We’ve been keeping tabs on Republican efforts to gut bank reform. Last week, as readers may recall, they failed in a fast-track effort to pass a bill, HR 37, intended to vitiate key parts of Dodd Frank. As much as we decried Dodd Frank as being too weak, it nevertheless had some components that would force big financial firms to exit or limit their riskiest activities. Today, HR 37 was passed by the House.
As we wrote at the start of the week on HR 37:
Not that the Fed or the Republicans, and the bankers they represent, are being so frontal as to try to repeal Dodd Frank, mind you. Their strategy is a combination of endless implementation delays, like Penelope dealing with her suitors, and modifying or eliminating technical-sounding provisions that are of keen importance to the banksters. The assumption is that the chump public won’t figure out that Congress and the central bank are handing major concessions to big financiers with no punishments or required behavior changes attached. Morgenson isn’t alone in calling out this strategy. David Dayen and your humble blogger have also warned about it…
Last week, as we discussed and Morgenson covered in her weekly column, House Republicans tried and failed to pass another set of Dodd Frank weakening rules along with a dog’s breakfast of other minor reforms so as to mask the true intent of the operation. It failed to get the required 2/3 vote for fast track approval but will be tabled under the normal process this week and is sure to pass.
We highlighted two noxious bits last week, a two year delay in a stipulation that would require the sale of most collateralized loan obligations held on bank balance sheets, and a waiver for acting as an advisor to small to medium-sized merger and acquisitions of the long-existing rule that firms that engage in securities transactions above a very trivial level be registered as broker dealers.
As we discussed, both these provisions are gimmies to the private equity industry, which in turn are huge revenue sources to the banks themselves. Since banks can still retain CLOs that are made of loans only, the objections are not about facilitating commerce or even merger financing. This is about banks having maximum latitude and therefore profit opportunity in managing CLOs, which are active vehicles, de facto internal hedge funds with a very specific risk asset mix. The partial waiver for mergers similarly greatly reduces the SEC’s purview and enforcement weapons against miscreant private equity firms, since the punishment for operating as an unlicensed broker dealer is deliberately draconian (dollar for dollar of transaction value) and most private equity firms have been flagrant, longstanding violators of this requirement.
Finally, the bill’s changes in derivatives would reduce transparency and increase risks in this arena by allowing Wall Street firms with commercial businesses — like oil and gas or other commodities operations — to trade derivatives privately and not on clearinghouses.
Trading on clearinghouses generates accurate price data that help both banks and regulators value these instruments. Because these clearinghouses perform risk management, problematic positions are easier to spot.
Bad enough that banks are in the physical side of the commodities business. Now they would get to hide even more risk. This is flagrantly at odds with the supposed object of post crisis regulatory policy, that of forcing banks out of risky, illiquid products and increasing transparency.
HR 37 passed the House today, on a 271-154 vote. 29 Democrats sided with the Republicans. Obama has said he will veto the bill, but the Republicans hope to corner him. From the Financial Times:
The White House has already said the president would veto the House bill if it passes the Senate too, saying it would undermine attempts to “prevent the kinds of excessive risk taking that caused the worst recession in more than 70 years”.
But Dodd-Frank supporters fear Republicans will try to tack Wednesday’s bill and others on to larger pieces of legislation that it will be harder for the president to reject.
Here is the roll call on HR 37. Please call your representative either way (phone numbers here). If they were voted nay, thank them. If they supported it, tell them you are disappointed that they are refusing to support bank reform. If your Representative is a Republican, work in business themes, like how Wall Street is working to the detriment of Main Street, and they need to get behind measures that will prevent future bank bailouts.
Please also call your Senators to stiffen their spines. The more members of Congress understand that voters are not fooled by the ruse of presenting Dodd Frank weakening provisions as needed tidying-up, and understand that this bill’s critical points are a gimmie to Wall Street, the more than some of those who went along because they thought this vote would be uncontroversial will think twice.