Bipartisanship, long left for dead in Washington, has struck again. And Wall Street looks to be the winner.
In the wake of the Equifax scandal, Congress has been under pressure to act. But the price of modest reforms in Washington is often much larger giveaways elsewhere, and that pattern holds true in the agreement announced Monday between nine Senate Democrats and the top Republican on the Senate Banking Committee.
The measure would roll back several key financial regulations, including sections of the Dodd-Frank Act. It does so under the cover of offering consumer protections and coming to the aid of community banks — though the financial institutions that benefit have not-so-obscure names, like American Express, SunTrust, and BB&T.
Four Banking Committee Democrats — Joe Donnelly, D-Ind., Heidi Heitkamp, D-N.D., Jon Tester, D-Mont., and Mark Warner, D-Va. — negotiated the bill with committee chair Mike Crapo, R-Idaho, after ranking Democrat Sherrod Brown, D-Ohio, broke off talks on a compromise bill with Crapo just last month. Warner’s Virginia colleague Tim Kaine, last year’s vice presidential nominee, signed on as an original co-sponsor of the bill, along with Joe Manchin D-W.Va., Claire McCaskill, D-Mo., Gary Peters D-Mich., and Angus King, I-Maine, who caucuses with Democrats. The Democratic support would give the legislation enough support to break a filibuster, if all Republicans signed on.
While five of these senators face re-election next year and come from states won decisively by President Donald Trump, Democrats scored a major victory over Trumpism in Virginia just last week, winning the governor’s race and potentially wrestling control of the heavily gerrymandered House of Delegates. Having Virginia’s senators engineer a bank deregulation bill days later sits uncomfortably with that triumph of the resistance.
“Using a moment the Democratic base is busy fighting the corporate giveaways in Trump’s tax scam to push through a gift-wrapped present for bank lobbyists is as cynical as Washington gets,” said Kurt Walters, campaign director for Rootstrikers, a grassroots progressive group.
The bill returns Washington to its longtime tradition of joining hands to reward Wall Street. Former presidents Jimmy Carter, Ronald Reagan, George H.W. Bush, Bill Clinton, and George W. Bush all hacked away at banking rules to varying degrees. After the worst financial crisis in nearly a century got in the way of this cross-party teamwork, banks had to lay low and were even forced to swallow Dodd-Frank — although former President Barack Obama did eliminate an entire section of the bill involving derivative regulations in a year-end spending bill in 2014.
Finally, enough time has passed that both parties can sign onto a bill that blows up financial regulations, in a show of comity lacking in Washington under Trump. Despite nonstop political caterwauling between Democrats and Republicans, nothing brings Congress together like following the banking industry’s wishes.
In this case, the Senate cabal has masked their handout by claiming to focus on relief for small community banks, which, being as American as apple pie, are politically unobjectionable (in reality, community banks often lobby for the same proposals as big banks, to get perks for themselves in the exchange). The bill also adds a handful of consumer protections, including one responding to the disastrous data theft at Equifax, as a trade-off for the deregulatory measures.
The proposal “includes over a dozen measures that would ease rules on banks, and a few minor changes for consumers that ought to be a given,” said Marcus Stanley, policy director at Americans for Financial Reform, the main pro-regulatory advocacy group in D.C.
According to a section-by-section summary of the legislation (full text will likely be made available later this week), banks with less than $10 billion in assets would be allowed to sell high-risk mortgages without the disclosure and ability-to-pay rules in place across the industry. This class of small banks would also be free from several reporting requirements, the Volcker rule restrictions on market trading with their own deposits, and numerous capital standards, as long as they maintain a simple leverage ratio between 8 and 10 percent (meaning that for every $100 these banks lend out, $8-$10 would have to be financed with equity).
Contrary to myth, there’s no urgency to help out community banks; over 95 percent of them turned a profit in 2016. And just because a no-documentation or interest-only mortgage comes from a community bank doesn’t make it a safe financial product. This concept of leaving consumers exposed to deceptive practices by “tailoring” regulations to exempt small banks was part of a letter signed by Kaine and 69 other senators, the same week Kaine was tapped by Hillary Clinton as the vice presidential nominee.
Meanwhile, the real intent of the legislation becomes clear in Section 401, which gradually raises the threshold for “systemically important financial institutions,” or SIFIs, from $50 billion to $250 billion in assets. This would free dozens of banks from enhanced Federal Reserve supervision and larger capital requirements. Far from a community bank measure, it would assist giants, like American Express, SunTrust, and BB&T. Treasury Secretary Steven Mnuchin recommended the same SIFI threshold earlier this year.
There’s also an exemption from mortgage rules for manufactured homes like trailers, the largest producer of which is Clayton Homes, a division of Warren Buffett’s conglomerate Berkshire Hathaway. Meanwhile, Congress has already exempted auto dealers from many lending regulations.
A third measure would allow hedge funds to create investment vehicles that share a name with an affiliated bank. It’s a marketing effort to give funds credibility; the biggest advocate for the change was BlackRock, the largest asset manager in the world. A fourth would make municipal bonds, a $3.8 trillion market, more attractive for big banks to purchase by tweaking capital rules.
The consumer protections are relatively modest. Credit bureaus would be required to offer a free credit freeze and unfreeze every year, a watered-down version of a recent bill from Sen. Elizabeth Warren, D-Mass. Warren’s bill would have made all credit freezes free, not just one annually. Veterans with medical debt and whistleblowers of elder financial abuse would also get protections, and the Treasury Department could use “Hardest Hit” funds intended for struggling mortgage borrowers to remediate lead and asbestos hazards in homes.
Critics see these measures as a bit chintzy compared to the deregulation. “With scandals at Wells Fargo and Equifax so recent or even ongoing, Congress ought to be passing robust new consumer protections, not doing favors for banks,” said Stanley.
Because the House has already passed a deregulatory financial bill called the CHOICE Act, Senate passage of this legislation could set up a conference committee. And with nine Democrats on board, the bill offers a path through the filibuster, the main barrier to getting initiatives through Congress.