In mid-January, Citigroup executives held a conference call with reporters about the bank’s fourth-quarter 2017 earnings. The discussion turned to an obscure congressional bill, S.2155, pitched by its bipartisan supporters mainly as a vehicle to deliver regulatory relief to community banks and, 10 years after the financial crisis, to make needed technical fixes to the landmark Wall Street reform law, Dodd-Frank.
But Citi’s Chief Financial Officer John Gerspach told the trade reporters he thought that some bigger banks — like, say, Citigroup — should get taken care of in the bill as well. He wanted Congress to loosen rules around how the bank could go about lending and investing. The specific mechanism to do that was to fiddle with what’s known as the supplementary leverage ratio, or SLR, a key capital requirement for the nation’s largest banks. This simple ratio sets how much equity banks must carry compared to total assets like loans.
S.2155 did, at the time, weaken the leverage ratio, but only for so-called custodial banks, which do not primarily make loans but instead safeguard assets for rich individuals and companies like mutual funds. As written, the measure would have assisted just two U.S. banks, State Street and Bank of New York Mellon. This offended Gerspach. “We obviously don’t think that is fair, so we would like to see that be altered,” he told reporters.
Republicans and Democrats who pushed S.2155 through the Senate Banking Committee must have heard Citi’s call. (They changed the definition of a custodial bank in a subsequent version of the bill. It used to stipulate that only a bank with a high level of custodial assets would qualify, but now it defines a custodial bank as “any depository institution or holding company predominantly engaged in custody, safekeeping, and asset servicing activities.”) The change could allow virtually any big bank to take advantage of the new rule.
Multiple bank lobbyists told The Intercept that Citi has been pressing lawmakers to loosen the language even further, ensuring that they can take advantage of reduced leverage and ramp up risk. “Citi is making a very aggressive effort,” said one bank lobbyist who asked not to be named because he’s working on the bill. “It’s a game changer and that’s why they’re pushing hard.” A Citigroup spokesperson declined to comment.
A bill that began as a well-intentioned effort to satisfy some perhaps legitimate community bank grievances has instead mushroomed, sparking fears that Washington is paving the way for the next financial meltdown. Congress is unlikely to pass much significant legislation in 2018, so lobbyists have rushed to stuff the trunk of the vehicle full. “There are many different interests in financial services that are looking at this and saying, ‘Oh my God, there’s finally going to be reform to Dodd-Frank that may move, let me throw in this issue and this issue,’” said Sen. Chris Coons, D-Del., in an interview. “There are a dozen different players who decided this is the last bus out of town.”
And Coons is a co-sponsor of the bill.
A hopeful nation — and the president himself — expected that the Senate would begin debate on major gun policy reform next week, but instead a confounding scenario has emerged: In the typically gridlocked Congress, with the Trump legislative agenda mostly stalled, members of both parties will come together to roll back financial rules, during the 10th anniversary of the biggest banking crisis in nearly a century. And it’s happening with virtually no media attention whatsoever.
Aside from the gifts to Citigroup and other big banks, the bill undermines fair lending rules that work to counter racial discrimination and rolls back regulation and oversight on large regional banks that aren’t big enough to be global names, but have enough cash to get a stadium named after themselves. In the name of mild relief for community banks, these institutions — which have been christened “stadium banks” by congressional staff opposing the legislation — are punching a gaping hole through Wall Street reform. Twenty-five of the 38 biggest domestic banks in the country, and globally significant foreign banks that have engaged in rampant misconduct, would get freed from enhanced supervision. There are even goodies for dominant financial services firms, such as Promontory and a division of Warren Buffett’s conglomerate Berkshire Hathaway. The bill goes so far as to punish buyers of mobile homes, among the most vulnerable people in the country, whose oft-stated economic anxiety drives so much of the discourse in American politics (just not when there might be something to do about it).
“Community banks are the human shields for the giant banks to get the deregulation they want,” said Sen. Elizabeth Warren, D-Mass., who is waging a last-minute, uphill fight to stop the bill. “The Citigroup carve-out is one more example of how in Washington, money talks and Congress listens.”
The Community Bank Hustle
S.2155 is known in Washington as the Crapo bill, named for the chair of the Senate Banking Committee, Idaho Republican Mike Crapo. But it is at least equally authored by North Dakota Democrat Heidi Heitkamp, with strong input from Jon Tester, D-Mont.; Joe Donnelly, D-Ind.; and Mark Warner, D-Va.
Warner, known lately for his role on the Senate Intelligence Committee, is a conventional ’90s-era moderate-to-conservative Democrat, a believer in businesses’ ability to self-regulate and a skeptic of onerous banking rules, as is Donnelly. But Heitkamp and Tester are cut from more populist cloth. Both played a quiet but potent role in 2013 in linking up with bank reformers Warren, Sherrod Brown, and Jeff Merkley to form a wall of Banking Committee Democrats who stopped cold Larry Summers’s bid to become chair of the Federal Reserve, instead backing Janet Yellen. Despite the partisan lean of their respective states, Heitkamp and Tester have often been reliable allies of progressives in the Senate.
