Dem defectors help Senate Banking Committee strike deal to free banks from post-crisis oversight

The rule being gutted is barely seven years old. Family wealth still hasn't recovered from the crisis that prompted it.

Sen. Joe Manchin (D-WV), right, joined seven other Democrats in striking a deal with Banking Committee Chairman Mike Crapo (R-ID), left, to weaken financial regulation. CREDIT: AP Photo/J. Scott Applewhite
Sen. Joe Manchin (D-WV), right, joined seven other Democrats in striking a deal with Banking Committee Chairman Mike Crapo (R-ID), left, to weaken financial regulation. CREDIT: AP Photo/J. Scott Applewhite

Less than a decade after Wall Street gambling destroyed the global economy and set working families back a generation or more, a bipartisan group of wealthy senators is now ready to let dozens of “too big to fail” banks avoid one of the cornerstone regulations put in place by Congress in response to the crisis.

Banking companies worth up to a quarter-trillion dollars would escape the most stringent new systemic-risk regulations from the 2010 Wall Street regulation bill under a deal struck by Senate Banking Committee members late Monday. That’s a quintupling of the asset limit put into the Dodd-Frank legislation that Republicans and some likeminded corporate Democrats have been aiming to weaken ever since it was passed.

Currently, any bank that holds $50 billion or more in assets must prove to Federal Reserve staffers that it has a safe and effective plan for unwinding its assets should the company fail. These so-called “living wills” have frustrated bankers. Monday night’s bargain between Chairman Mike Crapo, Sen. Angus King (I-ME), and eight Democrats on the committee would free 26 of the 38 banks currently subject to the Fed’s extra oversight.

For years, banking lobbyists have wanted looser rules for “systemically important financial institutions,” or SIFIs in Dodd-Frank parlance. They have argued the law set too loose a threshold definition of banks that could be large enough to bring down the entire economy should they fail, insisting the error was throttling the flow of consumer credit.

But the real winners of deregulation here will not be small business borrowers or would-be homeowners, as the credit-choking argument implies, but rather bank shareholders. “Analysts said it isn’t clear that lending would actually increase,” the Wall Street Journal notes. “But banks that had been avoiding mergers…could be more inclined to deal-making, said Brian Klock, an analyst at Keefe, Bruyette & Woods.”

Whether or not the banks that benefit from Crapo’s deal with committee Democrats ultimately seek mergers, their shareholders will have an easier time cashing out dividends. The new definition of a SIFI in the deal would allow more than two-dozen of the largest banking firms to serve up dividend checks without having to undergo additional regulatory oversight.

Sen. Sherrod Brown (D-OH), a staunch progressive on Wall Street policy and Crapo’s main negotiating partner on Dodd-Frank questions since Republicans retook the Senate in 2014, rejected the agreement Crapo reached without him. Brown suggested his resistance to Crapo’s deal on the asset limit derived as much from a desire to see worker-friendly policies attached to the bank giveaway rather than to any particular objection to changing the definition of a “systemically important financial institution” (SIFI) under Dodd-Frank rules.

“I understand my colleagues’ interest in agreeing to this legislation, but disagree on the wisdom of rolling back so many of Dodd-Frank’s protections with almost no gains for working families,” Brown said in a statement. “Banks made record profits last year and it looks like executives will get bigger bonuses this year.  Hourly wages have stagnated for 40 years, and too many Americans are still feeling the impact of the 2008 financial crisis. Who needs help the most?”

The “almost” in Brown’s statement is something of a tell. The giveaway to bank shareholders is the cornerstone of Crapo’s deal, but it does also include a smattering of small-ball tweaks designed to make it easier for truly small financial institutions to make home loans. Tighter mortgage rules would no longer apply to a lender with less than $10 billion on the books who doesn’t re-sell its home loans into securities. Aggressive, sometimes fraudulent activity in that secondary market for securitized mortgages turned Wall Street into a casino in the years before the crash.

Only the 12 richest banks in the country would continue to be subject to stiffer mandatory oversight under Crapo’s bill. Some of the big winners from the banking industry would be American Express with its $161 billion in holdings, Regions Financial with about $125 billion on the books, and even Credit Suisse, the massive $225 billion banking firm that has repeatedly settled criminal and civil cases over its business practices in recent years.

State Street, among the largest asset management firms in the world with $236.8 billion in banking assets and trillions more in investments, also gets an escape hatch from the Dodd-Frank bill’s sternest tool for preventing a repeat of the 2008 crisis.

Even among the relatively smaller fish in Crapo’s escape pod, there are signs of danger for the real economy. Citizens Financial Group, BB&T, SunTrust Banks, and Zions Bancorp have each failed “stress tests” from the Fed in recent years, the Journal noted. Zions would no longer have to take the tests at all under the new legislation. The others could still face the tests when the Fed deems them necessary, as banks with between $100 billion and $250 billion in assets would have some strings attached to their removal from the SIFIs list under the deal.

With eight Democrats and King already signed onto the package at the committee stage, the proposal is almost sure to pass the full Senate.

The Dem defectors come from the centrist cluster of the party. Sens. Joe Donnelly (D-IN), Heidi Heitkamp (D-ND), Tim Kaine (D-VA), Joe Manchin (D-WV), Claire McCaskill (D-MO), Gary Peters (D-MI), Jon Tester (D-MT), and Mark Warner (D-VA) all signed onto the bill after Brown’s talks with Crapo broke down.

The deregulation of banking almost always precedes new abuses by the industry, as waves of back and forth on regulatory policy dating back to the 1980s illustrate. But even where de-regulators can claim to have gotten it right, because their preferred changes didn’t usher in new calamity, the root effect of deregulation is always to help the rich get richer.

Bankers make money off of market volatility while workers’ economic security relies on stability. Anything that helps bankers play by looser rules inherently drives economic activity away from the real economy where people trade their time for a wage, and toward the speculative bubbles and prop bets that animate the financial sector.

While the $50 billion threshold for SIFIs in Dodd-Frank has always had its wonky detractors, its primary value was as a simple, bright line between a set of banking business activities that is probably safe and another that could destroy families and communities if something goes wrong. Ditching that bright line for a toggle switch that banking executives can more easily game to their own advantage will help exacerbate overall wealth inequality.

And it’s not like bankers needed a permission slip to try to work around the spirit of the post-crisis regulatory crackdown. By the winter of 2015, they were already looking to rebrand and revive one of the most dangerous types of high-stakes economic wagering that was at the heart of the last meltdown.