View source for Notes:BC1.EF.WSJ.Hensarling vs. Cronyism and Dodd Frank

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|HasArticleText=Originally published in WSJ

<big>K Street’s Biggest Opponent</big>

Jeb Hensarling has been a lonely figure fighting earmarks, subsidies and tax preferences. It’s time more Republicans joined him.


By 
Kimberley A. Strassel 
 
Dec. 11, 2014 7:24 p.m. ET 
 
Texas gave America the Lone Ranger, and then—because it is a generous sort of place—in 2002 it gave the country an updated version of him: Rep. Jeb Hensarling. The Republican has spent a decade riding herd on cronyists who give capitalism a bad name by giving or taking special government favors. With the coming dawn of a Republican Congress, we’re about to see if the rest of the GOP sees the wisdom of joining Mr. Hensarling’s posse. 

Washington’s Lone Ranger was at it again this week in the fight over reauthorizing the Terrorism Risk Insurance Program, a “temporary” program created in 2002 that requires taxpayers to absorb the costs of insurance payouts after an attack. Mr. Hensarling earlier this year set his sights on the program and methodically elevated the subject of its industry payoffs into a Washington hot topic, causing one unnamed industry lobbyist in October to gripe about the reauthorization delay: “If Jeb Hensarling were not in Congress, a bill would have passed with enormous support.” The Texan didn’t get all the reforms he wanted in the reauthorization bill that did pass this week, but he got some. And he made his point. 

The episode was classic Hensarling. The congressman stepped down from the House leadership after the 2012 election to become chairman of the House Financial Services Committee, where he could be at the center of restoring what he calls the “bedrock” GOP principle of “free enterprise.” From that perch, Mr. Hensarling has doggedly worked to dismantle crony government programs that reward the well-connected business elite. While his efforts have rarely resulted in total victory, they have created flash points and forced his fellow conservatives to publicly justify their mercantilist tendencies.

Take his longtime fight to eliminate Fannie Mae and Freddie Mac, the government-backed housing giants that were central to the 2008 crash. Mr. Hensarling has yet to get a House vote on his proposal, though this focus has helped put uncomfortable attention on those pushing only watered-down reform. Earlier this year, he led a battle against plans to roll back reforms to the federal flood-insurance program. The House passed that atrocity, but only after former Majority Leader  Eric Cantor  (to great outrage) did the insurance lobby’s bidding and bypassed Mr. Hensarling on the way to a vote. 

This fall he provoked a debate over reauthorization of the Export-Import Bank, which exists to provide cheap financing for select industry players. The bank was set to die; all the GOP had to do was nothing. The House instead caved and threw Ex-Im reauthorization into a September funding bill, though Mr. Hensarling was able to limit its extension to June—when he intends to have that fight all over again.

Such fights in the next Congress will be even more worth watching. Corporate America invested heavily this midterm in getting a Republican Senate, in part because it wants nothing more than to get back to the good old Tom DeLay days of mutual GOP-Fortune 500 back scratching. The K-Street lobbyists are about to put enormous pressure on Republicans. Lobbyists will line up three deep outside the offices of  John Boehner  and Mitch McConnell, demanding that the leadership ignore Hensarling-style reforms.

Which gets to the other reason the Hensarling battle over free markets is about to matter more: All eyes are now on the GOP. Republicans are happy to criticize obvious (and Obama -backed) recipients of government largess: the Solyndras of the world. Yet few have been willing to shut down larger programs that pay off entire industries and send dollars back to their state businesses. This is why many voters see the GOP as the party of the “rich and powerful” and Democrats get traction with their populist catchphrases.

In a May speech to the Heritage Foundation, Mr. Hensarling noted that the world of earmarks, subsidies and tax preferences has caused “many to view success with suspicion. That in turn makes it easier for liberals to mislead with calls for bigger government to ensure ‘fairness.’ ” Conservatives, he said, have ceded that word to the left, when they should be talking about how “everyone must be bound by the same rules.” 

This ought to be the Republican rejoinder to the Elizabeth Warrens of Congress, who like to complain that Washington is rigged on behalf of billionaires and giant companies. It absolutely is. But Democrats are the ones who are champions of big government, which exists to reward the politically connected, and to hide those rewards within legislation and backroom bureaucratic payoffs. The left isn’t concerned so much about government payoffs as it is about controlling who gets them. The GOP has a yawning opening to make this case, and position itself as the party that truly represents Main Street. 

