Steven Mufson and Tom Hamburger (c) 2014, The Washington Post. WASHINGTON — The acrimony that erupted Thursday between President Barack Obama and members of his own party largely pivoted on a single item in a 1,600-page piece of legislation to keep the government funded: Should banks be allowed to make risky investments using taxpayer-backed money?
The very idea was abhorrent to many Democrats on Capitol Hill. And some were stunned that the White House would support the bill with that provision intact, given that it would erase a key provision of the 2010 Dodd-Frank financial reform legislation, one of Obama’s signature achievements.
But perhaps even more outrageous to Democrats was that the language in the bill appeared to come directly from the pens of lobbyists at the nation’s biggest banks, aides said. The provision was so important to the profits at those companies that JPMorgan Chase’s chief executive, Jamie Dimon, himself telephoned individual lawmakers to urge them to vote for it, according to a person familiar with the effort.
The White House, in pleading with Democrats to support the bill, explained that it got something in return. It said that it averted other amendments that would have undercut Dodd-Frank, protected the Consumer Financial Protection Bureau from Republican attacks and won double-digit increases in funds for the Securities and Exchange Commission and the Commodity Futures Trading Commission. “The president is pleased,” White House press secretary Josh Earnest said.
Earnest said that Democrats were upset about “a specific provision in this omnibus that would be related to watering down one provision of the Wall Street reform law. The president does not support that provision. But on balance, the president does believe that this compromise proposal is worthy of his support.”
But “that provision” isn’t just any provision. It’s one that goes to the heart of the Dodd-Frank reform because it would let big banks undertake risky activities with funds guaranteed by the federal government — and hence taxpayers.
The omnibus appropriations bill would do that by undoing the Dodd-Frank provision that ordered banks to move their riskiest activities — such as default swaps, trading commodities and trading derivatives — to new entities so that deposits guaranteed by the Federal Deposit Insurance Corp. would not be in danger.
House Minority Leader Nancy Pelosi, D-Calif., pointed to this item as the main reason she would vote against a bill backed by her own president.
“What I am saying is, the taxpayer should not assume the risk,” she said. She said the amendment went “back to the same old Republican formula: privatize the gain, nationalize the risk. You succeed, it’s in your pocket. You fail, the taxpayer pays the bill. It’s just not right.”
It isn’t only liberal congressional Democrats up in arms about the proposed change. “It really is outrageous,” said a former senior Obama Treasury official, who spoke on the condition of anonymity to preserve business relationships. “This was the epicenter of the crisis. This is what brought AIG down, what brought Lehman Brothers down.”
The nation’s biggest banks — led by Citigroup, JPMorgan and Bank of America — have been lobbying for the change in Dodd-Frank, which had given them a period of years to comply. Trade associations representing banks, the Financial Services Roundtable and the American Bankers Association emphasized that regional banks are supportive of the change as well.
The banks have long argued that the Dodd-Frank provision will limit their ability to extend credit to clients and that setting up separate entities to engage in derivatives and commodities trading isn’t practical. The ABA’s top lobbyist, James Ballentine, executive vice president of congressional relations and political affairs, said in an emailed statement that the requirement that banks move some swaps in to separate affiliates “makes one stop shopping impossible for businesses ranging from family farms to energy companies that want to hedge against commodity price changes.”
But the regulatory change could also boost the profits of major banks, which is why they are pushing so hard for passage, said Simon Johnson, former chief economist of the International Monetary Fund and a professor at the MIT Sloan School of Management.
Johnson said the amendment of Dodd-Frank only affects a small portion of derivatives. “I don’t want to make a mountain out of a molehill on this,” he said. But he added that “on a forward-looking basis this could become very big.”
The effort to pass such language has been years in the making. Language that was written and edited in part by the major banks was originally inserted in a House bill that called for relaxation of the push-out rules in 2013. Citi declined to comment on the role its lobbyists played in developing the legislation, which was originally disclosed in an e-mail exchange reported on by The New York Times. However, a blog post written in 2013 by the bank’s head of global public affairs referred to the effort to modify this portion of Dodd-Frank as “a great example of how the industry and Congress can work together to find common ground.”
Barney Frank, former chairman of the House Financial Services Committee, on Wednesday also urged his former colleagues to reject the omnibus appropriations bill. He called the amendment inserted into the bill “a substantive mistake, 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.”