By Rob Blackwell
In a presidential race dominated by fights over the debt limit and job creation, it is unusual for a candidate to devote much attention to the impact of Dodd-Frank on small banks.
But Newt Gingrich has rarely taken the conventional route.
The former House Speaker, whose candidacy has been marred by the sudden defection of his senior staff and lackluster fundraising, is the only Republican presidential contender to talk in depth about his objections to the regulatory reform law.
In fact, in a sit-down interview Friday, he sounded a lot like a community banker.
"The game is rigged against small banks at two levels," Gingrich said in an interview at his Washington office. "One is that the aggregated marginal advantage of borrowing money that is set up here by the Fed is profitable if you are a very, very large bank. It's not nearly as profitable if you are a small bank. You have that disadvantage."
The other problem comes from what he sees as the massive new regulatory burden spurred by the year-old law.
"The regulatory burden can be handled by a large multinational bank as part of their general management process. It kills a small bank," he said.
In a wide-ranging conversation, Gingrich cited fears that community banks are near the brink of extinction, repeatedly slammed Washington "bureaucrats" who micromanage the financial system and challenged the wisdom and efficacy of creating a consumer protection agency.
Although many politicians like to praise community banks in general, it's unclear how much their fate truly bothers them. For Gingrich, it's hard to escape the sense that the issue is a core part of his conservative philosophy.
"I have a particular passion for getting back to a community-based, small-business based, local entrepreneurial system," he said. "The whole base of the American model is local citizens with local resources providing local leadership. When you get to huge bureaucratic institutions, so you are branch #643, you have no capacity to provide local leadership anymore."
The former Speaker of the House also shared many small bankers' distrust for, and distaste of , government interference. In his view, the government's response to the financial crisis just made the situation worse.
"We had a crisis in 2008 because there were banks that were too big to fail," Gingrich said. "They are now bigger. How could the United States adopt a reaction to banks being too big to fail by making them bigger? They have a larger market share today, which is the opposite of rational behavior."
Instead, the government should have found a way to encourage small bank expansion.
"You would ideally like to have a policy that maximized the growth of small banks that were small enough that they could fail without risk to the general economy," Gingrich said.
Like Tom Hoenig, the president of the Federal Reserve Bank of Kansas City, Gingrich said that Dodd-Frank solidified, rather than eliminated, the concept of too big to fail.
By designating certain firms as "systemically important financial institutions," the government is essentially signaling it will support those companies in a crisis, Gingrich said.
He also warned that the Financial Stability Oversight Council, which is headed by the Treasury Secretary and designed to detect and prevent systemic risks, is a dangerous entity that could lead to significant problems.
"When you have a handful of people that have the power to intervene in institutions that have billions of dollars, you have an invitation to corruption on a grand scale," Gingrich said. There is an "inherent, inevitable corruption of having a Treasury committee appointed by the president micro-manage banks. It's unavoidably a corrupting influence."
Gingrich argued that the overall problem with the law is its attempt to micromanage the system. The financial crisis wasn't caused by a lack of authority on the part of regulators, but their failure to use the powers they already had. Giving them more abilities just doesn't make sense, Gingrich said.
"You already have a whole series of agencies that if they had done their job, it would have worked," he said. "We are now going to add more layers of agencies on top of the agencies we already have with the premise that the next one is going to be smarter and better."
A better strategy would have been to pursue -- and criminally prosecute -- bad actors during the financial crisis, including companies like Goldman Sachs & Co. that sold products that they themselves were betting against.
"That clearly is a conflict of interest in which one side of Goldman Sachs is betting against another side of Goldman Sachs," Gingrich said. "I am for punishing people who break the law. I am for people at equity losing money if they violate basic rules of honesty. I am not for trying to find a way to create a 100% mistake-proof future based on bureaucrats. That's both an invitation to corruption and it's an invitation to destroy the entire free market system by drowning it in petty regulations."
As proof, Gingrich pointed to money given out under the Federal Reserve Board's emergency liquidity programs. Like Rep. Ron Paul, the Texas Republican running for president, Gingrich wants to audit the central bank to see exactly where all the Fed's funds were going to.
"You have no idea who made money and why," Gingrich said. "Some of the things they were doing if it wasn't so tragic, it would be a comedy. So the Libyan National bank I think indirectly got $5 billion. Doesn't that strike you as slightly weird? Goldman got, I think $13 billion through the back door without having to acknowledge it because they got it through AIG."
Gingrich said such a situation should disturb the average American, who can't understand the logic behind who received bailouts and who did not.
"If you are a normal American citizen and you look at this stuff and you look at your mortgage and you look at your job you look at the amount of money the banks now have and you say to yourself, 'How come the fix is in for the big boys and against everybody else in America?'" Gingrich said. "And Dodd-Frank is part of that fix."
Instead, Gingrich said that regulatory activities during and after the crisis have largely been hidden from view.
"The system decided that it was better to sweep everything under the rug. I don't understand," he said. "You would have to ask this administration. This administration hates the rich in general but protects them in particular."
To his mind, regulators should have let AIG fail, like they did for Lehman Brothers.
"You know what capitalism is? Taking risk," Gingrich said. "You know what all those guys who are rich and made all that money and had all those neat places out in the Hamptons? That's what you get for taking risk. You know what happens when the risk fails? You lose the plane, you lose the mansion. That's what capitalism is. What we've invented is socialism on the way down and capitalism on the way up."
Attempts to give the government greater resolution powers are also misguided, Gingrich said.
"You are now going to replace classic bankruptcy, which occurs in the market, under the rule of law, with a group of bureaucrats appointed by the president, sitting in a room, deciding to preempt the market by being so wise that they are going to bankrupt a company before it goes bankrupt," he said.
While President Obama has also hailed the creation of Consumer Financial Protection Bureau as a key achievement of the reform law, it's clear Gingrich does not agree.
"I don't think Washington bureaucrats micromanaging agencies is a very good idea," he said. "You will notice that [President Obama] has had very great controversy over the kind of people he wants to appoint to that bureau. I think that's because they'd be so interventionist. The question you have to ask yourself is: why do you trust one person picked by politicians to supervise entire industries?"
What is unclear is how far Gingrich's candidacy can go.
After his top aides defected last month and recent fundraising numbers indicated his campaign is $1 million in debt, the conventional wisdom is that the Georgia Republican will have to pull out soon. But in a radio interview on Friday, Gingrich dismissed that notion, saying that other candidates have returned from worse situations and noting his economic record compared with his competitors.
"I think the gossip in the end gets drowned out by the substance," Gingrich said.
Political analysts aren't so sure. Larry Sabato, the director of the University of Virginia's Center for Politics, said Gingrich's "chances are minimal."
Still, Gingrich remains relatively high in Republican polls, and Sabato said it would be a mistake to rule him out.
"Anybody who is on the ballot has a shot," said Sabato. "You never know what's going to happen."