alabama has introduced legislation that would require financial regulators to justify proposed rules by conducting detailed cost-benefit analyses. The idea is a nonstarter with Democrats.
Shelby has had more success in blunting the impact of the newly established Consumer Financial Protection Bureau—successfully blocking the nomination of Richard Cordray as the bureau's director.
The fight over confirmations is expected to continue in 2012, as is the partisan dispute over funding for some of the agencies tasked with implementing Dodd-Frank.
In 2011, Republicans reduced a proposed funding increase for the SEC and prevented an increase at the Commodity Futures Trading Commission.
In the House, Republicans plan to continue to hold hearings on what they see as the excesses of the 2010 reform law. In a recent interview, Capito, who chairs the House consumer credit subcommittee, made clear that the CFPB will remain under the microscope. “I think we'll still be pushing for some kind of congressional oversight over an agency that is going to be, what, $400 million and 1,000 people, and really affects the lives of about every American who has any kind of financial transactions or credit card,” she said.
House Republicans are also still raising the possibility of a bill that would make corrections to Dodd-Frank.
“There are a number of small fixes that do not undermine the legislation,” Royce said. “We can only get so far though without support of Democrats in the Senate, and we will be making that effort. I hope we do not have to wait until the next Congress to do it.”
But in most instances, a congressional Republican's small correction to Dodd-Frank is a Democrat's substantive change. Even GOP supporters of such a bill acknowledge that passing one in 2012 will be a tall order.
“I think a lot of that depends on the landscape, because 2012 is, you know, going to be an election year,” Neugebauer said.
