GOP lawmaker pushes alternative plan for financial regulatory reform

Exclusive reporting for FinReg21 by Darrell Delamaide

It’s all healthcare, all the time, reports Rep. Scott Garrett, after visiting his constituents at factories and county fairs during the first week of the August recess. “It’s all anybody wants to talk about,” he says.

The Republican congressman representing New Jersey’s 5th District, a solidly Republican base in an otherwise blue state, has found “99%” of the people he talked to opposed to President Barack Obama’s healthcare reform, particularly the so-called “public option” for a government-run health insurance.

“They don’t want the government running their health insurance,” Garrett said in an interview with FinReg21.

For the ranking member of the House Financial Services subcommittee on capital markets, however, the main focus of his efforts remains the regulatory reform agenda that has dominated the committee’s work over the summer with a seemingly endless stream of hearings.

The administration’s plan is losing steam, Garrett says. “Members of the Democratic majority are beginning to see that these issues are more complex and nuanced than they thought at first,” he says.

The reform plan, launched at the White House by Obama himself in June, came later than Garrett had expected, given the early talk of wanting some measures passed before the Memorial Day break or at least before the August recess.

Now the administration is “kicking the can down the road on the difficult issues,” Garrett says, and going for the more populist measures, such as the bill limiting executive pay passed out of committee last month before the break.

A rift has even opened up between the administration and some of the top regulators regarding proposals to monitor systemic risk and to endow a new consumer protection agency with broad powers. While Treasury Secretary Timothy Geithner has portrayed opposition from the regulators as an effort to defend their own turf, Garrett says there is some merit in their arguments.

“I think you can’t separate safety and soundness issues – prudential regulation – from consumer protection,” Garrett says, as the administration proposes to do with its Consumer Financial Protection Agency. The Republican congressman agrees with the current bank regulators, who have testified before congressional committees that oversight should not be separated in this fashion.

The committee minority won an important battle last month when Chairman Barney Frank (D-Mass.) indefinitely postponed the scheduled markup of legislation for the new agency.

“Maybe to some, the idea of creating an entirely new federal bureaucracy with dubious benefits to society sounds like a political winner,” Garrett said at the time in welcoming the postponement. “It’s clear that the more people concentrate on the consequences of this idea, the less they like it.”

There will certainly be action in the House on the CFPA proposal, Garrett told FinReg21, but it’s less certain how much authority the new agency would have when legislation finally emerges.

“Nobody is saying that lack of consumer protection is what brought on this crisis,” Garrett says, “so the question is why are we dealing now with this issue that may end up doing more harm than good.”

Garrett and his fellow Republicans are also opposing the notion of allowing the Federal Reserve to monitor a new class of financial institutions deemed to be systemically important – dubbed Tier 1 Financial Holding Companies in the administration’s reform plan.

For Garrett, the Obama plan perpetuates the bail-out mentality of selecting institutions that are too big to fail. Even a resolution authority allowing the government to seize and unwind financial holding companies will not take care of the problem, he says.

“There isn’t anybody who can tell you that in the end it won’t be the taxpayer who is on the hook for this,” he says. Assessments on the protected institutions would have to be so huge they could themselves create problems for some of the firms.

An alternative reform plan from the Republicans calls for an expedited bankruptcy procedure better tailored to financial institutions, so that they could be allowed to go bankrupt, no matter how large or systemically important.

Instead of extending the Fed’s supervisory authority to include non-bank financial holding companies, the minority caucus wants to strip the Fed of its current regulatory responsibilities for bank holding companies and assign this to a consolidated bank regulator that would combine all current federal regulators – the Office of the Comptroller of the Currency and the Office of Thrift Supervision, as well as the supervisory functions of the Fed and the FDIC.

In addition, Garrett says, they would like to limit the emergency powers of the Fed, which were used in the current crisis to make loans to non-banks. The central bank departed from a monetary policy role to take over fiscal responsibilities, he says, doing the kind of spending that Congress is responsible for.

As to the task of monitoring systemic risk, another role the Obama reform plan assigns to the Fed, Garrett and his cohorts envision a board of experts to watch over market stability and capital adequacy. While this board would look at the interaction between various financial sectors, it would not supervise individual institutions and would not supplant existing regulators.

One of the keys to the Republican program, Garrett explains, is “to have bank regulators do their job for once.”

He sees the regulatory reform – along Republican lines – as critical to restoring “vibrant free markets.” When the Republican alternative was unveiled last month, Garrett, who played a significant role in putting it together, said, “Regulatory reform is needed to make sure that financial companies are never again allowed to wager their consumers’ money without consequence, nor to rely on the government for a handout when they make reckless decisions.”

Garrett, who was first elected to Congress in 2003, has emerged as one of the chief Republican spokesmen on financial services since his selection earlier this year as the ranking member for the capital markets subcommittee, which has jurisdiction over securities markets and the SEC, as well as insurance, government-sponsored enterprises, and derivatives.

A lawyer who represented insurance companies, Garrett was active in the state legislature prior to his run for the U.S. Congress. Even though he is one of the most conservatively rated Republicans in the House, he has been popular with his constituency, which returned him to office in the 2008 election with a 14-point margin over his Democratic challenger in a race that was supposed to be close.

New Jersey is ranked as a blue state – it went 57% for Obama in the presidential vote – but the Republican candidate in this year’s race for governor, Chris Christie, now has comfortable lead in the polls over the incumbent Democrat, Jon Corzine.

Along with the lead enjoyed by Republican Bob McDonnell in the Virginia gubernatorial contest, the New Jersey election represents an early referendum on Obama’s administration, Garrett says, though the contest in his state is also heavily influenced by a massive political corruption scandal that came to light last month.

Garrett, a native of New Jersey who turned 50 last month, got both his undergraduate and law degrees at state schools – Montclair State University and Rutgers University respectively.

He has said that he was interested in government since childhood. He told a New Jersey reporter last month that the only time he really got his parents angry as a teenager was when came home at 1 a.m. because a Wantage Township Council meeting he was attending ran late.

The fourth-term congressman doesn’t speculate about his political future, or whether a conservative Republican could win statewide office in a blue state. But, noting the Republican edge in the governor’s race coming after the much-ballyhooed “death” of the GOP, he commented, “These polls sure can be fickle, can’t they?”