Tough Choices Ahead for Jeb Hensarling

WASHINGTON — Rep. Jeb Hensarling, chairman of the House Financial Services Committee, has attracted his fair share of critics, but it's hard to argue he's lacking in vision.

Those who tune in regularly to the chairman's remarks at hearings or other events around Washington know precisely where he stands on any given issue.

In his own words, he's "pro-market, not pro-business," he worries that "the regulatory burden is strangling small businesses and entrepreneurs" and views the "positively Orwellian" Consumer Financial Protection Bureau as "perhaps the single most powerful and least accountable federal agency in all of Washington."

Above all, Hensarling is committed to "ensuring we have the deepest, most liquid, most transparent, most competitive, most innovative capital markets that the world has ever known," he explained in a recent interview, invoking another oft-used signature phrase.

But more than a year into his leadership atop the powerful banking panel, it's still unclear whether the free-market conservative is willing to trade in any of the ideological beliefs that fueled his rise in the Republican Party for the messy reality that is dealmaking in today's Congress.

It's been difficult for the native Texan to gain substantial traction on many of his initiatives since assuming the gavel in January 2013 — though to be sure, the frustrations of the past year are not entirely of his making.

"It's tough to judge his legislative ability in a year where everybody expected — and Congress lived up to the expectations — of nothing getting done," said Brian Gardner, an analyst at Keefe, Bruyette & Woods.

His tenure to date has left some bankers frustrated, arguing he should do more to reach across the partisan divide on key issues they care about, most notably housing finance reform. They see Hensarling as more interested in running for a party leadership position next year than in necessarily enacting legislation.

Yet others are more sympathetic to the Texas Republican, viewing him as a committed conservative who knows he automatically faces an uphill battle in getting a bill signed into law unless he compromises with an administration he disagrees with on most every issue.

Obama had just begun his second term in the White House when Hensarling took the top spot on the committee, and Democrats had recently picked up several additional seats in the Senate.

Hensarling has since managed to pass more than two dozen bills out of the banking panel, some with substantial bipartisan backing. Although many of those have made it to the House floor, the vast majority of the provisions have little chance of becoming law in the current political environment.

"I am painfully aware that we continue to be in divided government," the Republican lawmaker acknowledged at the beginning of the interview. "I continue to be very much aware that Barack Obama is my president and that Democrats have the Senate."

The committee has perhaps been most successful in coming together around targeted regulatory relief for small banks from the Dodd-Frank Act, an issue that has gained considerably less attention in the Senate.

Lawmakers on the House Financial Services Committee, for example, voted nearly unanimously last month on a package of bills that included an exemption for certain collateralized loan obligations under the Volcker Rule and a provision to establish an appeals process for the designation of rural communities under the Consumer Financial Protection Bureau's qualified mortgage rule. Republicans and Democrats, including Rep. Maxine Waters, D-Calif., the ranking member on the panel, also recently came together earlier this month over concerns about employment discrimination practices at the consumer agency.

"Notwithstanding the fact that some have opined that Maxine Waters and I may appear to be fairly close to ideological bookends, I have always sought to find common ground with my Democratic colleagues," Hensarling said.

Still, those efforts have been piecemeal, and have occurred alongside fierce partisan clashes over more divisive issues, like the GOP's ongoing push for structural changes to the CFPB and other, more sweeping changes to Dodd-Frank.

Increasingly, the committee leader has also faced discontent from those in his own party, along with those in the banking industry. Several critics expressed frustration with Hensarling's approach, arguing that the committee should be quicker to pivot off items that are politically popular with the base but are otherwise nonstarters, to those that are more likely to gain momentum.

"If something's going nowhere, he has been slow to recognize that and shift gears to explore and investigate or look into other issues," said one Republican familiar with the committee's work.

The highest profile conflict to date occurred earlier this year during negotiations over a flood insurance bill to limit impending rate hikes under the national program. House leaders dashed several efforts by the chairman, ultimately bringing alternative legislation supported by Democrats to the floor in an effort to appease lawmakers in some of the more heavily affected districts.

Hensarling, joined by a number of other House committee chairs, opposed the bill, citing concerns about the financial health of the flood insurance program and taxpayer subsidies. But the legislation ultimately sailed through the House and was signed into law by the President a few weeks later.

"It was holding true to his conservative values that seemed to lead him to a decision to oppose that legislation, but there was a strong majority, including strong Republican support, for the changes," said Edward Mills, an analyst at FBR Capital Markets. "He did not tack to where the caucus was or where the committee was — he stayed where was, which caused a situation in which he was not the dealmaker in that process."

Some observers downplayed the issue as an isolated incident, spurred by political expediency ahead of the November elections.

"The obstacles he has had are reflective of what is a very big division in the Republican Party — you have part of the party that wants to address long-term structural issues and another part that just wants to focus on Obama and getting to the elections," said Mark Calabria, director of financial regulation studies at the Cato Institute.

Others noted that efforts to shore up his right wing credentials could be part of a larger strategy to run for a House leadership position in the future. Speaker John Boehner, R-Ohio, has not yet signaled that he will step down anytime soon, but Hensarling has been repeatedly mentioned as one of a small handful of potential challengers for a top leadership spot when the time comes.