Facing re-election in states that President Donald Trump won handily, the fundraising benefit of backing a bank reform bill needs little explanation. But that a populist Democrat feels they can sponsor such a bill and see political benefit — or at least not face much pain — represents a stark failure on the left to adequately frame and define the conversation around banking, Wall Street, inequality, and the economy. For years, big Wall Street banks have laundered themselves through down-home community banks, with bored Democrats and a bored public helpless to lift the mask.
With just days before the floor debate begins, the bill has the support of 13 Democrats, enough to break a filibuster. That’s thanks to the community banks, who have a sterling reputation on Capitol Hill. Like auto dealerships, they have a strong local presence in every district. While the bigger banks brand stadiums, community bank names can be found on T-shirts worn by youth soccer teams. Tellers know the names of their customers because they went to high school with them. In an ideal world, they make safe but important loans to local families and businesses and provide a perfect contrast to Wall Street greed and recklessness. So when community banks and their lobbyists howled that Dodd-Frank’s thicket of regulations was harming their ability to compete with more deep-pocketed rivals and diverting too much money to compliance that could be used for lending, Congress paid attention. “Among the people that have pushed hardest for me to support the legislation are, believe it or not, credit unions and community banks,” said Sen. Tom Carper, D-Del., a co-sponsor.
Never mind that community banks are actually doing pretty well. In the third quarter of 2017, the Federal Deposit Insurance Corporation reported that 96 percent of the nation’s 5,294 community banks were profitable, up from just 70 percent in the depths of the crisis in 2009. And those profits are higher than ever, with greater loan growth than the big banks. Community bankers would argue that consolidation and bank failures have weeded out those who cannot compete, but failures have been nearly nonexistent and consolidation is in line with historical patterns. Indeed, all but the smallest community banks are actually growing in number and assets. In addition, nearly all of the most important Dodd-Frank rules are already tailored to exempt or reduce costs on smaller banks.
Regardless, progressive and moderate Democrats have spent years trying to relieve the alleged Dodd-Frank compliance burden on community banks. A series of smaller provisions passed virtually unanimously. But whenever Democrats suggested a broader overhaul, Republicans rejected it unless it included pieces for larger banks. In 2015, then-Banking Committee Chair Richard Shelby, R-Ala., produced a community bank bill that was characterized as a “sprawling wish list” for Wall Street.
That was by political design, argues Barney Frank. Democrats have wanted to address community bank concerns not just for policy reasons, but also to take a potent force off the Wall Street battlefield. For that same political reason, Republicans have resisted those efforts. Frank wrote:
While the law was and still is generally popular, the community banks, situated as they are in every member’s district, and enjoying a much more favorable reputation than their much bigger brother and sister institutions, generated the only criticism of financial reform that legitimately worried members, particularly of course those who had voted for it.
Had those of us who supported reform still controlled Congress, we could have adopted these two changes, thereby greatly strengthening the political potion of both the bill and those members particularly from marginal districts who had voted for it. But for precisely that reason, the zealous ideological enemies of regulation who controlled the House Committee on Financial Services were determined to allow no such alleviation of the pressure. To them, what we saw as flaws that could be fixed at no cost to our goals were weapons to be wielded against those goals.
When Crapo replaced Shelby as chair in 2017, Democratic ranking member Sherrod Brown, D-Ohio, tried to work with him, soliciting ideas from committee members to find a solution. But after months of negotiations, Brown walked away from the talks. “There was some agreement that we should help community banks,” Brown said in an interview. “But it starts with changing the rules for small banks and then you have to do it for the big guys.”
Instead of the ranking member’s departure ending the process, however, the very next day moderate Democrats on the Banking Committee stepped into his place. Led by Heitkamp and Tester, they negotiated directly with Crapo, and within a couple weeks, reached a breakthrough on S.2155: the “Economic Growth, Regulatory Relief and Consumer Protection Act” (pro-regulation groups have taken to calling it the “Bank Lobbyist Act.”) Within weeks, the bill swiftly passed the Banking Committee 16-7, with Republicans and a bloc of four Democrats — Heitkamp, Tester, Donnelly, and Warner — voting down every attempt to amend it.
Heitkamp, Tester, and Donnelly are all up for re-election in November, in states Trump carried by a wide margin. Democratic staffers believe they longed to show distance from the national party, whatever the topic. “They want to be able to say ‘bipartisan’ to constituents,” said one aide. “The ‘what’ doesn’t matter.”
Or, it does matter, but Republicans aren’t offering many options. Yet making bank deregulation that “what,” as the aide put it, didn’t appeal to another 2018 re-election hopeful from a Trump state: Sherrod Brown. “The financial services industry did better than anyone with the tax cuts, and they just want more,” he said. “I don’t hear an outcry, whether in Appalachia or downtown Toledo, saying be bipartisan and give lots of stuff to big banks.” Indeed, recent polling shows widespread support for tougher regulations on the banking sector.
That’s why the 13 members of the Democratic caucus supporting S.2155 — which includes Maine independent Angus King — reflexively claim they’re merely providing relief to the sainted community banks. “There is a small range of revisions to Dodd-Frank that have won bipartisan support that will address some of the challenges in terms of access to credit for community banks,” said Coons. A “fact versus fiction” memo distributed by the four Banking Committee Democratic supporters insists that S.2155 assists community banks, adds consumer protections, and does nothing of consequence to any other player in the financial system.
