First Step in Republican Campaign Against Bank Reform: HR 37 Passed in House

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.

Morgenson flags a third issue:

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.

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  1. steelhead23

    Sorry to say that my representative, Kurt Schrader, was one of the 29 Democratic bankster boot lickers that voted for this measure. I suppose he’s voting to support his constituents – no, not his constituents in the Willamette valley but his true constituents – on Wall Street. As long as it is his Wall Street constituents that fund his campaigns, they will continue to garner his support. I suspect this is true to the rest of the 29 Democratic bankster boot lickers that don’t hail from Manhattan. Letters coming.

    1. j7915

      the question to ask is: just how important are the Wall Street banksters to the average constitutent in the williamette Valley? Just like Sen Hollings carried water for the MAPP and the RIAA. I doubt if any of HIS constituents even knew what he was doing in Washington, “in their name”. While he was paid a bought by Mickey Mouse and Hollywood entertainement.

      1. Jess

        No quibble with your argument, but I think you meant MPAA (Motion Picture Association of America), not MAPP.

  2. charger01

    My favorite up-and-coming empty suit, Cathy mcmorris-rodgers, voted for this trash. Flame mail will be deployed shortly.

  3. Peter Pan

    This is my Democratic congressman’s response regarding his approval of HR 37:

    Dear Peter,

    Thank you for contacting me about H.R 37, the Promoting Job Creation and Reducing Small Business Burdens Act. I appreciate you taking the time to share your thoughts with me.

    There has been a lot of overheated and misleading rhetoric about H.R. 37, so I want to be clear that I am a strong supporter of the Dodd-Frank Wall Street Reform and Consumer Protection Act and would never vote to undermine laws that keep consumers safe. Having worked in economic development in Tacoma during the 2008 financial crisis, I saw first-hand the very real impacts that excessive risk taking and a lack of oversight and accountability had on businesses and families across our region. This crisis was fueled by Wall Street and hurt businesses on main street and families in towns in our region and throughout the country.

    I understand your frustration with those in the financial industry that contributed to our economic collapse and the impacts it has had on our community. I’m frustrated too.

    Not only do I support the Dodd-Frank Wall Street Reform and Consumer Protection Act, I’ve actually fought back against repeated efforts to undermine it. I’ve voted against bills that would have made it harder for the Consumer Financial Protection Bureau, the Federal Reserve, and the other financial regulatory agencies to protect consumers and ensure the stability of the financial system.

    There are folks leading Congress right now that want to repeal Dodd-Frank. They are wrong and I oppose them. That said, where there are common-sense tweaks that can be made to the law that represent legitimate reforms that help it work better, I think we should be willing to consider them.

    With that in mind, let me take a moment to provide some background on H.R. 37. This legislation is composed of 11 separate bills that were previously introduced over the course of the past two years. By many accounts, this bill contained modest reforms and technical corrections. What’s more, it’s important to point out that the 11 bills that comprised H.R. 37 were previously bipartisan.

    In fact, when these bills were considered either by the House of Representatives or the House Financial Services Committee, nearly all received strong support from both Democrats and Republicans.

    · H.R. 634; passed the House 411-12

    · H.R. 677; passed committee 50-10

    · H.R. 801; passed the House 417-4

    · H.R. 2274; passed House 422-0

    · H.R. 742; passed House 420-2

    · H.R. 3623; passed committee 56-0

    · H.R. 4164; passed committee 51-5

    · H.R. 4200; passed committee 56-0

    · H.R. 4569; passed committee 59-0

    · H.R. 4571; passed committee 36-23

    · H.R. 4167; passed House by voice vote

    Of all these bills, the most controversial one was H.R. 4571, which would revise the amount of stock-based compensation that private companies, including small and medium-sized businesses around the country, can provide to their employees. Since that threshold hasn’t been updated in 16 years, there was some debate about what the appropriate level should be for the new threshold. This provision was lowered when it was included in H.R. 37 and is no longer considered controversial.

    Some of the criticism of this bill has centered on a provision related to the so-called “Volcker Rule.” This rule is designed to prohibit banks from engaging in speculative trading. Specifically, the rule bans banks from putting their own money at risk when trading financial instruments to increase profits. It also limits the relationship banks can have with hedge funds and private equity funds.

    I support a strong Volcker Rule and will continue to fight against efforts to undermine it and other critical protections for our financial system, consumers, and the economy.

    As part of the Volcker Rule, banks have to sell off their ownership interest in various kinds of financial instruments. Since these financial instruments were not defined by law, federal regulators have had to determine which kinds of products banks could hold and which ones would have to be sold.

    When the final version of the Volcker Rule was issued, one of the financial products that had to be sold was what is known as a collateralized loan obligation (CLO)—a kind of security backed by a pool of various loans. These products are actually pretty commonly held by banks – and not simply by large banks on Wall Street but also by the community banks in our region. Many small community banks own these products as a way to help reduce their risk and increase the amount of capital they can lend to families and businesses.

    One of the provisions in H.R. 37 would extend the deadline for selling off this kind of financial instrument for an additional two years. I don’t think giving banks two more years to sell off these assets undermines the Volcker Rule or Dodd-Frank. In fact, I think giving banks more time to get these assets off their balance sheets reduces the risk that banks are forced to dump these assets in a fire sale. Forcing small and medium-sized banks to sell off these financial products no matter the price could cause real harm to their balance sheets, sharply limiting the ability of families and businesses to borrow money and creating significant financial instability.

    That same concern is what drove financial regulators to fully extend the deadline for banks to sell off CLOs for three years, the maximum allowed under current law. It seems reasonable to me that an additional two-year extension will help reduce the uncertainty associated with this rule.

    So why the controversy? The fact is this is a bill that is, substantively, similar to a bill that was backed by most Republicans and Democrats just four months ago. Some Democrats opposed H.R. 37 because it was brought up in an expedited manner early in the new Congress. In addition, though, I sense that there is frustration by many of my colleagues at the refusal of the majority party in the Congress to do more to address Wall Street abuses and reign in economic inequality. I share that frustration but disagree that opposing this reasonable legislation is the right way to signal that frustration. As someone who supports Dodd-Frank, I fear we undermine common-sense regulation and fuel those who want to repeal the whole thing if we treat this law as something written on stone tablets.

    The House considered H.R. 37 on January 7, 2014 under an expedited process that required support from 2/3rds of voting members for passage. The bill came short of this mark and failed 276-146. It was considered again under regular order on January 14, 2014 and passed in the House with my support by a vote of 271-154 and is now pending in the Senate.

    As the federal regulators work to fully implement all the provisions of the Dodd-Frank Act, I will continue to closely monitor this issue and keep your thoughts in mind as Congress furthers the debate on how to best protect our nation from another financial crisis. Thank you for reaching out. It is an honor to serve as your representative.


    Derek Kilmer
    Member of Congress

    1. steelhead23

      Thanks for posting Rep. Kilmer’s response. I would guess he got those talking points from the bank lobby, but they are on point. But I find the argument that small community banks own CLOs to be surprising. Why would a bank that issues its own loans, knows the credit history of the borrower and the value history of pledged collateral, choose to purchase CLOs that it knows very little about? Makes no sense to me, but maybe its true. My guess is that CLOs make up a vanishingly small portion of your average community bank’s portfolio. Yves?

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