What Hensarling pick for Treasury would mean for banks

If President-elect Donald Trump selects House Financial Services Committee Chairman Jeb Hensarling as his Treasury secretary, it would be a clear sign that he intends to embrace a more traditional GOP agenda when it comes to financial services issues.

The Texas Republican is a fierce opponent of the Dodd-Frank Act, and a conservative ideologue who has preferred to stick to his principles rather than compromise to move forward on legislation.

In virtually every banking issue of note during his 13 years in Congress, Hensarling has pushed toward the right. That includes housing finance reform, where the protégé of former Sen. Phil Gramm, R-Texas, has sought to eliminate Fannie Mae and Freddie Mac and dramatically curb any government role in the mortgage market.

He has particular enmity toward the Dodd-Frank Act, which he has blamed for slow economic growth; the Consumer Financial Protection Bureau; which he views as an unaccountable agency run amok; and the Financial Stability Oversight Council, which he wants to abolish.

“In my world,” the FSOC “would play probably no role,” Hensarling said in a speech last week. “I do not believe that FSOC is adding value to our economy.”

Ironically, if Hensarling is confirmed as Treasury secretary, he would be nominally in charge of the FSOC, acting as its chairman. He would also be a key player in setting much of the Trump administration’s economic policy.

Among his likely first objectives is the passage of his own bill, the Choice Act, which dismantles much of Dodd-Frank, curbs the powers of federal banking regulators and offers institutions a chance to ease regulations in return for holding higher capital.

His well-documented record on financial issues makes him a known entity to the financial industry, which respects Hensarling’s knowledge and intellect but views him as inflexible on certain issues, including housing finance reform.

Whether he would be confirmed is an open question. On the one hand, Senate Democrats may see Hensarling as a potential ally of big banks because of his deregulatory policies and his repeated attempts to roll back Dodd-Frank.

“If Donald Trump puts up a Treasury secretary nominee who will empower Wall Street … I will vigorously oppose that person,” Sen. Jeff Merkley, D-Ore., said in an email last week before the announcement was made, alluding to a number of deregulatory bills the House Financial Services Committee chairman has passed out of the committee.

Yet Hensarling may be a preferable alternative to many others Trump and his advisers have reportedly weighed in the past couple of weeks, including multiple alumni of Goldman Sachs and even Jamie Dimon, the CEO of JPMorgan Chase.

Hensarling is “a member of the Congress, and he’s got an impeccable reputation as a decent man and has a lot of experience in the area,” Sen. Orrin Hatch, R-Utah, told the Dallas Morning News last week.

Hatch chairs the Senate Finance Committee, which is responsible for confirming the Treasury secretary.

Despite his reputation as an ideologue, observers said Hensarling also knows when to bend to get things accomplished.

“He has passed over 40 different bipartisan bills that have passed the committee on a bipartisan basis,” said J.W. Verret, a law professor at George Mason University and a former House Financial Services Committee staffer.

Unlike most Treasury secretaries, Hensarling would come into the job with a clearly stated agenda. Last week he talked about pushing forward on the Choice Act, reform of the Federal Reserve System and even housing finance reform.

One item that would be unlikely to make his list is restoration of the Glass-Steagall Act, a Depression-era law that divided commercial and investment banking and was repealed by the Gramm-Leach-Bliley Act of 1999. Though Trump’s campaign embraced a return to Glass-Steagall this summer, the idea has not surfaced since — and Hensarling would almost certainly be opposed to any such move.

“As a protégé of Sen. Gramm, he stands in the way of serious consideration of Glass-Steagall restoration,” said Bartlett Naylor, a financial policy advocate at the watchdog group Public Citizen, wrote in an email.

If Hensarling is chosen and confirmed to the Treasury, it is not immediately clear who would succeed him as Financial Services chair. Verret said that, no matter who it is, the work Hensarling has done on the committee could be picked up by another Republican.

“The Choice Act has been developed in a way that it has been informed by all the Republican members of the committee,” Verret said of the Choice Act. “If he leaves and someone replaces him, I think the next chairman can take up the flag and charge up the Hill very quickly, very easily.”

Under Hensarling, the international Basel accords are likely to be further fractured. The U.S. and European Union are already at loggerheads on how far to go in embracing the international committee’s capital and liquidity standards, with the U.S. taking a harder line.

But Trump and Hensarling are skeptical of such agreements.

“As regulations are given from Basel into the U.S. financial regulators, we now have kind of an agreement … where the U.S. is absorbing regulatory guidance, regulatory suggestions from the international community,” David Malpass, a senior economic adviser to Trump, said in a recent speech. “There is a giant problem of the international financial regulatory system being run in ways that work very well for New York and Washington. These are gigantic boom cities … and benefiting from an international financial system which is leaving millions and millions of people out, so part of the goal is to create a financial system that works for the average person rather than the financial elite that involved in those markets.”

Hensarling’s distaste for the Basel accords manifested itself in the Choice Act, which would provide banks with an “off-ramp” to Basel capital and liquidity requirements if they met a simpler leverage ratio.

Hensarling is also close to Vice President-elect Mike Pence, whom he served with in the House and succeeded as chair of the House Republican Conference. Hensarling has also embraced Trump’s populist message to “drain the swamp” in Washington.

Some consumer groups, however, see that as disingenuous.

“Hensarling is a gator-in-chief in D.C.,” said Mary Bottari, deputy director at the watchdog group Center for Media and Democracy, while pointing out that hedge funds, commercial banks and insurance firms have been some of his largest contributors.

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