Title II of the bill does target banks with under $10 billion in total assets. These banks would be freed 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. For the smallest banks, examinations would be less frequent.
But some of these rules may advantage community banks at the expense of consumers. Section 101 lets community banks issue high-risk loans like adjustable rate mortgages without the disclosure and ability-to-pay rules in place across the industry, as long as they keep them in their portfolio of loans. The theory is that small banks with “skin in the game” won’t take imprudent risks. “I’ve got an S&L crisis that says otherwise,” wrote Georgetown Law professor and former CFPB adviser Adam Levitin in a blog post. He believes the provision will encourage community banks to load up on high-cost, toxic loans, setting them up to fail if economic conditions shift.
Plus, whether you get your mortgage from Wells Fargo or the local banker down the street, if no attention is paid to underwriting and you get stuck with a bad loan, you’re equally in trouble. Other changes to mortgage rules in S.2155, like not requiring appraisals in rural areas or eliminating escrow account requirements, all share a common thread. “You can tell they’re not technical fixes because they all push against consumers,” said Mike Konczal of the Roosevelt Institute.
Perhaps the worst of these gifts to smaller banks is Section 104, which could enable discriminatory lending. A recent Center for Investigative Reporting study showed that African-Americans still find it far more difficult to get a home loan than whites, even if they have greater income and wealth. Loans for people of color also often come with higher interest rates and fees.
But S.2155 would hinder regulators from suing lenders over such practices. Dodd-Frank increased data requirements under the Home Mortgage Disclosure Act, or HMDA, having lenders report credit scores, debt-to-income ratios, loan-to-value ratios, and other information. But Section 104 exempts banks and credit unions from reporting that data if they make fewer than 500 loans per year. This includes 85 percent of all banks and credit unions.
“HMDA data is a crucial tool to make sure every American has access to opportunity,” said Katie Porter, a California congressional candidate and mortgage industry expert. “Discrimination in lending has an ugly history in the U.S. This would make the data unreliable.” And the data are the building blocks of any lending discrimination case; you can’t enforce fair housing laws without the facts.
The office of Tester, the Montana Democratic senator, said that the bill “does nothing to change the protections under the HMDA that were in place before the financial crisis.” But discriminatory lending was rampant before the crisis; Wells Fargo brokers in Baltimore referred to black borrowers as “mud people” and the mortgages they gave those borrowers as “ghetto loans.” Dodd-Frank increased disclosure because lawmakers determined it necessary. Despite claims of “substantial costs” of compliance, banks already collect this data for their own files; they don’t want to share it because it would open them up to litigation. Adding critical gaps into the statistics would also make unusable the data needed to police all lending discrimination, not just for banks making fewer than 500 loans.
So in the name of reducing regulatory burdens on small banks, S.2155 would enable them to overcharge black and Latino people, or deny them mortgage financing. And one of the Democrats supporting the bill is Tim Kaine, the former vice presidential candidate who began his career as an attorney fighting racial discrimination in housing. The bill he’s championing now would facilitate it.
Delaware’s Carper, like Coons, co-sponsored the bill late, citing added consumer protections for winning over his support. Some of his concerns were alleviated, he told The Intercept, when he learned that Barney Frank himself was behind the bill. “One of the concerns I’ve heard is that somehow the legislation is going to tear apart Dodd-Frank and I’m told this is just hearsay, but I’m told that Barney Frank was quoted as saying that for the most part it leaves Dodd-Frank alone.”
Frank said that Carper was misinformed. “Of course it changes Dodd-Frank. What I said is that it doesn’t change 90 percent of Dodd-Frank,” Frank told The Intercept.
On Thursday, Frank took to the webpage of CNBC to elaborate. “If I were still a member of Congress, I would vote no on this package,” he wrote, citing the relaxing of anti-discrimination rules and the risk that deregulated stadium banks could cause to the financial system.
“While I share the view of many of the pro-reform Senate Democrats who have accepted this package that responding to the concerns of small and midsized banks has both substantive and political arguments in its favor, I believe that the price the Republican colleagues are demanding is too high.”
S.2155’s biggest giveaways go not to community lenders but to what a Senate aide dubbed stadium banks. “If you can get naming rights to a stadium, you’re not a community bank,” the aide said.
In fact, 18 stadiums around the world are named after one of the banks that get significant help from this bill. The benefits mostly come from Section 401, which changes the Dodd-Frank threshold for enhanced regulatory standards, administered by the Fed. Currently, any bank with over $50 billion is subject to such standards, which include extra capital and liquidity requirements, stress tests, and souped-up risk management. The bill raises that threshold to $100 billion immediately, and to $250 billion within 18 months.
That would relieve 25 of the 38 largest U.S. banks from enhanced regulations, including Citizens Bank (Philadelphia Phillies), Comerica (Detroit Tigers), M&T Bank (Baltimore Ravens), SunTrust (Atlanta Braves), KeyBank (Buffalo Sabres), BB&T (Wake Forest University), Regions Bank (AA baseball’s Birmingham Barons), and Zions Bank (Salt Lake City’s Real Monarchs of Major League Soccer). Stadium banks have been lobbying for years for this change, and they’re on the verge of getting it. And even Fed chair Jerome Powell, while supporting the bill, called Section 401 “the most significant piece” in the legislation.
