Romney's Muddled Message on Dodd-Frank

TAMPA, Fla. — For a candidate who is vowing to repeal the Dodd-Frank Act, Mitt Romney sure seems on board with a significant number of its provisions.

In an interview with Time magazine last week, the Republican presidential candidate suggested that the proper response to the financial crisis would have established tougher capital requirements, stricter limits on leverage, and risk-retention rules.

The problem? All of those ideas are already part of Dodd-Frank.

It's possible that Romney was citing pieces of the law that he agreed with, or implying that implementation of those measures is proceeding poorly. But if so, he didn't say that.

Instead, he spoke mostly in broad strokes, seeming to endorse the kind of bank regulatory system that we have today.

"We do need to have regulation in the banking industry," Romney said. "Extensive regulation is appropriate in an industry that has such an impact on the overall economy. We have to look at what the causes were of the last crisis and take action to prevent those causes from reappearing."

Romney, who has made over-regulation a key theme of this week's Republican convention in Tampa, then proceeded to cite specific ideas aimed at preventing the next crisis.

"What kinds of things come to mind include capital requirements, levels of leverage which are appropriate and inappropriate, banks maintaining risk in assets which they gather," he said. "Specifically, I'm referring to the idea [that] if a bank originates a loan or a mortgage that it should be on the hook for some portion of the loss if that loan or mortgage fails. These kinds of provisions, I think, would be directly applicable to the kind of crisis that we experienced before."

But much of that plan sounds identical to ideas that are already part of the Dodd-Frank law.

One of the few congressional Republicans who voted for Dodd-Frank, Maine Sen. Susan Collins, authored a provision that requires banking agencies to establish minimum capital and leverage requirements for banks and systemically important non-bank financial companies. The process of turning those requirements into concrete regulations is now well under way.

Moreover, Dodd-Frank requires banks that securitize loans to retain some of the risk in their own portfolios.

Ironically, the risk-retention provision is one of Dodd-Frank's most controversial measures, and its implementation has met strong resistance from the housing industry as well as both Democrats and Republicans in Congress.

Romney's comments would appear to indicate he sides with the Obama administration's side in that debate or, at the very least, supports the idea behind risk retention.

Elsewhere, Romney has spoken favorably about other aspects of Dodd-Frank.

He's said that in the wake of the financial crisis, derivatives needed to be regulated, and that there was a need for better regulation of mortgage lending — both ideas that are already part of the reform law.

To be sure, no one believes that Romney is exactly on the same page as President Obama when it comes to financial reform, but since his statements have been frustratingly vague, it's hard to know exactly where the GOP hopeful stands. To date, Romney has said only that he wants to repeal Dodd-Frank and replace it with a "streamlined regulatory framework," a proposal that could mean just about anything.

It's not even clear, for example, whether Romney would favor eliminating the Consumer Financial Protection Bureau — one of the most politically popular parts of the reform law yet the most contentious for financial institutions.

Indeed, the only part of the financial reform law that Romney has specifically rejected is the designation of certain banks and nonbanks as systemically important. Like House Republicans, Romney argues that the systemic designation effectively makes those firms "too big to fail."

In the Time interview, he suggests this ensures the government will bail out those companies in the event of a crisis - a notion that a strict reading of Dodd-Frank would appear to reject (Under the law, regulators cannot bail out an individual firm, but now have the power to seize and unwind it).

"The right course was not to say that this handful of banks will be protected by the government, implying therefore that all the rest of the banks are on their own, because smart depositors will all move toward the banks that are protected by government," Romney said.

"It had the opposite effect of what was advertised. What was advertised was that we would keep the too-big-to-fail banks from getting bigger, but the result of the legislation is just the opposite."

Romney is also not the only member of his campaign to endorse a piece of Dodd-Frank. Rep. Paul Ryan, before becoming the GOP's vice presidential candidate, told voters in his home state of Wisconsin that banks should not engage in proprietary trading.

"If you're a bank and you want to operate like some nonbank entity like a hedge fund, then don't be a bank," Ryan said. "Don't let banks use their customers money to do anything other than traditional banking."

That comment appears to support the Volcker Rule, a Dodd-Frank provision that is designed to stop exactly such conduct.

Some have also suggested that Ryan's words indicate he is a proponent of breaking up the big banks.

For his part, however, Romney has not gone that far. In the same Time interview, Romney said he opposes reviving the Glass-Steagall Act's separation of commercial banking and investment banking. Advocates of that idea argue that it would be a simple way to combat the too-big-to-fail problem.

"There are others who suggest, 'Well, let's go back to Glass-Steagall,'" Romney said. "But interestingly, that was not a cause of the last crisis. Trying to solve problems that did not exist may be counterproductive."

Once again, however, that position puts Romney close to the Obama administration's view. On several occasions, Treasury Secretary Timothy Geithner has rejected calls to break up the big banks and restore Glass-Steagall.

"I would not support reinstating Glass-Steagall," Geithner said in 2009.

Unless Romney gets more specific in the near future, it will remain unclear exactly what he would seek to change if he wins in November.