Next week marks the 10th anniversary of the run on Bear Stearns, the investment bank that collapsed under the weight of toxic subprime mortgages. Although JPMorgan Chase snapped up Bear Stearns for pennies on the dollar, this maneuver failed to stop the bleeding from the mortgage meltdown, leading to the biggest economic crisis in nearly a century.
That seems like a terrible political backdrop for the Senate to pass a bill that deregulates the banking sector. But that's exactly what's about to happen.
The Economic Growth, Regulatory Relief and Consumer Protection Act, which pro-regulation groups have called the "Bank Lobbyist Act," advanced in the Senate this week with the support of 50 Republicans, 16 Democrats, and one Democratic-leaning independent. Bipartisanship, it seems, isn't dead.
We're witnessing a familiar swing of the pendulum: toward regulation when banks crash the economy, away from regulation when memories fade. The next stop is often financial crisis, and the nonpartisan Congressional Budget Office stated this week that the bipartisan legislation would increase the risk of another one happening.
"We’re witnessing a familiar swing of the pendulum: toward regulation when banks crash the economy, away from regulation when memories fade."
Pitched as a way to provide regulatory relief for community banks, the bill goes well beyond that; it rolls back key pieces of the Dodd-Frank Act and includes giveaways to large institutions of the same size and scope as the ones that crashed the economy in 2008.
The most important measure in the legislation raises the threshold for enhanced regulatory supervision by the Federal Reserve from $50 billion to $250 billion. The beneficiaries, 25 of the top 38 banks in America, could be called "stadium banks:" not big enough to count as Wall Street mega-banks, but big enough to have a sports stadium named after them.
A failure of one or more of these banks would likely be catastrophic — a fact made obvious by the recent past. For example, Calabasas-based Countrywide was America's biggest subprime lender, supplying one out of every five new mortgages, when it fell in 2008, deepening the financial crisis. It had assets of $200 billion.
Dodd-Frank targeted stadium banks for more rigorous monitoring and increased capital and liquidity requirements, so they — instead of taxpayers — could pay for their own losses. If the new legislation releases stadium banks from such rules, they could take on more risk, and they would lose a powerful disincentive to get even bigger by gobbling up smaller rivals. So although it is intended to enhance community bank competition, the deregulatory legislation will likely consolidate the industry.
Technically speaking, the Federal Reserve could still apply tighter rules on these banks. But a one-word change in the bill, from "may" to "shall," obligates the Fed to tailor any new rule it makes to a bank's size and risk profile. This language is an invitation to litigation, with banks claiming that the Fed didn't undertake the proper cost-benefit analysis. It actually would leave the Fed more constrained to act than before the financial crisis. And the Fed didn't exactly cover itself in glory during that episode.
"When powerful interests need something done, suddenly Democrats and Republicans can put aside differences and work together."
Big banks shouldn't be jealous, as they get goodies as well. Nearly all giant foreign banks with operations in the U.S. could enjoy the same weaker rules as the stadium banks. Stress tests currently conducted semi-annually to measure how big banks would perform in a downturn will now occur on a "periodic" basis, with no definition of "periodic" given. Citigroup and JPMorgan could take advantage of a relaxation of leverage rules, enabling them to take on more debt and ramp up risk. And big banks would also be able to count municipal bonds as highly liquid assets, hooking an unrelated $3.8-trillion market into any financial catastrophe.
The list of problems with the legislation goes on. It rips consumer protections away from mortgage borrowers. It exempts 85% of banks and credit unions from supplying data used to detect discriminatory lending practices. There are a few crumbs for consumers, but nothing that justifies the widespread weakening of financial rules.
Banks, including the community banks that allegedly need relief, are enjoying record profits. And the Trump administration doesn't need any help deregulating the financial sector; they're busily doing that on their own. So why would more than one-third of the Senate Democratic caucus provide the margin of victory on a bill assisting Trump's aims?
The answer is simple: money. North Dakota, Indiana and Montana may not have any banking giants within their borders, but the top three recipients of campaign donations from commercial banks since 2017 are Democrats from those states who are up for reelection in November: Heidi Heitkamp, Joe Donnelly, and Jon Tester.
This whole process reveals that bipartisanship usually arrives in Washington at the barrel of a money cannon. There is no constituency for bank deregulation outside of executive boardrooms and K Street lobby shops. Nobody is begging Congress to call off financial regulators. In fact, they'll likely punish politicians who do. But when powerful interests need something done, suddenly Democrats and Republicans can put aside differences and work together. Another way of saying bipartisanship is "watch your wallet."