While former head of financial regulation at the Fed Daniel Tarullo and Dodd-Frank author Barney Frank have supported moving the threshold to $100 billion, going up to $250 billion would include firms that historically have been problematic. “The last crisis proved that three banks in the $100 to $250 [billion] range were shown to be systemic, because regulators had to arrange a quick emergency bailout or sale,” said Arthur Wilmarth, law professor at George Washington University. National City was a $145-billion bank and a major subprime originator when it failed and was sold to PNC. The financing arm of General Motors, GMAC, had $210 billion in assets when it received $17.2 billion in bailout money and another $7.4 billion in guarantees after crumbling under the weight of bad loans. And Countrywide, once America’s biggest subprime lender, had $200 billion in assets when it was sold under duress to Bank of America. Going back further, if you adjusted Continental Illinois’ size for inflation when it received a federal bailout in 1984, it would fall in the $100 to $250 billion range.
“At the peak, Countrywide was originating one out of every five mortgages in the country,” said Warren. “And it’s smaller than some banks deregulated by this bill.” Warren added that the stadium banks deregulated in S.2155 received a total of $47 billion in bailout funds directly, and trillions more in loan guarantees and emergency Federal Reserve lending. “The bill says a $200 billion bank should be regulated the same way as a tiny community bank. That’s nuts, and extremely dangerous.”
Other financial reform figures closely involved with the creation of Dodd-Frank are speaking out against the new measure. Former Fed Chair Paul Volcker argued in a letter to the Banking Committee that lifting the threshold to $250 billion put the global financial system at significant risk. And even one-time Warren opponent Antonio Weiss, a senior official in the Obama Treasury Department, slammed the change in a letter as “ill-advised and potentially dangerous,” mirroring Warren’s language.
Wilmarth noted that stadium banks typically have the business models and ambitions of the big banks, and trouble with them often serves as an early warning signal. “It’s like a herd of elephants,” he said. “If some fall over the cliff, it’s likely to drag others with them. And the market figures that out. It assumes that if the big regionals are in trouble, that comes out earlier and it’s not hidden as well.”
In theory, the Federal Reserve could re-apply enhanced standards to banks between $100 to $250 billion after S.2155 goes into effect. In reality, Trump’s handpicked Federal Reserve Board, which has deregulatory aims of its own, would probably not do much. And the courts have created a chilling effect. When the Financial Stability Oversight Council tried to apply enhanced standards to non-bank insurer MetLife, as they can under Dodd-Frank, MetLife successfully blocked that designation, arguing that the FSOC didn’t apply sufficient cost-benefit analysis. Sarah Bloom Raskin, who served at the Fed from 2010 to 2014, called the idea that the Fed would proactively apply enhanced standards “legislative fool’s gold.”
Federal Reserve chair Jerome Powell on Thursday said he supported the increased threshold and that the bill “gives us the tools we need” to apply enhanced stands to banks under it. But some disagree. “I find it unlikely that this Fed or really any Fed would be able to muster the political initiative to apply those enhanced standards,” said Jeremy Kress, a former Fed attorney and now a professor at the University of Michigan. “Those rules would be very vulnerable to challenge, which disincentivizes the Fed from going there in the first place.”
Indeed, the Fed already had discretion to regulate systemically risky banks before the crisis; we saw how that turned out. “The purpose of the threshold was to regulate the Fed so they don’t take their eye off the ball,” said Marcus Stanley of Americans for Financial Reform, a critic of the legislation. “Democrats are encouraging the Fed, the Trump Fed, to take their eye off the ball.”
Raising the threshold for stadium banks will likely also affect the U.S. operations of globally systemic foreign banks, companies like Barclays (Brooklyn Nets), Bank of Montreal (Toronto FC of Major League Soccer), BBVA Compass (Houston Dynamo, MLS), Santander (minor-league baseball’s York Revolution), and Deutsche Bank (an equestrian stadium in Aachen, Germany). These foreign banks also took U.S. bailout funds in the crisis, and have giant rap sheets full of alleged misconduct like foreign exchange and interest rate manipulation, money laundering, tax evasion, transactions with sanctioned countries, mortgage fraud, and illegal repossessions from active-duty servicemembers, to say nothing of being, in Deutsche Bank’s case, Donald Trump’s personal banker.
After Dodd-Frank, the Fed created an intermediate holding company structure for foreign banks’ U.S. operations, so money couldn’t be repatriated to home countries in a crisis. The Fed subjected those over $50 billion in domestic assets to enhanced standards, to maintain “equality of competitive opportunity” with U.S. banks. If the threshold is raised for stadium banks, the equality provision would likely trigger the Fed to do the same for foreign banks, affecting every large firm in the U.S. except HSBC, which holds U.S. assets above $250 billion.
