Three years after Congress passed sweeping reforms of Wall Street, the industry has successfully widened a variety of cracks in the Dodd-Frank law. But credit for the industry’s success at watering down the landmark legislation doesn’t just go to well-heeled lobbyists – regulators and lawmakers are helping.
The New York Times’s Dealbook blog reports this morning on the most predictable sort of industry subversion of the law’s intent: Citigroup essentially wrote a bill that would keep taxpayers on the hook for banks’ bets on the complex, high-stakes financial products known as derivatives. The derivatives market was central to the financial collapse. Added together, the total on-paper value of the derivatives bets outstanding in 2010 was roughly 23 times greater than the entire world’s economic output. Dodd-Frank included a requirement that financial institutions take their derivatives gambling to separate institutions not backed by federal deposit insurance.
But the House Financial Services Committee passed a bill undoing that reform in early May. “Citigroup’s recommendations were reflected in more than 70 lines of the House committee’s 85-line bill,” Dealbook reports, and “two crucial paragraphs” were taken wholesale from the industry. While the change is supported by such heavyweights as Federal Reserve Chairman Ben Bernanke and Dodd-Frank namesake Barney Frank, Americans for Financial Reform director Marcus Stanley notes that it “restores the public subsidy to exotic Wall Street activities.”
While bank lobbyists exist to advocate for bank interests, legislators and financial regulators work on the taxpayer’s behalf. But with battles over Dodd-Frank ongoing, the House Financial Services Committee is a plum assignment for legislators because of the industry cash the seats invite. In the case of the Citigroup-penned derivatives bill, supporters “received twice as much in contributions from financial institutions compared with those who opposed” the proposal, Dealbook notes.
Elected officials aren’t the only public servants using positions critical to Dodd-Frank’s survival to weaken its protections for taxpayers. And as financial reporter David Dayen wrote in The American Prospect on Tuesday, some regulators are instead working to protect Wall Street. Dayen’s prime example is a Commodity Futures Trading Commission member named Mark Wetjen, who forced the CFTC into a compromise that undermines Dodd-Frank’s effort to bring transparency to the derivatives market. Instead of big reform, like forcing banks to make derivatives trades publicly or requiring actual competition in that market, Wetjen ensured the absolute minimum change to how derivatives get originated. As a result, the law that was supposed to dramatically reshape the derivatives market and mitigate its risks to the real economy will instead impose only “the smallest possible increase” in competition and transparency, Dayen noted.
Wetjen, who is rumored to be the next head of the CFTC, has been hard at work watering down other Dodd-Frank reforms as well:
He asked for several bank-friendly changes to planned derivatives rules, delayed rules by refusing to commit to voting for them, advocated giving Wall Street additional time to comply, publicly announced concerns with [Chairman Gary] Gensler’s proposed regulations in a speech to the main trade lobby for the industry (the International Swaps and Derivatives Association), and generally took Wall Street’s side, both in public and behind the scenes. In February, word leaked that Wetjen wanted to weaken the RFQ proposal. He has become the key swing vote on the panel, threatening to side with Republicans and vote down rules unless his changes are implemented.
Between lobbying dollars and industry-friendly regulators, the financial industry is succeeding at undermining the government’s response to the biggest economic collapse since the Great Depression.