Today, the Senate will begin to vote on amendments to Sen. Chris Dodd’s (D-CT) financial regulatory reform bill. According to a piece in the Washington Post, many (conveniently unnamed) lobbyists for the financial services industry are dismayed by the strength of the legislation. The lobbyists used phrases such as “draconian,” “crazy,” and “insanely unproductive” to describe the bill.
In anticipation of the amendment debate, during which many attempts will surely be made to blow holes in the legislation by lawmakers sympathetic to the banks’ concerns, White House Communications Director Dan Pfeiffer laid out the 10 most wanted lobbyist loopholes. There are some obvious ones on the list — like weakening the bill’s consumer protection provisions — but also some that are garnering fewer headlines.
For instance, number nine on the list is “Letting Firms Make Loans Without Skin in the Game.” And lo and behold, according to Congressional Quarterly, banks are approaching Sen. Bob Corker (R-TN) and other lawmakers to try and talk them into advocating this change:
Lenders are pressing Tennessee Republican Bob Corker and other lawmakers to file an amendment that would strike a provision in the current legislation requiring banks to hold on to at least 5 percent of a mortgage before slicing the rest of the loan into pieces and selling it into the securitization markets.
This provision — known as risk-retention — is an important part of the bill, and addresses a key problem that contributed to the country’s economic meltdown, which was the ability for subprime lenders to securitize and sell off an entire loan, divorcing themselves from the risk of mortgage default.
As the Center for Public Integrity has pointed out, during the subprime bubble “lenders were selling their loans to Wall Street, so they wouldn’t be left holding the deed in the event of a foreclosure.” This fueled a dramatic decline in lending standards. Dodd’s bill would require that lenders retain 5 percent of every loan on their books so that they are not completely separated from default risk.
The Wall Street Journal yesterday provided a good example of the damage this sort of securitization can cause, as one bad bond ends up infecting all sorts of assets:
In one case, a $38 million subprime-mortgage bond created in June 2006 ended up in more than 30 debt pools and ultimately caused roughly $280 million in losses to investors by the time the bond’s principal was wiped out in 2008.
“If I lend you money and I expect to be paid back, I’m going to be more careful than if I lend you money and you’re going to pay back somebody else. And securitization has weakened that borrower/lender relationship and the discipline,” explained Rep. Barney Frank (D-MA), who has pushed for 10 percent risk-retention. If Corker does indeed propose an amendment striking risk-retention from the bill, the Senate should be sure to vote it down.
Update:
Corker, joined by Sens. Mike Enzi (R-WY) and Kay Bailey Hutchison (R-TX), has proposed an amendment striking the risk-retention portion of the legislation.