Brown, the Ohio Democratic senator, asked Treasury Secretary Steven Mnuchin in Senate testimony in January whether foreign banks should expect regulatory relief, and Mnuchin replied, “That is correct.” The recommendation to raise the threshold on foreign banks, in fact, is in a June Treasury Department report on financial regulation.
Supporters of the bill vociferously reject the implication. “Those views are a myth and certainly not the text of S.2155,” Tester said in a committee hearing on Thursday. The Democratic supporters’ “fact versus fiction” document states that nothing in S.2155 changes the intermediate holding company structure, “which subjects a foreign bank’s U.S. operations to requirements similar to those imposed on U.S. banks.” But that dodges the point: if the U.S. banks are deregulated, the foreign bank’s U.S. operations will enjoy the same treatment.
Similarly, Tester got Powell, the Fed chair, to say that S.2155 doesn’t require the Fed to weaken Dodd-Frank prudential standards. But the point is that foreign banks would cry foul if their U.S. operations under $250 billion in assets were held to unequal treatment relative to domestic banks. Litigation would likely ensue. Pressure would be imposed. And the Fed doesn’t have a good track record of standing up to that.
The Big Boys
Most of the 13 U.S. banks with more than $250 billion in assets also have stadium naming rights, and they weren’t left behind either. Citi (New York Mets), Bank of America (Carolina Panthers), Wells Fargo (Philadelphia 76ers), and JPMorgan Chase (Arizona Diamondbacks), among others, all can benefit from a host of smaller measures that cumulatively add up to a lot.
Some of the changes apply to just one word. Section 401 changes the frequency of company-run stress tests for big banks from semi-annual to “periodic.” There’s no real definition of periodic, but under the current regulatory regime it’s likely to be less than twice a year and could even be once every three years. The bill also reduces the number of scenarios that have to be run under the stress tests from three to two, making them less onerous and more susceptible to gaming. The stress tests are supposed to show how banks would survive under adversity; undermining those exams robs them of meaning.
Another word change could prove catastrophic. Currently the Federal Reserve can tailor enhanced rules on banks, based on size or amount of risk. Indeed, stadium banks are already treated differently from mega-banks, raising the question of why the $50 billion threshold needs to be raised. But S.2155 changes one word on this tailoring directive, from “may” to “shall.”
That means that the Fed would be required to assess all its rules, even ones not yet in place, to ensure they’re tailored to each specific bank. Critics see that as an invitation to litigation abuse anytime the Fed wants to act, forcing them into a lengthy cost-benefit analysis. “Let’s say you’re general counsel of Goldman, and the Fed wants to do something,” said a Democratic Senate aide. “If it says ‘shall,’ the general counsel can say I have a 40-page complaint that says you’re violating the statute without mandatory tailoring. So let’s fix the regulation. As a lawyer that’s how I’d use the new leverage.”
If the Fed’s hands were tied by cost-benefit analysis requirements, they could end up having less discretion to quickly react to financial risk than they did before the crisis, rolling back the rules even beyond Dodd-Frank.
Section 403 lets Citi and other big banks count municipal bonds as “highly liquid assets” that could be used toward the “liquidity coverage ratio,” a stockpile of assets that can be sold off in a crisis. Some have questioned whether muni bonds, which are thinly traded, could be sold for cash so quickly in an emergency. Mega-banks using muni bonds as liquid assets can load up on risk elsewhere on the balance sheet. Lobbyists have been working on this provision, initiating an astroturf campaign to get random cities to call Congress in support.
And then there’s Section 402, which Citi has been so aggressive in prying open to reduce its leverage requirement. Using debt instead of capital to fund activities gives banks a better shot at higher returns, but also increases risk of collapse, because capital is meant to absorb losses if the bank runs into trouble. Too much gambling without the capital to back it up helped generate the cascade of bank failures in 2007 and 2008 that eventually required hundreds of billions of dollars in government assistance. “Capital is what prevents bailouts, what gives market discipline,” said Sheila Bair, former chair of the FDIC.
Custodial banks covered by the provision would not have to count reserve funds deposited with central banks into their supplementary leverage ratio. The SLR isn’t onerous – just 5 percent for the largest banks, meaning that for every $100 they lend out, they only need $5 of capital on their balance sheet. After the change, banks could park $30 at the Federal Reserve and get away with 5 percent capital on the remaining $70, or $3.50. It sounds like a technical tweak. But the FDIC has estimated that the capital reduction for these banks would be as high as 30 percent. It only makes sense if you think custodial banks are wildly overcapitalized and impervious to failure.
The primary custodial banks Section 402 was originally intended to assist, State Street and Bank of New York Mellon, are giant, systemic firms that at the height of the financial crisis were borrowing $60 to $90 billion a day from the Federal Reserve. Adding Citi to that would only increase the risk factor.
Supporters argue that a House version of the bill, which defined custodial banks as those that “primarily” engage in custodial banking, got unanimous support in the House Financial Services Committee, including from every Democrat. The Congressional Budget Office estimated that the House bill would give JPMorgan Chase and Citi a “50 percent chance” of reducing their leverage. Citi is clearly trying to up that to 100 percent.