"One of the reasons why Hensarling is seen to have a bright future is that he really has been somebody who is liked by the Republican establishment and the Tea Party," Calabria added.

Still, whatever the fate of his longer term ambitions, Hensarling has several key banking battles ahead.

Congress must reauthorize the country's terrorism risk insurance program before yearend, a situation that could put Hensarling again at odds with many in his party, including House leadership.

In the interview, he revealed that he plans to extend the program, but under what conditions, and whether those are ultimately palatable to others in his caucus with close business ties, remains to be seen.

"I believe TRIA will be reauthorized, but I think there are a number of reforms that will be called for and put into the legislation," Hensarling said.

Moreover, the most critical fight may prove to be how he responds to growing momentum to overhaul the housing finance market.

"The biggest test will be his willingness to compromise on the GSE product. How far is he willing to go to get a law?" said one senior financial services executive.

The Texas Republican initially made the removal of Fannie Mae and Freddie Mac a central focus of his chairmanship, but his bill, the Protecting American Taxpayers and Homeowners Act, has been stalled in the House since last summer. He won a tough vote to get the conservative legislation out of his committee, but the bill has failed to come to the floor over concerns from industry and those within his own party about the hardline approach to getting government all but entirely out of the mortgage finance market.

Arguably, the conservative bid is a bargaining tactic, an attempt to stake out a right flank position so that he can approach talks with the Senate with as strong a position as possible.

"I think Hensarling might be a little more pragmatic than people give him credit for. I think he knows his end game is to be negotiating with the Senate — it's too early to be scaling back his bill," said Gardner. "I think as a chairman you have to be patient so you're not negotiating with yourself."

But the push has also come at the expense of other priorities the committee could have been pursuing, especially given the divisive effect it's had among his own party.

"The PATH Act has consumed the energy of the committee — and it also has sapped the energy of the committee," said the Republican observer. "Members, staff, and industry groups are definitely frustrated, because there's been less opportunity to move on legislation that would have had a chance to get over the goal line."

Of the many hurdles facing housing finance reform this year, Hensarling seems most preoccupied with the lack of time on the legislative calendar, given the frenzy of the midterm elections looming on the horizon.

The Senate Banking Committee released its highly anticipated legislation to reform the housing finance market last month, well after initial projections that panel leaders could have a deal in place by the end of 2013. Chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, the ranking member, have scheduled a markup for their bill on April 29, later in the year than was originally anticipated.

"I'm sometimes discouraged by the timing of it all, since we all know housing finance reform is a heavy lift… I fear somewhat that the window of opportunity to do such a major lift — that window of opportunity is rapidly closing," Hensarling said. "I'm not a Las Vegas bookie, I don't know how to handicap the odds. It's not something we've given up on, but it's going to be a challenge in the time that's remaining on this legislative calendar."

While the timing question is a crucial one, it's hardly the only hurdle to GSE reform in the near-term. The reality is that the odds are low for even the Senate bill to come up for a floor vote this year, if and when it emerges from the Banking Committee, which could put pressure on banking leaders in both chambers to bypass the standard legislative process and try to cut a deal amongst themselves.

"I do think that once the Senate Banking Committee has acted, there will be pressure on Hensarling to begin to engage in a dialogue, because it's less clear that either bill can get through the floor in regular order," said one banking lobbyist. "Can you get some agreement and birth another product to bring to leadership on both sides?"

But to the extent there's a growing consensus about how to overhaul the market, it appears to be coalescing around something closer to the Johnson-Crapo framework, making Hensarling's job more difficult. Powerful housing industry groups, including the National Association of Realtors and the Mortgage Bankers Association, have thrown their weight behind the competing Senate plan, and even some House Republicans are said to be wary of moving toward an almost exclusively private-sector market. That has caused some to wonder whether Hensarling will be able to meet Senate lawmakers anywhere near halfway on any potential negotiations.

For his part, the banking panel leader has repeatedly said he would be willing to sit down with his counterparts in the Senate, while remaining committed to the framework he introduced in the House.

"I had always expected to go to conference with the Senate. On the House side I think we feel strongly that if you do not end permanent government guarantee in the second mortgage market, you are de facto perpetuating Fannie and Freddie and their legacy of boom and bust and bailout," he said. "I never want to write off the ability to negotiate in good faith with somebody, but this is a subject that I've studied very carefully and I feel strongly, as do many members of my committee, about good public policy."

Still, it's possible the political winds could soon shift in the Senate, and Hensarling's patience may pay off. Party control of the Senate is likely to come down to a few closely watched races, and if Republicans take over the chamber, the Texas Republican could be sitting across the table from a very different set of players.

Sen. Richard Shelby, R-Ala., still has two years left as chairman if the Senate flips, and would likely approach mortgage finance reform, and other key issues, from a position much closer in line with Hensarling's own.

Ultimately, the Texas Republican's views may be well known, but his legacy has not yet been fully determined.

"He's playing the long game — he's working hard to lay the groundwork to have the most free-market oriented system he can get," said Francis Creighton, head of government relations at the Financial Services Roundtable. "He's not looking to say, I got this narrow derivatives bill passed, but I used my time as chairman to revamp big pieces of the financial services sector."