So Just Why Does Dodd-Frank Cost $38 Billion?

A week ago, it looked like smooth sailing for the financial regulation bill. After pulling an all-nighter, the conference committee agreed on what they believed to be the bill's final version. All that was left was for each chamber to pass the compromise. But then a few centrist Senate Republicans balked. They didn't like a $19 billion tax that was to be levied on big banks and hedge funds to pay for the bill. Since then, the bill was changed to rely on funding from more banks and the bank bailout fund. This all raises an important question: why does this regulation cost so much in the first place?

In fact, the total spending in the bill is around $38 billion. Due to internal offsets for items like depository insurance and Securities and Exchange Commission revenue, before the original tax measure, it would have widened the deficit by something like $13.5 billion over 10 years. That's where the bank tax came in. But how does the bill spend $38 billion to begin with?

There are six sources that would raise the deficit by $500 million or more according to the Congressional Budget Office (estimate before change, and after change, both .pdf). They include:

Dodd-Frank Deficit Items.PNG

Orderly Liquidation Authority

Let's start with the big one -- the Orderly Liquidation Authority. This is the new regulatory power granted to the FDIC to wind down big, interconnected failing firms. Of course, the architects of the bill swear that this won't be a bailout authority, so why does it cost so much?

Here's a quick explanation of how the authority would work. A firm (think: AIG) collapses. The FDIC seizes it. In order to stabilize the market, it takes over operations and all of the firm's obligations. Then, it wipes out equity holders and pays out creditors, after appropriate haircuts. Of course, it needs money to do that, and the bill doesn't create any resolution fund to dip into. So the FDIC needs to borrow this money from the Treasury. Once the economy has stabilized, it will sell off the assets of the failed firm to pay back that borrowing. If there's a shortfall, it will assess the financial industry accordingly to make taxpayers whole.

So why the cost? The CBO scores things on a short-term basis, instead of a long-term basis. The entire process above would take some years, however, so getting back the money used isn't in the estimate. But the resolution authority is ultimately believed to be pretty close to budget neutral.

Consumer Financial and Other Protection

Of course, that still leaves several billion more in spending. The rest is real. The consumer financial protection bureau would have an ongoing cost. Although its budget will fall under the Federal Reserve, the central bank's current funding for consumer protection isn't as great as the needs of the new agency. By 2015, when the CFPB is fully functioning, its additional cost will be around $800 million per year. Other financial oversight protection can be thought of in a similar way, though it will only cost about $100 million per year.

Neighborhood Stabilization and Emergency Mortgage Relief

Both of these initiatives are intended for the housing market. Neighborhood stabilization is an initiative already underway, where local governments buy and rehabilitate foreclosed homes. The bill provides the program another billion. Emergency Mortgage Relief is meant to help unemployed Americans who are having trouble paying their mortgage avoid foreclosure. These programs do not represent ongoing expenses.

Fixed Annuities

Due to the way the bill changes fixed annuity regulation, the CBO expects around $1 billion in lost tax revenue over 10 years. This isn't really new spending, but more a loss in revenue for the federal government going forward.

The Government Could Make Money

Considering what a huge portion of the pot the resolution authority makes up, the rest of the spending seems pretty light by comparison. It should also be easily paid for through the new bank assessments alone. If you assume that $20 billion isn't real spending, then the $11 billion set aside by "ending TARP early" shouldn't actually be used at all. This funding should ultimately go towards deficit reduction as planned.

Ongoing spending will only amount to around $1.3 billion per year. But the CBO shows the new ongoing revenues to exceed $2 billion per year after 2018. This implies government might ultimately make money on financial regulation.