While Citi does engage in some custodial services, it’s a minor part of its overall business. “I think any smart lawyer can argue that all banks are custodians in the sense that they hold our deposits,” Bair said. If regulators agreed, it would allow the biggest banks to massively lever up. And the regulators who will write the rules for the Trump administration are largely pulled from the biggest Wall Street banks, and would be amenable to their persuasion.
“Before the crisis we did exactly what we’re doing now,” Bair added. “We reduced capital requirements, and levels dropped significantly. In good economic times, you should have the big banks build capital buffers, not reduce them.”
Separately, the Federal Reserve is interested in weakening other capital requirements, a reversal from the bipartisan interest in making sure banks could pay for their own mistakes in a crisis. So there’s a cumulative effect here that, if successful, would ramp up debt-fueled risk. “Those who have championed banks taking deposits to make loans and not restoring the Wall Street casino are opposed to this,” said Sen. Jeff Merkley, D-Ore.
Citi’s aggression is darkly reminiscent of a 2014 year-end spending bill, which included a repeal of a critical section of the Dodd-Frank financial reform regarding derivatives. Citi lobbyists actually wrote the repeal language. According to public disclosures, Citi has spent $80,000 in the fourth quarter of last year hiring two lobbying firms to represent it on a number of issues, including S.2155.
Tester, one of S.2155’s biggest boosters, downplayed the idea that there’s anything wrong with exempting central bank deposits from the leverage ratio. “The provision has the support of former Obama Federal Reserve Governor Dan Tarullo, a chief architect of the post crisis rules,” his office wrote in response to questions. But in fact, in his final speech at the Fed last April, Tarullo said this:
Some central bankers around the world have been arguing to exclude central bank reserves from the leverage ratio denominator, on the ground that they are “safe”… But this would defeat the whole purpose of a leverage ratio, which is to place a cap on total leverage, no matter what the assets on the other side of the balance sheet may be.
He added that there would be a “slippery slope risk” of regulators excluding other assets, like sovereign debt, from the leverage calculation. Famously, during the crisis, regulators deemed mortgage-backed securities risk-free for capital requirements, encouraging banks to load up on them.
Republican FDIC Vice Chair Thomas Hoenig, perhaps the most insistent defender of the leverage rules, savaged the potential degradation of the rules in a letter to the Banking Committee in January. “For the sake of the economy their integrity should not be compromised,” he wrote.
Financial services lobbyists working on the bill indicated that other banks, who already secured their benefit in S.2155, have looked nervously at Citi’s aggressive effort, fearing it could topple the whole bill. “If you are doing really well on this bill, like SunTrust or whatever, you don’t want any last-minute stuff,” one lobbyist said. “You’re happy with what’s in there. You don’t want to take chances.”
The Push Is On
The lobbying campaign to build support for the bill extends from the hallways of Congress to the voters in the midterm elections. Bankers around the country are being flown to Washington, D.C., told to contact key staff members, and to write opinion columns in support of the Crapo bill.
The “Push Is On For Senate Reg Relief Bill,” announced the Independent Bankers Association of New York State in a February email to members with instructions on how to pressure Senate Minority Leader Chuck Schumer. The bill offers a script to read and a sample letter. Bankers should tell Schumer’s staff that the bill will “help my bank’s customers, Main Street small businesses, and local communities across the state.”
The Independent Community Bankers of America, a lobby group for the industry, is sponsoring a number of radio advertisements to call on voters to contact lawmakers and sign onto the bill. The Crapo bill, one ad claims, will “give little guys like you and me” help to “fuel our dreams” by paving the way for “economic prosperity.”
On Monday, ICBA lobbyist Paul Merski will appear at the Heritage Foundation, the conservative think tank with wide sway among Republicans, to tout the bill. The Mortgage Bankers Association, which is hosting Crapo at its annual conference in April, is similarly calling on members to mount a grassroots lobbying drive to support the legislation.
Disclosures show a wide range of lobbyists have been retained to press for the measure. Citigroup, Regions Financial Corp., Bank of New York Mellon, Citizens Financial Group, and Huntington Bancshares Inc., are among many financial firms with Capitol Hill lobbyists working to influence lawmakers. Goldman Sachs lobbyist Steve Elmendorf, known for his prolific fundraising for Democratic candidates, is also registered to lobby on the bill. Elmendorf has cut donations to the sponsors of the bill, including Kaine, Tester, and Heitkamp.
Is part of the push to deregulate the banks part of a campaign fundraising strategy? According to a MapLight analysis of OpenSecrets data, sponsors of the Crapo bill received on average about $258,000 in campaign donations from the banking sector, compared to about $184,000 for non-sponsors. Heitkamp, Donnelly, and Tester are the three largest recipients of contributions from commercial banks in the 2018 cycle.
According to the Financial Times, some of the biggest benefactors to these Democrats are banks just below the $50 billion asset threshold who would love to see that threshold rise, averting stringent regulation. In fact, it’s likely that those smaller banks will immediately gobble up rivals if the bill passes, without fear of enhanced standards. In other words, S.2155 is a vehicle for bank consolidation.
In the run-up to his previous election campaign, Tester, in a move perceived by many as a fundraising gambit, sponsored a bill to reduce so-called swipe-fees from credit card companies. Banks and financial firms that stood to benefit from the fee rollback, in turn, donated heavily to Tester’s campaign coffer — just as they are again doing for the sponsors of the Crapo bill up for reelection this year.
