As Congress nears the final hour for negotiations to keep the federal government open, leading Republicans are insisting that any agreement include a provision that could put taxpayers on the hook for risky bets taken by our largest banks. This battle demonstrates the determination of Wall Street’s allies in Congress to use any leverage possible to gut financial reform.
At issue is whether taxpayer-guaranteed banks will be able to bet on swaps, financial instruments designed to “swap” risk from one party to another. When a company buys a swap on a particular investment, for example, they buy the assurance that if their investment goes sour, they’ll get recouped for some of their losses. Swaps are especially risky when they are concentrated in a small number of financial institutions, and today a significant majority of swaps are held by our four largest banks, including some of their taxpayer-supported segments. Risky and concentrated bets in swaps were central to the financial crisis, leading to insurance giant AIG’s bailout by U.S. taxpayers.
The Dodd-Frank reforms enacted in response to the crisis required banks to “push out” some types of swaps to non-taxpayer guaranteed affiliates. Banks already obtained key loopholes in the final Dodd-Frank bill, but Congress is now trying to exempt nearly all swaps from this requirement, pushing language drafted by a Citigroup lobbyist that would enable the largest banks to continue to profit from taxpayer support of their trades. Key Democrats have insisted this provision be dropped from any government funding package, even though many members of both parties have previously supported enlarging this loophole. The White House has signaled its concern with the rider, but has not said it will veto a bill that includes it.
The plan to tie financial de-regulation to the funding bill is part of a strategy by Wall Street’s allies in Congress to use any leverage necessary to weaken oversight of our financial institutions. As one senior GOP aide explained, “The regulatory reforms in the cromnibus [funding bill] are the first cracks in the Dodd-Frank armor…. If liberal Democrats vote for this package it shows that conservatives can use must pass legislation to repeal the regulatory state.”
This strategy is on display elsewhere in Congress this week. Rep. Jeb Hensarling (R-TX), chairman of the House Committee that has oversight over our financial system, is insisting that any extension of Terrorism Risk Insurance include an unrelated provision that will weaken separate Dodd-Frank reforms intended to make swaps trades less risky.
These two battles only foreshadow the efforts to weaken financial reform we will see once control of the Senate shifts in January, giving Wall Street’s allies even more power on the Hill. The House has repeatedly voted to weaken key components of financial reform, and new leadership in the Senate has made clear its intention to attack financial reform. Congress is especially enthusiastic to undermine the Consumer Financial Protection Bureau, the agency charged with protecting consumers from financial abuses. Members of Congress from both parties are also determined to gut mortgage protections that protect borrowers from inflated fees and discourage lenders from making the risky loans that fueled our financial crisis.
That Congress is doing the bidding of Wall Street is hardly surprising: the industry spends $1.8 million per day on lobbying and campaign contributions, and members of Congress desperate for campaign cash are all too eager to cozy up with Wall Street lobbyists. But whether we are surprised or not, we can be sure that this week’s battles are only the beginning of the campaign to gut financial reform.