In the next week, the Senate is expected to pass the Economic Growth, Regulatory Relief, and Consumer Protection Act, a bill that rolls back some of Dodd-Frank's financial regulations and widens existing loopholes.
Republicans drafted the bill. But it has 12 Democratic cosponsors, giving it a filibuster-proof majority.
The legislation exempts banks with less than $10 billion in assets from the Volcker rule (which bars commercial banks from some speculative trades) and various mortgage requirements; allows banks with between $50 billion and $250 billion in assets to operate with less regulatory scrutiny; and directs the Federal Reserve to tailor regulations to the specific balance sheets of the bigger banks, rather than enforcing rules equally across-the-board.
Most Democrats don't like the bill. But in my conversations, they don't see it as an enormously consequential rollback of their Wall Street reforms, either.
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"I would vote against this bill," says former Rep. Barney Frank, a Democrat who helped spearhead the namesake Dodd-Frank Act. "But I understand the pressure to vote for it, and I don't think the bill makes a serious dent in what we did."
Behind this legislation lies the view that Dodd-Frank is an onerous hassle for community and regional banks, neither of which were major players in the financial crisis. Some Democrats, including Frank, have long been willing to amend these portions of the original bill. Frank previously supported raising the threshold for tighter regulation from $50 billion to $100 billion and giving more leeway to local banks, for instance.
Those banks are powerful. Most members of Congress don't have Goldman Sachs headquartered in their state or district. But pretty much every member of Congress represents a raft of smaller banks that play key roles in their community. "The politics here are driven by banks with $10 billion in assets and under," says Frank. "They're in everyone's district. It's not campaign contributions that drive this. It's that everyone has four or five or 12 community banks. They're everyone's friends."
But Republicans went much further in drafting the bill than Frank and supporters of Dodd-Frank would've preferred.
In loosening stabilizing regulations on banks with up to $250 billion in assets, the legislation dismisses the lessons of past crises. We know that banks often make the same mistakes at the same time — that's the story of not just the recent mortgage crisis, but the savings & loan crisis of the 1980s. And three or four troubled banks in the $200-billion range add up, together, to a Lehman Brothers-level failure.
To ease regulations on these banks because they are not, individually, as big as the banks that caused the 2007 crisis is to misunderstand the nature of the crisis itself.
"The next crisis might be that a bunch of boring commercial banks all make the same mistake in a highly correlated way," says Mike Konczal, a financial reform expert at the Roosevelt Institute. "The argument that this doesn't hurt [like] what went wrong in 2008 isn't that good of an argument."
Another change is even more puzzling. Dodd-Frank says that the Federal Reserve "may" tailor regulation for the biggest banks, if it sees the need to do so. The Senate legislation surgically changes that word to "shall." What that means is that rather than being able to regulate all big banks the same way, the Federal Reserve will now need to create specific regulations for each major bank it regulates.
This change does two things: First, it gives bank regulators — who may be hoping to someday cash in at the firms they now oversee — more power to decide the fate of the banks under their purview. Second, it gives the banks' teams of high-priced lawyers more power to tie the Federal Reserve up in court by arguing that the regulations are not sufficiently tailored to their situation.
As Gary Gensler, the former head of the Commodity Futures Trading Commission, dryly noted in a letter to the Senate banking committee, "laws and regulations generally are better when they are applied consistently."
There's also a strange loophole in the bill that would make it easier for foreign megabanks like Credit Suisse and Deutsche Bank to escape regulation by sheltering their U.S. holdings in vehicles that keep them under the $250 billion mark. This seems like an obvious mistake, but when Democratic Sen. Sherrod Brown offered an amendment to close the loophole, it lost on a party-line vote.
Then there's the provision raising the limit, from 50 to 500, on the number of mortgages a bank can offer before reporting on who got the loans and at which terms — a change that will make it harder to track racial bias in lending.
And all of this is being done to solve ... what problem, exactly? As Gensler notes in his letter:
Corporate and industrial loans, as well as overall loans in the banking sector, have grown significantly since precrisis levels, 35% and 31% respectively. The financial system is back to pre-crisis levels of activity, representing over 7% of gross domestic product, consistent with some other developed nations. Bank profits were at record levels in 2016 and, in the third quarter of 2017, banking industry's average return on assets was at a 10-year high. ... The new [tax reform] law represents a 35% tax cut for the industry, or a total of $249 billion over the next 10 years.
Is the banking industry really in such dire need of relief?
In the final week of the election, the Trump campaign released an ad titled "Donald Trump's Argument for America." Today the commercial is mostly remembered for kicking up a furor over alleged anti-Semitic imagery, but it's worth remembering Trump's closing argument.
Pictures of bankers and politicians flash across the screen: "The establishment has trillions of dollars at stake in this election," Trump says, "for those who control the levers of power in Washington and for the global special interests they partner with, these people that don't have your good in mind."
Trump argued that he, and he alone, would break up the oligarchy that had come to control Washington, and govern on behalf of the people rather than the constellation of special interests that had written the last three decades of laws. His argument carried particular power coming just a few years after the financial crisis, and in a race against a Democratic candidate who had accepted almost $700,000 dollars in speaking fees from Goldman Sachs.
But Trump's campaign proved a poor guide to his presidency. The changes in this bill are precisely designed to line the "pockets of a handful of large corporations and political entities." That's why the financial industry is lockstep behind this legislation.
When Trump took office, there was a chorus of admonitions against "normalizing" his conduct. To a large extent, that push has succeeded, except regarding his total abandonment of his populist promises, the promises that set him apart from his Republican challengers and won him the election.
We've normalized the empty promises because we expect politicians to lie, because Trump is a Republican and Republicans cut taxes for the rich and lift rules on banks, because it is harder to dramatize a change to a regulation than an unhinged presidential tweetstorm.
But this, too, is a dangerous form of normalization. Is the problem in America right now really that our banking system is too safe, that the Federal Reserve has too much power to standardize its regulations? Did the unemployed Ohio machinists who pushed Trump's candidacy to victory really do so because they wanted regulatory relief for banks with between $50 billion and $250 billion in assets?
The populist wing of the Democratic Party has been outraged over this bill. On the Senate banking committee, Ohio Sen. Sherrod Brown has been leading the opposition. And Massachusetts Sen. Elizabeth Warren has been trying to rally her base to the cause. "The bank lobbyists are getting ready to pop champagne and light their cigars," she wrote in an email to supporters.
The political pressure that led to this bill is part of the swamp Trump promised to drain. His support for the legislation shows how little he believed the promises he made. But the Senate Democrats who've signed onto this bill show he's not doing this on his own. Barely a decade after the financial crisis upended American life, our politics may be chaotic, but for the banking industry, it's back to business as usual in Washington.