“The sad fact is,” Warren said, “that a lot of things that are bipartisan get that way because there’s a lot of money behind the effort.”
The Promontory Pickup and the Buffett Bounty
This being a bank bill, Warren Buffett had to get something, of course, along with his fellow financiers. For example, Section 204 allows hedge funds to create investment vehicles that share a name with an affiliated bank. It’s a marketing effort to give the funds credibility; the biggest advocate for the change was BlackRock, the largest asset manager in the world. The banks are already naming stadiums — why not name hedge funds too?
Section 202 helps out Promontory, a deeply connected financial services firm formed by Eugene Ludwig, who ran the Office of the Comptroller of the Currency under Bill Clinton. The firm is crawling with former regulators who have passed through the revolving door to work for the banking industry; Ludwig himself makes $30 million a year. Promontory started a lucrative side business in broker deposits, an industry designed to creatively end-run an FDIC rule.
The FDIC insures deposits up to $250,000; any more held in any one institution can be lost if the bank fails. Wealthy individuals and businesses get around this by spreading their money around, with no more than $250,000 at any one bank. And for a fee, Promontory’s Certificate of Deposit Account Registry Service, or CDARS, will grant you an insured account for your riches. The money will actually be deposited at different banks, but the customer only has to deal with a single account. There are other players in this industry, but Promontory is by far the largest.
It’s technically legal, and supporters believe the extra deposits boost smaller banks to increase lending. But in reality, broker deposits are kind of dangerous for banks, a form of “hot money” that can backfire amid sudden shifts. Sherrill Shaffer, a professor at the University of Wyoming, has studied this phenomenon, finding that large depositors not directly connected to the bank because of the broker deposits exert less discipline on the bank’s risk-taking. “The studies have generally found that on average, banks that use more broker deposits are in fact riskier and also more prone to fail,” Shaffer said.
In response to this, the FDIC mandated that banks taking broker deposits needed to limit their take and hold more capital against them. But Section 202 incorporates a bill from Warner, the Virginia Democrat, that essentially strips capital requirements and limitations on broker deposits. Promontory’s deep well of lobbyists, which includes the Duberstein Group and former Democratic banking staffer Dwight Fettig, muscled the provision into the bill. “It is entirely inappropriate to grant financial insiders a statutory exemption from regulatory risk controls in order to circumvent limits on insured deposits,” wrote Americans for Financial Reform in a letter to Congress.
A similar provision that’s completely disconnected from any community bank relief, but very connected to big money, concerns the manufactured home industry. Trailer park buyers are typically low-income and have few affordable options for shelter, and sellers exploit that. A series of investigations in 2015 found that Clayton Homes and Vanderbilt Mortgage, the nation’s largest mobile-home empire and its companion lender, targeted minority borrowers with high-pressure sales tactics, issuing loans swollen with hidden fees. When the loans failed, Clayton repossessed and resold the homes, earning more fees each time.
Section 107 of the bill could facilitate such practices. It would allow manufactured home sellers to steer borrowers to the specific lending product of their choice. It would also allow the home seller to get indirect compensation from financers for successfully steering borrowers their way. Since some sellers own financing arms, the potential to push borrowers into bad loans by deregulating the market is obvious. “The industry has been waiting for this for years and it seems closer,” said Doug Ryan, director of affordable homeownership at Prosperity Now, a consumer rights organization.
The biggest beneficiary would be the owner of Clayton Homes and Vanderbilt Mortgage — Warren Buffett, through his conglomerate Berkshire Hathaway. As Buffett noted in his recent investor letter, Clayton controls 49 percent of the manufactured home market; it’s one of the highest-earning non-insurance businesses in Berkshire’s portfolio. In 2016, Clayton Homes foreclosed on one in every 40 properties, over three times the national average. The Manufactured Housing Institute, the industry’s trade group, is one of 115 financial interests that have lobbied on S.2155; it’s largely a cat’s paw for Buffett’s manufactured home companies. Said Ryan: “When one company is so big, the trade group reflects them.”
Crumbs for Consumers
Bill supporters point to what they consider robust consumer protections that safeguard against any predatory effects of deregulation. They include prohibitions on credit reporting agencies including medical debt in reports on veterans; added whistleblower protections for reporting elder abuse; authorization for the Treasury Department to apply the Hardest Hit Fund, used for foreclosure mitigation, to lead remediation in homes; and restoration of a tenant protection law that prevents mortgage companies from immediately kicking renters out of foreclosed homes.
These protections, said Sen. Richard Shelby, R-Ala., were the cost of getting to 60 votes. “If we get a number of Democrats to vote with us, we generally move legislation. But there’s a price to do that. Generally we give something away,” he said.
The problem, Senate staffers said, is that there’s no private right of action for any of these protections. Since Congress enabled arbitration clauses to bar the ability for financial consumers to band together in class action lawsuits, that leaves government enforcement. And under Trump, such enforcement doesn’t exist. In fact, under acting Director Mick Mulvaney, the CFPB has taken up no new enforcement actions at all.