Yet to do that, they’ll have to rediscover some principles. A lot of Republicans have used the excuse of a bottlenecked Democratic Senate as a reason not to follow Mr. Hensarling in his rides to kill off the likes of Fannie, Ex-Im or TRIA. They have no such excuse now. 

Write to kim@wsj.com
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|HasArticleText=Originally published in WSJ



Let’s Pretend Dodd-Frank Works 

<big>Elizabeth Warren’s phony outrage over a rewrite of swaps rules.
</big> 

Updated Dec. 12, 2014 12:17 p.m. ET 
 
The political left is outraged over a corner of Congress’s omnibus spending bill that rolls back a corner of the 2010 Dodd-Frank law. The premise of this made-for-media furor is that Dodd-Frank must never be altered because it ended taxpayer bailouts of giant banks. If only.

The Dodd-Frank provision at issue requires each bank holding company to move roughly 5% of its derivatives contracts from its commercial bank insured by the Federal Deposit Insurance Corporation into a separate subsidiary that is not insured by the FDIC. Therefore all the derivatives exposures would still belong to the same bank holding company, and roughly 95% would stay in the FDIC-insured depository institution. 

The vaunted 5% are instruments that the politicians have decided are particularly risky. And we are asked by Sen. Elizabeth Warren (D., Mass.) to believe that having banks move them to another subsidiary of the same company represents “important protections that keep our economy safe.” 

Ms. Warren says that junking the rule will “let derivatives traders on Wall Street gamble with taxpayer money and get bailed out by the government when their risky bets threaten to blow up our financial system.” She’s urging Democrats to oppose the big budget bill, and as we write this she’s stampeded many House Democrats against it. 

We’re all for shrinking the taxpayer safety net. And we hate to be the ones to break it to Ms. Warren, especially mid-passion play, but separate provisions of Dodd-Frank have already stretched the taxpayer safety net to cover Wall Street’s derivatives trading. 

All of the major clearinghouses that stand behind derivatives trades have been deemed “financial market utilities” and under the law now have access to emergency loans from the Federal Reserve. All of the giant Wall Street banks at the center of the derivatives market have already been deemed “systemically important” under the law. And the FDIC, which now has the responsibility to rescue—er, “resolve”—failing banking giants, has already clarified that its goal is to keep the subsidiaries of giant bank holding companies operating even if the parent is failing. 

During Ms. Warren’s Wednesday stemwinder, we got the feeling that even she understands this. We can’t say for certain whether she was ad-libbing or reading from a text, but she referred to the FDIC as “the agency that will be responsible for bailing out Wall Street when their risky bets go sour.” Exactly.

This proposed change is far from the top priority in fixing Dodd-Frank. The change will give big banks an edge over non-bank competitors that cannot use deposits to fund their derivatives trades. It ought to be revisited as part of a larger overhaul of the 2010 law. But no one should believe that the Dodd-Frank status quo prevents bailouts.

This week’s show of anger is intended to promote the same false narrative that liberal politicians have been telling since the 2008 panic. This fairy tale holds that the root cause was derivatives, and not the underlying mortgage crisis and too-easy monetary policy that Washington did so much to create. 

Bankers without fear of failure can get in trouble in many ways (although usually it’s about real estate), and many have failed for reasons that had nothing to do with swap contracts. Hard as it may be for progressives to understand, derivatives serve an economic function beyond enriching bankers. Main Street companies and farmers use them every day to manage risks—locking in prices on products they buy and sell, reducing their exposure to changes in interest rates or the value of currencies in which they will be paid by overseas customers. 

Such activity had nothing to do with the financial crisis, but the misguided war on derivatives resulted in another Dodd-Frank provision requiring Main Street customers to put up more cash when engaging in such contracts—cash that could otherwise build their businesses. This destructive piece of Dodd-Frank is also going away this week, thanks to Rep. Jeb Hensarling’s (R., Texas) bargaining over federal terrorism insurance. 

For those who seek to prevent future taxpayer bailouts, the issue is not about the terms of a manufacturer’s swap contract or which bank subsidiary is allowed to hold which type of exposure. The issue is whether guardrails can be created to prevent central bankers, regulators and politicians from creating a credit mania and then rescuing the biggest losers when the boom turns to bust. 

This is the critical reform project, and debunking the false assurances of Dodd-Frank is a good place to start.

Correction: An earlier version of this editorial misstated the role played by Sen. Chuck Schumer (D., N.Y.) in promoting the change in derivatives regulation as part of the budget legislation.
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