No one is taking credit for tucking a Wall Street deregulation measure into the spending deal that passed the House late Thursday night. But the lobbying process and legislative railroading echoes a move from December 2000 that helped precipitate the financial crisis of 2008.
JP Morgan CEO Jamie Dimon made personal phone calls to reluctant members of Congress on Thursday to help ensure that the House passed a massive spending measure that many progressives opposed because it contains an unrelated clause that reverses a key piece of the Wall Street reform packages passed in 2010.
The measure was hand-written by lobbyists from Citigroup — 70 of its 85 lines reflect the bank’s preferences, and the two crucial paragraphs were pulled verbatim from the lobbyists’ draft — and had even passed the House as a standalone law. The financial industry as a whole spent nearly $2 million a day on influencing Congress during the most recent election cycle.
The decision to move deregulatory measures through the spending process rankles former congressman Barney Frank (D-MA), even though he largely supported the substance of the Citigroup-drafted measure. He blasted the “cromnibus” deal as “a terrible violation of the procedure that should be followed on this complex and important subject, and a frightening precedent that provides a road map for further attacks on our protection against financial instability.” Frank pointed out that “it was a similar unrelated rider put without debate into a larger bill that played a major role in allowing irresponsible, unregulated derivative transactions to contribute to the crisis.”
All of this kerfuffle over making policy change through unrelated spending bills dates back to June, when Politico reports financial industry lobbyists decided to ditch the normal policymaking process and shift their focus to the appropriations process. The idea was to gain additional leverage for a controversial deregulatory measure by attaching it to much bigger legislation that funds basic government services, in hopes of quieting opponents. Republicans worked with the lobbyists, according to Politico, beginning with a June hearing of the Appropriations Committee.
At that hearing, Rep. Kevin Yoder (R-KS) proposed the amendment that would later find its way into the “cromnibus.” When one Democrat objected, asking why a body that has always decried making policy in spending bills would adopt that approach on behalf of Wall Street’s interests, Chairman Hal Rodgers (R-KS) joked, “Just because.” Then Rep. Marcy Kaptur (D-OH) pointed out that tucking controversial deregulatory measures into spending bills played a big role in bringing about the financial crisis that had precipitated the reforms Yoder was seeking to undercut.
“I think what the gentleman is trying to do is really dangerous,” Kaptur said, “and it doesn’t belong in this committee.”
Yoder’s amendment was approved without a formal, recorded vote. The success appears to have emboldened lobbyists, who redoubled their efforts to wedge the measure into spending bills beginning in September according to Politico’s sources. Now the Citigroup-written, Yoder-deployed measure is days away from becoming law.
Both Frank’s statement this week and Kaptur’s objections in June refer back to a crucial and shadowy episode from December 2000. An omnibus spending bill passed after extensive horse-trading negotiations that played out deep in the shadows of the Bush-Gore vote recount in Florida. Then, as now, a controversial piece of financial deregulation got slipped into a gigantic must-pass spending measure. The Commodity Futures Modernization Act, which prevented regulators from overseeing the risky derivatives transactions that would later turn the subprime mortgage bubble into a world-swallowing financial sinkhole, was tucked into a spending bill courtesy of then-Sen. Phil Gramm (R-TX).
Gramm told the New York Times in 2008 that he did not personally insert the language that exempted credit default swaps from regulation, and has said elsewhere that he doesn’t believe the swaps were even all that big a deal. But emails from the time show that Enron executives were lobbying Gramm heavily over the derivatives rules, and that he and his staff were crucial to crafting the rules that exempted swaps from regulation. A Sunlight Foundation case study of the process that produced the derivatives deregulation describes Gramm as the key character, and quotes a hedge fund trade publication’s news story from the time: “Congressional aides said Sen. Gramm did succeed in getting additional language protecting the legal certainty of swap, especially those traded by banks, which are the main users of the products.”
Swaps didn’t cause the crisis of 2008. But they were an essential piece of the rationale that ratings companies used to justify their AAA ratings for investments that soon proved worthless. With tens of trillions of dollars’ worth of swaps on the books of various federally-insured financial companies, the products made the financial collapse much larger than it might have been and put taxpayers on the hook. That’s why Congress sought to drive the products out of the taxpayer-backed portion of the financial industry in the Dodd-Frank package in 2010.
Now, less then five years later, the law designed to reverse Gramm’s mistake and help to contain future financial calamities has been gutted before the Securities Exchange Commission even finished implementing it. Voters may never find out who exactly is responsible for inserting the swaps rule revisions into a bill to fund the government. But considering how quickly the $6 billion “London Whale” swaps fiasco spun out of control for JP Morgan in 2012, it seems likely that the public will eventually learn the full cost of this most recent exploitation of the appropriations process to tweak the rules in Wall Street’s favor.
It won’t take another 14 years to see this kind of back-handed approach to undermining public oversight of corporate activity, either. One senior GOP Senate aide told The Hill earlier this week that forcing Democrats to help pass the cromnibus “shows that conservatives can use must-pass legislation to repeal the regulatory state.”