The centerpiece consumer protection intends to respond to the data breach at credit reporting agency Equifax. Warren and bill supporter Warner introduced legislation to impose mandatory financial penalties for data breaches, but despite Warner’s leadership on S.2155, that didn’t make it into the bill. Instead, Section 301 would give consumers fraud alerts for a year and allow for free security freezes and unfreezes. It would also give the option to consumers to opt out of having their personal information sold to marketers. It also wouldn’t refund credit freezes consumers paid for since the breach, as another Warren bill would do.
Coons, a Democrat from Delaware, highlighted the consumer angle, saying that his support was won over with protections such as “a guarantee that all active duty service members — whether regular military, or guard or reserve — are provided with a whole range of credit monitoring, so a free credit report, credit upgrade… It’s not just you call and you need to get one report, it’s also rehab, it’s also updates. And it’s fully enforceable.”
Others disagreed. “The consumer protections are so non-controversial that many could pass unanimously,” said a Senate aide. “It’s not anywhere close to a balanced package.”
The Final Fight
Mitch McConnell, the Senate majority leader, filed cloture Thursday to start debate on S.2155 next week. With enough Democratic support to clear the Senate, passage of this deregulation — absent a last-minute outcry — is a foregone conclusion, a familiar recurrence of the pendulum shift on financial regulation, which tightens after a crisis and then ebbs when memories fade. “Think about how we go through this cycle in America,” said Merkley, the Oregon Democrat. “We deregulate the banks, they do crazy risky investments, the whole thing crashes and hurts Americans. Why can’t we learn the lesson that it makes no sense to say drive 120 mph when they are going to crash?”
The one potential roadblock that could potentially keep S.2155 from passage may be the right-wing chair of the House Financial Services Committee, Jeb Hensarling, R-Texas. The House has passed dozens of financial deregulation bills this year, none of which have gotten Trump’s signature because of Senate opposition. “He’s going to want a pound of flesh to push this through the House,” said one Democratic aide.
So far, Senate Democrats supporting the bill have said they won’t allow anything controversial to be crammed into their bipartisan compromise. The question is whether they’ll ultimately know what made it in. Hensarling and Crapo are “pre-conferencing” the bill – inserting the items Hensarling wants into a manager’s amendment that will get a vote on the Senate floor. The House would then likely pass whatever the Senate sends over. The timing is unclear; Senate Republicans could move to vote on the package just hours after the manager’s amendment is finalized. And with regulatory language, monumental changes that come in the form of one-word changes can easily be overlooked.
For Hensarling’s part, some wonder if he’ll acquiesce to the Senate, given his doctrinaire stance on gutting Dodd-Frank as much as possible. “He’s going to get a bunch of bills he can crow about, but not bills that are terribly important,” said a financial services lobbyist. “The binary question for him is, do I take half a loaf?”
Ultimately, the lobbyist thought Hensarling, who’s retiring at the end of the year, would take what he could get. “The Senate has all the leverage, and the 13 Democrats know that,” he said. “They’re going to continue to stick together.”
Meanwhile, outside groups aren’t giving up the fight. Organizations like Rootstrikers and Credo are calling the 13 Senate Democratic supporters the “bailout caucus,” bombarding them with contacts to switch their support. They’ve delivered 450,000 “actions” to Congress — petition signatures, phone calls, and emails. Brown’s office has released letters showing the opposition of numerous ex-regulators, including former Fed chair Paul Volcker, to aspects of the bill. “Certain provisions of S. 2155 will turn the clock back and return us to the days when our financial system engendered widespread mistrust, structural weakness and systemic crisis,” wrote former Fed governor and Obama Treasury official Sarah Bloom Raskin.
Indivisible, the group born out of resistance to Trump, has also highlighted the bill and pushed members to call Senate offices. “We think meaningful regulation of Wall Street is a core progressive value,” said Chad Bolt, senior policy manager with Indivisible. “Most [supporters] are saying this is about helping the community banks in my state. I would respond, then pass a bill that’s limited to helping community banks!”
However, the 13 senators have not really wavered. “I think there are plenty of places where regulations are appropriate, and I also think we need to deploy those regulations using some common sense,” said Carper, the Delaware Democratic senator.
The whole process reveals the totemic power of bipartisanship, which can sway lawmakers into supporting things that could cut against their political interests. There is no real constituency for bank deregulation outside of bank executive boardrooms and K Street. Trump voters aren’t intensely concerned with giving Barclays or SunTrust less supervision, or giving Citigroup fewer leverage requirements. In fact they’ll likely punish those politicians who do. But “working together to solve the nation’s problems” sounds so good that it doesn’t even matter what outcomes result.
“People need to understand that, regardless of party, this is a vote against the safety and health of the economy and the economic well-being of families,” said congressional candidate Katie Porter. “This bill should have zero votes.”
Two weeks from now is the 10th anniversary of the Bear Stearns collapse; the Lehman Brothers anniversary comes six months later.
“There’s a collective amnesia that what happened 10 years ago can’t happen again,” said Brown.
Kate Aronoff, Aída Chávez, Lee Fang, and Ryan Grim contributed reporting for this story.